Why VCs Are Attracted To Online Wine Retailer Lot18

I was happy to receive an email this week from Lot18, my favorite online wine marketplace, announcing that the company had raised an additional $30 million in Series C venture capital financing led by Accel Partners.

For those who aren’t familiar with it, Lot18 runs “flash” short-term (sometimes lasting only a couple of hours) sales on premium wine and wine-related products, and recently added travel, food and wine experiences, and gourmet foods to its offerings. Since I’m a big fan of the site from the consumer perspective, the news of investors wanting to put their money at risk to grow this business was good news to me. Lot18.com has only been around since last November and has reportedly raised a total of nearly $50 million in investments, has 500,000 members, and did $1 million of sales in one month earlier this year.

With new flash sale sites popping up all over the place in a number of categories (clothing, accessories, food, wine, travel), this category already seems saturated with a lot of sites that will eventually be faced with an inventory scarcity or less price advantages as the economy recovers and wineries (and other sellers of products and services) no longer need to liquidate inventory at below-retail prices.

With this in mind, I looked at this most recent substantial investment as an opportunity for me to research the short history of Lot18 to examine some of the factors that might make this an attractive investment for the VCs. When I really started looking, I realized this company is getting a lot of attention from bloggers, as well as VCs, and I think these are some of the reasons why:

(1) Founders with a Track Record.

Co-founder of Lot18, Philip James, was previously the founding CEO of snooth.com, a wine-focused web site with over 805,000 members that offers extensive wine reviews, online price comparisons between wine merchants, and many other wine-related products and services. Kevin Fortuna, Lot18’s other founder, was formerly the CEO of Quigo, an advertising technology company that was sold to AOL Time Warner for $360 million in 2007. Combined, those two look to possess a very relevant set of skills and experience for this type of venture, and they are a good reminder that, when looking for investment in a yet-unproven company, proven people are very compelling. 

(2) Gradual Loosening of Regulations in a High Value Industry

Gomberg, Fredrikson & Associates, a wine industry consulting firm, reported earlier this year that the United States has just eclipsed France as the largest wine-consuming nation, and that the retail value of United States wine sales in 2010 topped $30 billion. This was a luxury industry that actually grew in the United States even during a recession, which, for a non-investing expert like me, seems like as good a place to put money to work as any.  Further brightening the future for online wine sales, states are continuing to loosen their regulations regarding interstate shipments of wine. Most recently, Maryland passed legislation allowing residents to have wine shipped directly from wineries to their homes. As these shipping regulations continue to change, investors can see an obvious path towards future growth without having to be too imaginative. As we often tell our clients who are looking for outside investment, a simpler story about the path to success is usually a better story.

(3) Differentiation from Competitors

Despite flash sales being a fairly young category of sales vehicle, there already seems to be more flash sale sites than even I can keep track of (and let’s face it, I love wine). In the wine category alone, Wines ‘Til Sold Out, wineaccess, wine.woot, and Gilt Taste are obvious competitors. I admittedly know more about Lot18 than I do about any of these competitors, but from a purely consumer perspective, I prefer Lot18 because of the excellent customer service I have received there and because it offers what appears to be a small and carefully chosen selection. Thus, the appeal of Lot18 specifically lies well beyond just discounts on the wine, which means I am likely to continue shopping there even if the discounts dwindle as the economy recovers in future years. When there are reasons a company should succeed in a bad economy as well as a good economy, any time seems like the right time to invest.

A Post by Alyssa Hirschfeld, Guest Blogger