Wal-Mart May Buy E-Commerce Startup For $3 Billion

By on August 8, 2016 in ArticlesBillionaire News

Is America's leading big-box retailer about to catch itself a unicorn? Citing people familiar with the matter, The Wall Street Journal reported Wednesday that Wal-Mart is in talks to buy e-commerce startup Jet.com for "as much as $3 billion." The move is clearly intended to bring some magic to Wal-Mart's sluggish e-commerce presence. But is it too early for Jet to sell-out?

Just barely a year old, Jet is already valued at $1 billion, placing it in the class of Silicon Valley "unicorn" startups with similar high valuations. The company's co-founder, Marc Lore, has drawn in more than $500 million in venture capital funding.

Justin Sullivan/Getty Images

Justin Sullivan/Getty Images

But a company that intends to take on an e-commerce giant like Amazon needs a lot of money. Jet is seeking to build a national network of warehouses, and offers a broad selection of goods. The goal is to underprice and outperform Amazon, using a formula that takes into account basket size and the proximity of the merchandise to buyers, as well as other factors.

The Hoboken, N.J.-based company planned to make a $50 annual membership fee – similar to Amazon's $99 Prime membership fee – its sole source of profits. However, this plan was abandoned last October, after Jet determined customers would resist the fee. Without members, the company was only able to discount its prices 4-5% less than competitors.

Last November, The Wall Street Journal reviewed Jet's financial plan. It found that the company would burn through nearly $500 million in its first 12 months of operation, and an average of $600 million the following three years. The numbers tell the brutal, and costly, truth of how hard it is for a newbie to break into e-commerce and take on the experienced giants.

After news of a potential sale to Wal-Mart broke, some news outlets came down hard on Jet for selling out too soon. The New York Times described Jet's sale to "the biggest traditional store chain around" as "humbling" for a company that "was born out of a dream of taking on Amazon and its grip on the world of e-commerce."

But a sale may not be selling out for Jet. Lore's first company, Quisdi, was also designed to compete with e-commerce businesses, and it was successful enough that Amazon bought it for $550 million. If Wal-Mart buys Jet for $3 billion, some could argue that it will be a huge success for Lore.

Of course, all of this could end up being just speculation. Wal-Mart could just be buying a stake in Jet or the talks could go nowhere. But if Wal-Mart wants to see some improvement in its stocks, it should probably make an announcement soon.

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