One way to make e-commerce work is to sell high margin products online — ideally, products that are necessarily high margin in the brick and mortar world to account for distribution costs. Therefore, going online cuts out the middlemen and you can profit even while selling for less. Proven examples include eyeglasses, cosmetics, baby products, and so on.

Re/code has a fascinating story on another example: Harry’s, for razor blades. What makes Harry’s so interesting is that the company raised $197 million on a $350 million valuation on basically zero revenue (they have sales, but at a level insignificant relative to the size of investment).

In short, investors are investing solely on the basis of potential.

Re/code is painting this as yet another example of technology’s growing bubble. But let’s dive deeper — far from a being sign of investor irrationality, this transaction might actually make rational sense.

The co-founder and co-CEO of Harry’s is the co-founder of Warby Parker, a company that proved the model’s success. So there’s comfort that the company’s execution will at least be sound.

$122 million of the $197 million investment is for acquiring a razor blade factory, which the company says is one of the only factories in the world they could acquire that makes razor blades in sufficiently high quality. The factory already has a profitable business so the acquisition might even be accretive at some point. So over half the capital’s allocation is relatively low risk.

Meanwhile, having control over production can be a sustainable competitive advantage. It will enable fast turnaround times, the ability to quickly respond to trends, just in time manufacturing (versus taking on inventory risk due to minimum quantity orders), and of course ensuring high quality.

Razor blades are an industry with high barriers of entry due to high capital requirements and thus dominated by few players (i.e. Gillette and Schick) — a barrier which Harry’s just overcame. It’s a moat that won’t be so easy for others to cross.

The question then is one of marketing. Will people buy razor blades online? Are the cost savings enough to change behaviors? Men are creatures of habit and mostly loyal to the brands they are accustomed to. Up to a point, they are also price inelastic for these kinds of goods. Yet, men are lazy and not having to make a trip to the store might be enough incentive to push them to Harry’s.

Presumably, Harry’s existing online business has already validated the product-market question. There are a lot of smart investors on board, so I assume they’ve gone over the data with a fine tooth comb.

If so, this is a transaction that makes sense: highly defensible, unique advantages, fat margins, proven model and proven team.