If you’re looking for toothbrushes, skin-care face masks, mattresses, glasses or even socks, there’s a digitally-native, direct-to-consumer (D2C) company or two that can help you out.
And thanks to smart digital marketing, the cult followings that ensue and the economics of e-commerce, D2C has changed how we relate to consumer goods (while attracting a waterfall of investment dollars).
Globally, D2C startups have raised between $8 billion to $10 billion in known venture capital across more than 600 deals since the start of 2019, according to Crunchbase data. The industry was catalyzed by a number of nine-figure deals for companies like Glossier, which sells makeup products, and Ro, which is a telehealth startup.
Indeed, when prepping this post for publication, our list of notable D2C rounds since the start of 2019 grew long enough that we abandoned the idea of including a digest. The sector has been active across a host of verticals, making it hard to sum up in terms other than rounds and dollars invested.
But those are trailing indicators of what is going on between D2C startups and their investors. TechCrunch was curious, especially in the wake of the troubled Casper IPO, how investor sentiment might have shifted and what venture capitalists are looking for in the category.
To get a grip on the matter, we caught up with Nicole Quinn from Lightspeed Venture Partners, Ben Lerer and Caitlin Strandberg from Lerer Hippeau, Gareth Jefferies from Northzone, Matthew Hartman of Betaworks Ventures, Alexis Ohanian of Initialized Capital and Luca Bocchio of Accel.
We got into advice for founders looking to raise, whether influencer marketing is worth it and which channel one investor says is an “all-but-closed door for most D2C companies.” We’ll start with a summary of the three trends that stood out the most from our collected answers and then share the full investor digests.
Three key themes for D2C in 2020
Our respondents come from a variety of firms with differing focuses, but this did not stop the group from covering similar ground at times. From their collected answers (shared below at length, for your perusal), we found three key trends, each with a number of points, caveats and more attached to it.
Given that you are busy and might not have the time to read all that follows, we’ve compiled the trends into a digestible format for you here. Let’s begin.
Theme 1: Don’t read too much into the disastrous Casper IPO
The early-2020 Casper IPO is famous for managing to happen right before the COVID-19 winter descended upon the private and public markets, freezing public offerings and cutting valuations on both sides of the market divide. However, it’s equally infamous for its poor financials, poor pricing, poor resulting performance and the recent shedding of most of its value.
Don’t read too much into it, however, says our investor group. Nicole Quinn, for example, told TechCrunch that her firm’s investing “velocity has stayed consistent” in D2C companies; she also said that “most” of the D2C startups her firm has invested in “are profitable and have been from year one or two.”
It might be perfectly reasonable to be optimistic about D2C startups post-Casper. Gareth Jefferies, when asked about the mattress company’s IPO, cited a tweet highlighting Casper’s notably weak economics. He went on to list what he thinks D2C companies should feature, the combination of which would “typically will lead to strong and capital efficient growth.”
Theme 2: Business fundamentals are more critical now as investors pivot from growth to profitability
Taking the baton from Jefferies’ note on “strong and capital efficient growth,” it appears that the flight to quality that the rest of the startup market is impacting the D2C space. He argued that it would be “accurate to say that there is a more acute focus, than perhaps there once was, on sound unit economics.”
There are “fewer investors inclined,” he said, “to financially support a ‘growth at all costs’ mentality” then there have been over the past few years.
It’s a point that Matthew Hartman echoed, telling TechCrunch that it appears today that investors are “returning to the fundamentals, where organic growth is valued over paid user acquisition and profitable customer acquisition is a focus versus the land-grab approach.”
For founders looking to raise, it’s a critical shift to understand; what was once at least attractive is now possibly unpalatable.
The focus on fundamentals like profitable growth and unit economics turns around a pretty interesting market dynamic that, while not unique to D2C startups, has particular resonance in the niche: Facebook and Google ads, and the prices growing companies pay for them.
Theme 3: D2C companies cannot depend on a few, key paid channels for acquisition
Probably always true implicitly, investor aversion to D2C over-reliance on Facebook and Google ads was a theme we noticed in responses.
Hartman said investors are “reacting” to the realization that D2C companies aren’t middleman-free, as there is an intermediary — Facebook. In his conception, “physical products have eschewed physical retail shelf space only to replace it with digital retail shelf space on Facebook and Google.”
Historically, according to Hartman, when those channels were younger, “there were arbitrage opportunities.” Those have closed. Luca Bocchio told TechCrunch something similar, noting that “D2C brands have come under pressure” after traditionally relying on “Facebook and Instagram for customer acquisition.”
According to Bocchio, those channels have “matured and become more expensive.”
This leads directly back into our previous notes on growth versus profitability and sound business fundamentals. You can’t have a sustainable startup if you’re stuck acquiring customers on an uphill treadmill that only feeds the investors of a few public companies.
One way to get around those particular costs is to attract attention to a brand in other ways. Lightspeed’s Quinn, for example, said “influencer marketing, or better still, influencer founders, are a scalable and repeatable marketing channel.”
There are other methods, but with Facebook and Google now mature and arbitrage thereof an all-but-closed door for most D2C companies, the ones that succeed (in both business and capital access) will have to look elsewhere for long-term customer growth.
But don’t take our word for it
That’s just our summary. You don’t have to listen to us. What follows are the investors’ responses shared at length. We’ve edited them modestly for clarity here and there as assistance.
Not every investor that participated in our survey answered every question, and some decided to pivot away entirely and instead send over a few paragraphs touting examples from their own portfolio. We’ve mostly included what was sent in when we felt it was worth sharing. More to come, but, for now, here are the participating investors (in order):
- Nicole Quinn, Lightspeed Venture Partners
- Ben Lerer, Lerer Hippeau
- Caitlin Strandberg, Lerer Hippeau
- Gareth Jefferies, Northzone
- Matthew Hartman, Betaworks Ventures
- Alexis Ohanian, Initialized Capital
- Luca Bocchio, Accel
Nicole Quinn, Lightspeed Venture Partners:
Has your investing cadence into D2C startups changed in terms of velocity?
We continue to look for and invest in the standout companies. We tend to invest both around a thesis area we are looking at and also opportunistically when a company is inflecting. Our velocity has stayed consistent and the last D2C investment we made was the no/low alcohol brand, Clean Liquor, in January.
What types of D2C startups/companies do you find the most attractive today? Has that changed over the last 12 months?
We have always been focused on those D2C companies which are capital-efficient and I would say the market has also shifted in that direction recently, post the Casper IPO, for example. Most of our D2C companies are profitable and have been from year one or two. This allows them to be self-reliant and build a strong and stable business while also growing quickly and getting product in the hands of customers who love them.
Is investor interest in D2C startups weak compared to fundamentals, about right or overheated?
I would argue it is too weak as investors look at the unit economics of some of the recent IPOs and think that is true for all of D2C. In reality, there are sectors such as beauty where many companies have product margins >90% or true brands such as Rothy’s where there is such a strong word-of-mouth effect and this gives them an unfair advantage with far better unit economics than the average.
Is D2C still an attractive startup genre for founders?
Yes. We are in between platforms right now and D2C has been able to transcend across platforms, from web to mobile, and I would argue it will with whatever the next platform will be, whether that be voice or AR or VR, etc. We are also in uncertain times where people are staying inside more and ordering online due to the COVID crisis, so I believe you will see e-commerce penetration increase as a percentage of retail sales (currently 11%) both during and post the crisis. D2C brands will be well-positioned to take advantage of this shift in behavior to ordering online more.
How has social media and the rise of cult followings impacted the way you source deals?
We live in a world where Facebook and Google are increasingly expensive to acquire customers on. We have also found that influencer marketing, or better still, influencer founders, are a scalable and repeatable marketing channel. As a result, Lightspeed works with those people who have strong social media or cult followings to help our companies as we believe in the power of both micro and macro influencers.
There’s been much made of CAC trends in the D2C space; is D2C CAC pressure falling, staying flat, or rising in your experience?
Across the board, we find that CAC rises as marketing spend rises and we encourage companies to do spurt campaigns to test where their CAC would go if they did dramatically increase marketing spend. However, finding new marketing channels that work well for your business (e.g. Pinterest, podcasts, influencers, etc.) can help here.
The best method we have found to keep your CAC flat has been to become a true brand. Calm, Goop, Rothy’s, Daily Harvest, Glossier and Away are terrific examples here. At Lightspeed we look for leading indicators of a true brand being built as that can result in CAC staying relatively flat as you rapidly scale the business.
Investors and founders alike are said to have scooted away from a growth focus to a focus on profitability. Is this trend manifesting in D2C startups? If so, is it leading to a mix shift in product?
We have always maintained a strong focus on unit economics and as a result most of our portfolio companies are EBITDA positive. This has not been at the expense of growth though so the holy grail is having both growth and profit.
I spent the first decade of my career covering public company brands and the most important element in a business to me is consistency. Consistency (of growth, profitability, etc) is king. When thinking about a mix shift in businesses or introducing new products, I believe the consistency of margin in those new products is crucial.
Today, how do you weigh a D2C startup’s brand against its product innovation? Is that ratio different than 12 months ago?
Newness drives revenue. We consistently see this in our companies and product innovation keeps the products new and exciting. However, I would stress the importance of ensuring that innovation is always in keeping with your brand.
A good example is Rothy’s who just launched handbags and their bags are exactly in keeping with the brand: sustainable, washable, beautiful. Another example is Goop where every new product they develop is true to the values of the founder, Gwyneth Paltrow.
How has Casper’s IPO impacted D2C valuations and investor interest?
As mentioned above, there is a view that all D2C companies have similar competitive pressure and unit economics to Casper. However, it is not the case and we need to all look at the companies on an individual basis.
Will brick-and-mortar go away? How has the reliance on stores changed over time?
This is a fascinating question in the times of Coronavirus. More generally, I would say we have seen Rothy’s, Goop, etc., see terrific results from brick-and-mortar, and I continue to believe in the power of the two together where brick-and-mortar gives a halo effect to online. Stores can also be seen as profitable marketing channels where they often break even in under a year and then market the brand while making money.
In the times of Coronavirus, I would encourage companies to close their stores to put the health of their shop staff and customers first and then shift focus to online. It depends on the product category but companies such as Daily Harvest, the frozen food D2C, have done well with their pop-up in NYC and are now leaning into their online presence and seeing strong demand from customers eating at home more.
What is one D2C company you wish you invested in, and why?
Glossier (I am sure many others will say this also) ;).
What are some lessons from a D2C company you recommend your portfolio companies follow?
Where do I start?! Every day is a new lesson! The most powerful lesson I have learnt is to focus on what is true to you and will make you a real brand. We are always looking for the leading indicators of a true brand being built in D2C (e.g. word-of-mouth, NPS, repeat rates, social media), and it’s driven from authenticity.
Lady Gaga’s HAUS LABS is having a terrific first year because every product, color, model, product name that we have decided on has come from Gaga. She is authentic and so is the brand — that’s why it resonates with customers so strongly.
Would you ever focus solely on D2C?
I believe it’s important to invest across the full spectrum of consumer businesses — from FinTech to consumer subscription to marketplaces to D2C — as there are lessons to be learnt from other companies which only help us be a better board member and helpful partner to our companies longer term.
Ben Lerer & Caitlin Strandberg, Lerer Hippeau:
Has your investing cadence into D2C startups changed in terms of velocity?
No, but the definition of a D2C startup has. We don’t use the term “D2C” anymore. We’re past the time when just cutting out the middleman was a disruptive strategy. We continue to invest in brands that are able to foster community and are skilled at managing their own relationship with their consumers. That being said, every brand needs an omnichannel approach in this world.
What types of D2C startups/companies do you find the most attractive today? Has that changed over the last 12 months?
Our strategy is always shifting to some degree based on what we’re thinking about and what we’re seeing. The shifts we’re making are based on changes we are seeing in consumer behavior and consumer interest.
For instance, we’ve been investing in companies that are in some way related to health and wellness, more so recently than a couple of years ago, and specifically in the areas that are currently either highly fragmented markets or smaller TAMs that we believe will see meaningful growth and consolidation in the coming years. Examples include companies like sexual wellness app Lover and a company currently in stealth in the addiction space.
Is D2C still an attractive startup genre for founders?
Of course! Next question.
Is investor interest in D2C startups weak compared to fundamentals, about right, or overheated?
Probably “about right,” but there are examples of categories and specific investors who are way under or way-overestimating the opportunities.
How has social media and the rise of cult followings impacted the way you source deals?
It’s great when a brand can build a cult following, but a brand can also win by brilliantly hacking their supply chain, cleverly unlocking new forms of distribution or by creating truly breakthrough products. You can build very successful businesses without cult followings. But cult followings are nice.
Gareth Jefferies, Northzone:
What types of D2C startups/companies do you find the most attractive today?
Generally speaking, the companies we find most attractive today are the same ones we always have — the companies that aren’t just an identical product with a new brand, and aren’t just predicated on some Facebook/Google arbitrage models. Companies where there is some substantial innovation in either or both of product or the distribution, ones where there is great customer love and advocacy, and in a category that can sustain a multi-billion dollar outcome.
The most fundamental thing is a no-brainer value proposition for the consumer. You have to be strictly better than the alternative for a large enough number of people. And there are a lot of different ways to get there — be it what Thirty Madison are doing with condition-specific D2C healthcare, or what NA-KD is doing with influencer distribution, or what arfa is building for the ‘non-median’ consumer with community-led product development (to give a few examples from our own portfolio).
The common denominator is that they all deliver a powerful no-brainer value proposition to the consumer, and take advantage of new technology channels to access them. I think this has always been true. I can’t think of a proven success in D2C that was “just” brand or “just” ad-spend arbitrage.
Is D2C still an attractive startup genre for founders?
I absolutely think so — it’s never been easier to start a D2C company (coronavirus and global supply chain disruption notwithstanding). You have platforms like Elliot in NYC that are helping founders spin up new companies in a matter of literally minutes over breakfast, you have individuals making millions or tens of millions from their kitchen tables using FBA, you have all sorts of other enablement-layer companies like Anvyl, Cala, Shopify, Kickstarter and more, and the no-code movement will only support this moving forward.
If you can put a good product together and navigate the path to market well enough, there’s great opportunity to make yourself, as a founder, wonderfully wealthy and fulfilled.
The more pertinent point, in my opinion, is whether or not it’s an attractive genre if you are a founder shooting for a venture-scale outcome and whether or not venture capital is necessarily the right fit for all categories. I expect you will see quite a lot of $10 million to $100 million exits in the next five to ten years, and a few $100 million to one billion ones, but I think one billion-plus outcomes will be relatively rare. I think this goes for other sectors as well as D2C, too.
Investors and founders alike are said to have scooted away from a growth focus to a focus on profitability. Is this trend manifesting in D2C startups?
I think it would be more accurate to say that there is a more acute focus than perhaps there once was on sound unit economics. In any category, D2C or SaaS or whatever, you are not going to produce venture-scale returns without a substantial amount of growth, but there are fewer investors inclined to financially support a “growth at all costs” mentality than there were 12, 24 or 36 months ago, and fewer founders pursuing that strategy as well, especially as it seems that now we’re staring down the barrel of a pretty serious recession.
Put another way: there is nothing wrong with spending to grow, as long as your lifetime value supports that spend. If your category is high margin, low return, high frequency of purchase, high retention, and not so competitive that customer acquisition cost (CAC) is unfeasibly high, you are going to be in a good place even if others are faltering. But you need an actually compelling consumer value proposition to get there — “subscription everything” doesn’t work anymore, if it ever did.
How has Casper’s IPO impacted D2C valuations and investor interest?
Nick Stocks at White Star (with whom we just co-invested in arfa) tweeted recently: “Casper should not be taken as a benchmark for all D2C companies. It is a benchmark for any company with 20% refunds, 40% marketing spend, barely any CAC coverage and a single order lifetime. D2C is a distribution channel. How you use it is what counts.” I can’t put it much more succinctly than that.
So to answer your question: I think Casper has impacted valuations and interest across the board (should it have, necessarily? probably not), but I think it has reiterated the need to back companies with preferably several of the following:
- Significant product innovation.
- A significant distribution innovation or advantage.
- Significant long-term defensibility, above and beyond just brand, which together will typically will lead to strong and capital efficient growth.
Matthew Hartman, Betaworks Ventures:
Has your investing cadence into D2C startups changed in terms of velocity?
At Betaworks, we spend more of our time on consumer tech that helps people create and communicate. So while investing in D2C brands is not our focus, we’ll continue to focus on the most-promising consumer tech for creating and communicating, and we don’t expect our velocity to change materially.
What types of D2C startups/companies do you find the most attractive today? Has that changed over the last 12 months?
In terms of D2C specifically, our focus has been and will continue to be companies that have a differentiated means of distribution and access to customers that isn’t predicated on paid user acquisition.
More generally, the last decade was an era of information harvesting, data harvesting, and attention harvesting. This has turned out not always to be to the advantage of the consumers.
As 2020 begins, people have become much more aware of the tradeoffs they’re making — trading away privacy and control over their attention, in exchange for access to “free” technology. Now that people are more explicitly aware of these tradeoffs, it remains to be seen whether they will change behaviors and whether those changes open up opportunities for new types of products and business models.
The side effect is that many of the consumer tech products growing today are using a subscription or in-app purchase model, meaning that increasingly they’re not focused on advertising. This is true of many new startups, but also consumer platforms at scale such as Fortnite, which doesn’t provide advertisers with ad inventory since its revenue comes from its users. This means that as attention shifts to paid platforms, the amount of attention “shelf space” may actually decrease.
Is investor interest in D2C startups weak compared to fundamentals, about right, or overheated?
I think what investors are reacting to is that what has been described as “D2C” in that it has no middleman has actually exposed that there is a middleman: Facebook. In many ways, those physical products have eschewed physical retail shelf space only to replace it with digital retail shelf space on Facebook and Google.
In 2010 when this was a new channel, there were arbitrage opportunities because larger companies hadn’t yet shifted their dollars and so this shelf space was underpriced. Today, it’s priced very competitively (i.e., its high cost reflects its strong value to businesses).
It seems investors are now returning to the fundamentals, where organic growth is valued over paid user acquisition and profitable customer acquisition is a focus versus the land-grab approach.
Is D2C still an attractive startup genre for founders?
I think a different framing is whether venture capital is still an attractive source of capital for founders building D2C products? Because of shifting distribution dynamics, a product can get attention from a small and then increasingly large audience profitably. So the question becomes whether in addition to investing profits in growth, the founder also wants to take external capital from VCs to grow even faster.
But in many ways venture capital is like a treadmill where the goal itself is growth, and that’s not going to be healthy for all businesses. A healthier (albeit slower) way to grow is to really master the data on lifetime value and understand customers, versus acquiring lots of customers really quickly, with less certainty around whether they’ll ultimately be profitable for the business.
There is probably an opportunity for alternative funding sources to be matched with entrepreneurial minds that don’t necessarily want to build “venture scale” businesses. By venture scale, I specifically mean businesses that overspend to grow quickly before becoming profitable vs. ones that grow at a more organic rate. It doesn’t mean the business will be smaller, just that it may take longer to grow by reinvesting profits vs just raising the capital to grow.
How has social media, and the rise of cult followings, impacted the way you source deals?
The rise of cult followings benefits brands and if it’s a focus, investors have an opportunity to use that same approach to build their brands among founders. At Betaworks, we have a program called “camp” where we do investments along different themes (e.g., “Audiocamp”). When we announce a camp in a new category such as Audio or Synthetic Media, we consistently find that the networks of people working in a particular category are very dense and gravitate toward each other.
The individuals spending time in those categories have a strong reach and the result is that we’re able to go deeper into networks that are just forming and really try to meet as many founders building in that particular category as possible. This makes it easier both for us to meet founders and for them to find us.
Is B2B D2C a thing that you’ve seen in the market?
For the past three years, D2C has been about commerce. Now healthcare, education, government, all of these industries that stalled in their digital transition, have been hyper accelerated. It’s unclear to me whether that will be called D2C or something else.
B2B tech communication products have already been using this approach (think companies such as Slack). Much of that was driven by a change in how products were purchased at businesses. So a question is whether that behavior change will happen in sectors that have traditionally had even more complex procurement.
Alexis Ohanian, Initialized Capital:
What types of D2C companies do you find the most attractive today?
Companies that focus on building a business – raising money should never be the goal. The Ro team is a good example of this: since day one, Ro has been focused on building a company with patients’ needs in mind. That means they invested when others wouldn’t in their own technology and nationwide physician/pharmacy infrastructure.
It’s because of this investment they could launch a coronavirus triage service so quickly. They’ll be able to leverage this in more ways moving forward that will continue to differentiate them as a market leader.
What are some lessons from a D2C company you recommend your portfolio companies follow?
Leadership + innovation in the time of COVID-19 – I continue to be impressed with the leadership and innovation coming out of Ro (Initialized 2017). They recognized early on that they could leverage their existing technology and nationwide infrastructure to lend a hand during this time of crisis.
In the span of a weekend, Ro’s team built a free telehealth triage assessment for COVID-19 to provide guidance and information about the novel coronavirus, including connecting patients to a healthcare provider for a free consultation. This is a two-year-old company that is moving faster than those who have been in this space for longer or who have ten times the amount of engineers. Ro’s leadership here will help unburden hospitals and clinics at a time for great need, and I can’t wait to watch them continue to innovate and improve healthcare.
Luca Bocchio, Accel:
We’re entering a new third wave of D2C. The first wave was about delivering the best price by cutting out the middleman and was exemplified by brands like Dollar Shave Club. The second wave was about convenience, like HelloFresh. In the third wave, companies are starting up in untouched categories, such as healthcare, with brands like Hims and Candid, and insurance, with Lemonade and Luko.
D2C brands have come under pressure, as historically most have relied on Facebook and Instagram for customer acquisition. As those channels have matured and become more expensive, D2C companies have started to leverage free trials as a hook to become customers’ daily staples, going back to above-the-line to gain market share. We’ve seen this with Smol, laundry detergent delivery, and Itch Pet, flea and worming treatment delivery.
We look for three key ingredients in a D2C business: mass-market appeal and customer love, stickiness/transactional categories, and high-margin products that can sustain multi-channel distribution.
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