Closing the Spigot? DTC Fundraising in a Coronavirus Reality | Coronavirus Series
Editor’s Note: This article is part of a series that explores the impact the coronavirus crisis is having on the world of ecommerce. Explore daily insights surrounding the coronavirus crisis or check out these additional resources to help you navigate your marketing strategy during this time.
The vision of an exit for a direct-to-consumer (DTC) brand—ringing the bell at the NYSE (or NASDAQ) on the day one’s brand goes public or riding off into the sunset after selling the business one built to a large global brand that will globalize your business—is pretty compelling. These massive liquidity events can represent the capstone moment for an entrepreneur and their team after years of willing a disruptive idea to life and then building a business.
Such moments are both extraordinary and rare. For every Drunk Elephant (sold for $845 million) or Bonobos (sold for $310 million), there’s a Casper Mattress (more on their “disastrous” IPO later) or Harry’s Razors (derailed acquisition).
Although the precise formula for success varies from company to company, one necessary ingredient for achieving this kind of stellar outcome? Hyper-growth. And unlike most other businesses that have faced fierce headwinds over the last few months during the global coronavirus outbreak, most DTC companies have actually had tailwinds.
Just how far these tailwinds push a DTC brand, though, may depend significantly on how they have been fueling that hyper-growth and, specifically, how reliant they’ve been on outside investors along the way.
Boom times for DTC and ecommerce
This much is clear: the global coronavirus pandemic hasn’t slowed the ascent of ecommerce.
Recent data suggests that ecommerce sales in the US will grow 18 percent, reaching $710 billion this year as a result of shoppers shifting online in massive numbers. Ecommerce will represent 14.5 percent of total retail sales in the US in 2020, a record-high share of overall retail sales.
“Everything we’re seeing with ecommerce is unprecedented, with growth rates expected to surpass anything we’ve seen since the Great Recession,” according to Andrew Lipsman, Principal Analyst at eMarketer. In fact, Lipsman said, some categories “have permanently catapulted three or four years into the future in just three or four months.”
As counter-intuitive as it may sound, Adam Domian, GM and head of Launchpad + Propulsion at venture capital firm, M13, told us recently that “there may be no better time to be innovating, especially in DTC. Consumer behaviors are evolving so quickly as a result of the coronavirus outbreak and economic downturn, that there’s a tremendous opportunity for innovators and entrepreneurs.”
This all sounds great. So what’s the problem?
Under the surface of the growth stats and buzz about ecommerce and DTC having their “moment” during the epidemic, there’s growing scrutiny and skepticism about the sustainability of this growth.
For some brands that have operated unprofitably and primarily powered their business with capital from investors, the recent coronavirus-related volatility in the markets have shifted the fundraising landscape meaningfully. Some of these shifts, which have made fundraising more challenging for DTC brands, started before the coronavirus but the volatility of the recent market has accelerated them.
"...there may be no better time to be innovating, especially in DTC. Consumer behaviors are evolving so quickly as a result of the coronavirus outbreak and economic downturn, that there’s a tremendous opportunity for innovators and entrepreneurs."
Adam Domian, GM and head of Launchpad + Propulsion, M13
Investors love(d) DTC
Over nearly a decade, the recipe for DTC success has been fairly clear: take an entrepreneur with a disruptive DTC idea in an attractive market and add significant capital from (mostly venture) investors. The result of this mix has often been explosive growth. CB Insights reported in early 2019 that DTC brands received a cumulative $3 billion in venture capital funds since 2012—$1 billion of that was allocated in 2018.
That’s a lot of rocket fuel from investors. Even before the coronavirus crisis spread to the US, though, there were signs of trouble.
The woes of February’s Casper IPO, at which it was valued at less than half of the $1.1 billion of one year prior, are well documented. The New York Times reported after Casper’s debut that the company had become “the latest money-losing outfit to get a cold shoulder from Wall Street investors.”
The company’s market capitalization today (just over $340m) is nearly identical to the amount of money investors poured into the business. The reasons for Casper’s disappointing debut stemmed from Wall Street concerns over their business fundamentals, namely the company’s unclear path to profitability in an increasingly competitive market. Growth at any cost was no longer enough.
The glory days of investors opening their wallets liberally to DTC brands may be over for the foreseeable future. Brian Berger, CEO of Mack Weldon, advised caution to any brand reliant on future funding.
He wrote that now “investors will be more circumspect about opportunities, valuations will come down to earth, and marketing and distribution strategies will be scrutinized.”
“There will be a VC cooling,” said Web Smith, the co-founder of men’s brand Mizzen + Main and founder of 2pm Inc. “Retail is not a VC-fundable proposition, in my opinion. Casper is a retail company, not a tech company—regardless of what they say in their S-1.”
Adam Domian sounds a more optimistic note, though. He said, “There’s capital available to brands. Investors will likely be more judicious with investments so founders should be prepared for that. Focus on crafting a business with a sound business model—ensuring things like a path to profitability, solid retention, subscription models—not just acquisition of customers at all costs.”
How should brands prepare?
The days of growth at any cost and pitching investors solely on a brand’s ability to acquire customers are over, at least temporarily. In the current environment, rigorous planning and preparation are critical before entering the capital markets. But with the right preparation, there are still funding opportunities.
Mike Garcia, managing director at Intrepid Investment Bankers, told me that “[i]n general, the markets are stronger right now than a lot of people realize, but a brand needs to have the right plan, data, and story. Figuring that out is the winning or losing factor. The subtleties matter.”
What does preparation mean? Domian offers some specific guidance. Know your P&L, your data, and your business model cold. Investors will scrutinize your command of your company’s mechanics. Timing’s also important—start your fundraising process before your cash situation is dire, or else you risk rushing a deal and agreeing to unfavorable terms. And take the time to do your own due diligence and research potential partner firms. It’s a critical, long-term relationship and it’s important to get it right.
Finally, with a pandemic bringing the global economy to a standstill over the last few months, all of us have had to confront some type of “new normal.” Although it’s impossible to predict how long this new normal will last, it’s important, Domain says, for brands to have a point-of-view as part of their storytelling that speaks to how their business is prepared to succeed in a post-coronavirus environment.
"[I]n general, the markets are stronger right now than a lot of people realize, but a brand needs to have the right plan, data, and story. Figuring that out is the winning or losing factor. The subtleties matter. "
Mike Garcia, managing director, Intrepid Investment Bankers
Be prepared: Plan upfront. Don’t hurt your credibility by showing a lack of preparation. Don’t go out to the markets before you’re ready.
Expand your options: “Consider a strategic acquirer,” suggests Garcia. Mergers and acquisitions (M&A) may be an even more attractive option currently given pressure on some larger retail companies to supercharge their ecommerce and DTC efforts in light of the coronavirus. The urgency is being driven, in part, because “all of the eyes” of the board, exec team, and shareholders are on the challenges these retailers felt when stores were forced to close around the world.
Keep investing in your brand’s community: The loyalty of a brand’s community is a hallmark of the most successful DTC brands. Both strategic acquirers and investors are more interested in companies “that have built strong communities surrounding their brands,” said Janki Gandhi, managing director at Goldman Sachs. The impact of community has only been accentuated during a period when millions (billions?) of people are experiencing some form of quarantine.
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