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Despite hungry VCs, DTC brands are rethinking their fundraising approach

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This is the latest installment of the DTC Briefing, a weekly column from Glossy sister site Modern Retail about the biggest challenges and trends facing the volatile direct-to-consumer startup world. 

Before 2020, some founders and investors were starting to warn that most consumer startups wouldn’t be able to secure the exit size needed to justify taking on venture capital financing. Then, the coronavirus pandemic caused people to shift their spending from stores to e-commerce sites at a rate that most retail analysts were predicting wouldn’t happen for another several years.

That’s fueled two divergent narratives: one, that venture capital funding is starting to fall out of favor with direct-to-consumer startups. And two, that it’s a great time to raise venture capital funding as a consumer startup, as more investors are finally waking up to the fact that there’s a huge opportunity for these companies as more people do more shopping online.

These two concepts aren’t necessarily mutually exclusive. What they have fueled, is further calls for DTC startups to not raise venture capital funding too early on, before they have proof of concept, as Modern Retail recently wrote in a piece on the “the end of the Series A.” There’s now a greater focus among one- or two-year old startups on getting to profitability and establishing sound unit economics earlier on. For later-stage startups that were finally able to prove last year that their category was poised to experience rapid growth, it’s an opportune time to fundraise — but, there’s still a risk of taking on too high of a valuation that they may not be able to prove out later down the line.

As a result, startup founders are trying to become more discerning about venture funding, rather than viewing it merely as free money.

Ali Kriegsman, co-founder of software startup Bulletin, is of the mindset that venture capital funding is falling out of favor amongst early-stage consumer startups — despite the record e-commerce sales reported in 2020 — as she detailed in an editorial for TechCrunch earlier this week.

“I spoke with a handful of founders, particularly in the wellness and beauty spaces who had really great years without venture financing, and grew astronomically,” Kriegsman told Modern Retail in a phone interview. “They were profitable from the beginning, but had even increased their profitability, so this sense of needing venture financing as a growth vehicle just didn’t ring as true.”

In 2020, e-commerce sales in the U.S. grew 34.2% year-over-year, compared to 14.6% the year prior, according to projections from eMarketer. That helped some direct-to-consumer startups triple or double their sales compared to the following year. The e-commerce boom helped mitigate some concerns that direct-to-consumer startups would start to hit a wall in 2020. In particular, Casper’s lackluster IPO at the beginning of 2020 helped fuel concerns that DTC startups would fail to grow rapidly enough and justify their lofty valuations. The mattress startup went public with a market capitalization of $377.9 million, after being privately valued at $1.1 billion.

Kriegsman’s startup initially launched as a retail-as-a-service company, before shuttering its physical stores in 2019 to focus on its online marketplace, which helps broker wholesale orders between brands and retailers. Bulletin has raised venture capital funding itself, but that’s because “it’s quite obvious that software and tehcnology businesses can scale faster and more cheaply.”

“From what I see andwhat I read, I think true category disrupters that can establish real ownership in a market — like Oatly as an example — can benefit as a venture financing,” Kriegsman added.

Veronica Armstrong, founder of fragrance and candle startup Isle de Nature, is among those still looking to raise a seed round this year. Armstrong’s company launched in 2018, and started selling its products in September. Armstrong said she’s worked for two venture-backed e-commerce startups previously, including greeting card maker Lovepop. While she’s aware of the drawbacks of venture capital — namely, how quickly founders’ share in the company can be diluted — she’s still interested in raising venture capital funding in order to get partners “that understand the category and our long-term vision.”

“With alternative financing, yeah you get money but you don’t get distribution expertise or anything else that would be additive,” Armstrong said. Still, she said that she built Isle de Nature so that the company would make money on each order from day one, so that the company wouldn’t be too reliant on venture capital to prop up the business. Added Armstrong: “This is the most exciting time of my career [in e-commerce] when we consider how quickly the spend from retail to e-commerce has grown.”

Mike Duda, managing partner at hybrid accelerator agency and venture capital fund Bullish, said that he’s seeing an increased interest from other venture capital firms that don’t focus exclusively on consumer startups in investing more in this sector, thanks to the pandemic. Particularly, on the software startups that can help fuel the e-commerce boom, citing ChowNow as one example.

There’s a risk, he said that as more venture capital money flows in, “it could lead to a bidding war over valuations still in some areas.” Still, he said that “entrepreneurs are getting smarter and savvier about the amount of money they should raise, and at what terms.” For one, VCs were souring on consumer startups before the coronavirus outbreak, and funding ground to a halt as soon as the pandemic hit. Those two events made founders more aware that an opportune fundraising environment — like this current moment — won’t last forever.

“It’s like, you better have two years of runway or else, because you don’t know what’s going to happen,” said Duda.

Despite hungry VCs, DTC brands are rethinking their fundraising approach

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