Event Recap

Event Recap: CLICK: A series about all things direct-to-consumer with Lightspeed Ventures & The Ember Fund

May 14
Aug 23
Alley Team
Event Recap

Event Recap: CLICK: A series about all things direct-to-consumer with Lightspeed Ventures & The Ember Fund

May 14
Aug 23
Alley Team
Event Recap

Event Recap: CLICK: A series about all things direct-to-consumer with Lightspeed Ventures & The Ember Fund

May 14
Aug 23
Alley Team
Person packing a boxPerson packing a box
Photo by Bench Accounting on Unsplash

Allbirds, Warby Parker, Casper – these are just a few of the well-known direct-to-consumer brands that have reinvented the way businesses are being built and how consumers interact with brands. In this series, we’ll speak to founders, thought leaders, and investors about what building a D2C brand actually looks like & what companies need to do in order to succeed in this market.

Mentioned:

Lalo | A Modern Baby and Toddler Brand - Lalo is a modern baby and toddler brand. We are rethinking the way parents shop for their little ones with a streamlined experience, thoughtfully-designed products, and unparalleled service.

HAUS LABORATORIES - This is not just another beauty brand. They say beauty is in the eye of the beholder, but at HAUS LABORATORIES, they say beauty is how you see yourself. They want you to love yourself, and it is their mission to spread kindness, bravery, and creativity by providing tools for self-expression and reinvention.

OUR PANELISTS:
Luke Tubergen
Ember Company
Noelle Tassey
Alley


TRANSCRIPT:

Noelle 0:00  
... installment of CLICK here at Alley. For those of you who don't know me, I'm Noelle Tassey CEO of Alley and I'll be your host today. We're gonna be talking all things direct-to-consumer, with our incredible panel of experts. So I'm going to hand it over to them to introduce themselves and tell you a little bit about their businesses. But first, for anyone who's listening, who is interested, we are doing a lot of these events right now to keep our community engaged while everybody is socially distant. So please feel free to join us tomorrow when we talk about mental health for leaders and teams, and Friday for a fireside chat around socially-conscious entrepreneurship. So without further ado, I'm going to hand it over to Luke to introduce yourself. Tell us a little bit about your business.

Luke Tubergen 0:49  
Hey, everybody. Happy to be here today and glad to be sharing the panel with Nicole. I work at The Ember Company and we work with emerging consumer brands. We have three platforms. We have the Lab, the Fund, which is what I manage, and then the Bonfire Group. And we'll be focused today about the Lab and that's where we provide inventory funding to fuel growth for emerging brands. We work with everyone in the consumer space, and particularly those that have inventory is where I sit. So I'm excited to talk.

Noelle  1:35  
Awesome. Nicole?

Nicole Quinn 1:36  
Hi, everyone, thanks, Luke. I'm a general partner at Lightspeed Venture Partners out here in Silicon Valley. Although we're very global, we have offices in China, India, Southeast Asia, Israel, London, and now, well in Silicon Valley. We're also spending a lot of our time meeting great companies all across the U.S. Before all this I asked that pretty much every single day on a plane. We truly believe that D-to-C companies in any fast-growing startups can come from anywhere, not just in this weird bubble of Silicon Valley. So, we— Lightspeed has about $10 billion assets under management. We're currently operating out of our 13th Fund, which has an early-stage Fund and a growth-stage Fund, in total about $4 billion and we are super excited about D-to-C investments. There was an interesting article this morning, from Business of Fashion, not sure if anybody read it, on why Silicon Valley are less excited about D-to-C. I do not think that's true and I'll talk about that today. And our investments in D-to-C include Goop and Rothy’s and House, HoneyLove, Sagely, Daily Harvest, HungryRoot, many others. So thanks for having me here today.

Noelle  3:02  
Awesome. Thank you both so much for joining us. And thank you to everybody who's tuning in, really excited that you're spending your Wednesday afternoon with us. So we're gonna start off just kind of by diving in and with a little bit of a background question about D-to-C. So you both approach investing in D-to-C from slightly different angles. So it'd be great to hear from both of you just what your approach is, in general, what you're looking for in the companies that you're working with, and also what your fund is bringing to the table. So Luke, do you want to kick off with that?

Luke Tubergen  3:40  
Yeah, happy to. You know, we look at things a little— a little differently than a traditional VC might. We— it was really started with the Ember Lab and that provides startups and entrepreneurs to a network of three hundred mentors, industry experts, really. And the thought there is just enabling entrepreneurs to make decisions smarter, better, faster, in order to kind of spur on their growth. And out of that, realize that many companies have a capital crunch and maybe don't fit their traditional VC model that's been in practice for a long time. And so we recognize a lot of that function is around inventory. And so we started our Fund to meet that need and solve for that problem. We provide inventory funding that we try to match up with the company's cash cycle. And yeah, we look at particularly that cash crunch that they have, but we also bring the expertise of the 300 mentors in our network to the table as well and try and be as value out as possible.

Noelle  5:01  
Awesome, Nicole over to you.

Nicole Quinn 5:03  
So, for Lightspeed, what we look for in a D-to-C investment is signs that a true brand is being built. That means different things to different people. For us, that means that we're seeing early signs of good repeat rate, good referral rate, a high NPS, strong NPS score, strong organic word-of-mouth. And you can generally get this at a pretty early stage. Typically, we come in around in the Series A Stage after the company is doing about half a million to a million a month. But I think even earlier than this, you can get a really good sense of whether a brand is emerging there. We sold out in Rothy’s. We started speaking to Rothy’s maybe after they launched three months earlier and had already got to those points and people were talking about it and just loved it. And it was amazing to see the way that people really gravitated towards the brand and talked about the fact that it was environmentally-friendly and sustainable. And it's just real customer love. And in terms of what Lightspeed brings to the table, we really try to be a truthful partner to— to the founder. You know, hopefully, you're on this journey for the next decade and we definitely want to be there right beside you. I make the analogy to— to a ship and you are the captain of your ship, you are driving your ship. You never want to work with an ambassador who tries to grab that wheel and takes it away from you. You always want to be the driver, but it's for us to be in the cockpit with you and say to you, we've sailed these seas before, watch out for that iceberg over there. Or there's a ship you might want to partner with that somebody might want to bring onto your ship and hire. So those are some of the areas that we help founders with and are lucky enough to have a 60-person operations team that also helps alongside the board member and one of our values is "one lightspeed." So we all work very much together.

Noelle  7:16  
That's terrific. And I love you know, we do a lot of these panels. And one of the fun things to me about this one is that you're both in the same space but approaching it from— from very different angles in terms of how you're funding these companies. So I'm really excited to get both your perspectives on what's happening today. So with you know, the current crisis and I'm sure you're both very engaged with all of your portfolio companies right now. What's the advice that you're giving people? You know, in terms of spend, burn, runway, marketing. What are the— what are the top pieces of advice that you're giving and what are the best moves you're seeing?

Luke Tubergen  8:00  
Yeah, I mean, I know for— sure— yeah I know, for— for me you know, it's a lot around just that kind of the spend, the burn, unit-economics profitability, you know. And it's not a one-size-fits-all conversation it really depends on the profile of the business. Some businesses just by, what they're selling, and how they're made up are positioned uniquely to take advantage right now and are doing really well because people are staying at home and their products fit really well with that profile. Other companies you know, really need to manage spend and, you know, bring things really tight because it doesn't fit well with the state of the world right now. So it really kind of depends on what the business profile is, where the business is at in their growth and how that really comes together with where the world's at right now. But a lot of it I think is around spend. Some it's like spend more now is the time like ramp up it's— it's— it's, you know, sales season and then others it's how do we really get through this in a way that's smart and you come out on the other side you know, a strong company ready to see ready to grow again.

Nicole Quinn  9:20  
I really agree with Luke with regards to it very much depends on the company and the subsector that you're in. I think the one commonality is that we are saying to companies that they need to get to 24 months runway. And so we just don't know how long we're going to come out of this. We have no idea you know what shape recovery it'll be. And so having 20— you know, 18 to 30 months runway or 24 months runway is something that gives you peace of mind and gives you the power that you will be able to weather the storm. We will say to win you have to be alive. So let's focus entirely on being alive right now. And so we're saying to companies "Listen, if your revenues down 50%, then we've got to cut costs by 50%." We've got to make sure that that runway is there. And so with regards to marketing, I really think that very much depends. With some companies it was, it makes sense to pull back entirely on marketing, because the demand just isn't there, you know? Maybe— maybe it's apparel or shoes, which are really having a tough time in this environment. Or maybe on the other side of things, you're selling something in wellness or— or food in this market. And my gosh, you know, this definitely is the right time to be spending much more on marketing. We're seeing that CPMs on Facebook have halved and so for the smart marketing people out there where the customers are coming to them in this environment, it really does make a lot of sense to lean into that and to spend more on Facebook. TV is exactly the same, prices are really coming down. So getting companies to— encouraging them to really lean into that. And so those would be a couple of the main things, but I'm happy to answer questions later on if there's specific areas people want to talk through.

Noelle 11:21  
Terrific, and I think we're going to circle back to this at the end as well, especially the unit economics piece. So just in terms of kind of getting to that 24 months in the bank and why that can be so difficult in this industry. But next, I just want to talk a little bit about the evolution of direct-to-consumer. So you've both been in this space for a while, it's a relatively, you know, young— well, it's a maturing— it's a maturing segment, really. But, you know, what do you guys think really contributes to the popularity of this model and of the space?

Nicole Quinn  12:01  
I can take that. So, for us, D-to-C, you know, has been always really interesting. I actually started off my career back in 2005 as an e-commerce analyst at Morgan Stanley. And so the UK always had about double the e-commerce penetration to the US. And so we were able to see really positive examples of e-commerce companies, both brands, and retailers who were growing really quickly, rapidly being adopted by customers, and also where public investors that time paying high multiples for them. So in the UK, you know, it was like Net-a-Porter, Yoox, ASOS, related to the IPO it was Alando. These are companies that were trading on like five to seven times forward revenue multiples. Which is so different to public e-commerce companies in the US where you know, Wayfarer and Zillow and companies like that, definitely traded at much lower multiples. And so it was encouraging to be covering a space that was just so loved by investors. And so I started doing that more on the angel investing side and then later on on the VC side, and always just saw huge opportunities in e-commerce. I feel like for D-to-C it's far faster and far cheaper than it has ever been to start these businesses because of great tools like Squarespace and Shopify and all the rest. So you really can very quickly start a brand and I mean, Casper is the real— really interesting one from how quickly they grew. They were very public to talk about the fact they did a million dollars in their very first month. If it's helpful, we can talk about whether I think it is a positive to talk about your company's traction publicly. We're investors in Stitch Fix and I think that they were very smart to sort of stay below the radar. And they very much stayed in front of the customer but did not come out there and speak to press and VCs about that traction. And as a result, they didn't have many copycats until they listed their S-1, and then straightaway, Amazon copied them. So it's, I think, a really smart strategy that Stitch Fix did. So for me, there's multiple different areas that are attractive, and the last one that I'll end on, which I hope we come back to and talk more on, is how quickly it— yeah, these companies can get to profitability. And so that's something that Luke and I had a great debate on yesterday. So I'll hand over to Luke to talk more about that. But that's definitely something that gets me excited about this overall space.

Luke Tubergen  14:47  
Yeah, definitely. That's really well said and I do think profitability is a really interesting conversation right now. But, you know, that fits into the larger D-to-C conversation. You know D-to-C obviously is dependent on the internet. And so as people got more comfortable with purchasing online, you know, companies were able to take advantage of where people were spending. But I do think that's evolving now where strictly D-to-C companies, you're starting to see that they need more, you know, omnichannel approach. And we're really supportive of that, have been since the start, I think, having a purely D-to-C it's very rare for a company that it makes sense to only be in that channel. So we've always kind of encouraged companies to be multi=channel In that sense, like digitally, native brands. But it's important, I think, to have the wholesale relationships or the retail relationships for most companies. And I think you're seeing that shift as it also relates to profitability. And seeing companies that grow, maybe in a more traditional, than the VC or the, you know, when D-to-C was first really taking note and going these, you know, companies that were going public early, or some of the first D-to-C companies going public is really exciting. But they were kind of, you know, doing it with a loss-leading product. And so it's interesting now, I think there's a lot more companies that are bootstrapped and are growing in a way that might look, you know, more traditional than just venture. And so that's where I get really excited is, you know, smaller companies that have this prospect of growing and maybe not reaching the billion-dollar exit, but they can still, you know, exit for a very large amount of money and make everyone happy along the way. So it's an interesting shift in the marketplace, but I do think kind of the core takeaway for me is, most D-to-C brands need to be omnichannel or be thinking about how to make that a part of their business.

Noelle  17:10  
So something that, you know, you both kind of touched on and Nicole, you know, you said, I think the exact— was it's faster and easier to start a brand right now than it ever has been before, right? Because there's kind of this full-stack. It's like plug-and-play. And you actually kind of were talking about that in the context of Casper. The mattress space is kind of notoriously crowded with bed-in-a-box products and these kinds of brands that are a little bit like turnkey. So I'm curious because you also spoke about really seeing traction with a brand like Rothy's, for instance, early on and that makes them to drive you to invest. Do you feel like the space is oversaturated with you know, sort of the turnkey copycat types of brands that are coming after let's say a market leader like Casper and like is there still room to win in those categories that are already kind of established?

Nicole Quinn 18:06  
So I think there were two parts to that question. I think it's whether there is saturation within those categories. And then it's also thinking outside the box a little bit with regards to whether there are interesting D-to-C brands already in all categories. And for the latter, I think, no, I think that there are not D-to-C companies in all those other categories. I think we're seeing the emergence of interesting categories all the time. Consumer preferences are changing. In Millennials, definitely, Gen. Z, are gravitating towards brands that stand for causes. And it's interesting the way that their shopping patterns are different. So I think that we'll always find new interesting categories and areas where D-to-C brands can be built. And I'm super excited about that. And then with regards to some of the categories that you mentioned which definitely have a lot of D-to-C companies in like Casper, it's interesting because if you come out and after the first month, you say, "Hey, everybody, we did a million dollars this month with building a mattress." And you know, somehow your margins come out as well, and people are thinking, Wait a second, this is a really interesting category, I can do this too. I can roll up a mattress and send this to people's homes, be profitable in the first transaction because the ARV is so high and wonderful. And so then, of course, you do get this flood of copycats coming in. So I would say I do think there's value in staying under the radar for a little bit longer, especially with regards to mentioning your numbers. And then I would say, I particularly like bias, but I particularly like the way that Rothy's have done this because I think you look at the fact that they spent three to four years in R&D before they launched a single pair of shoes. So they really made sure that the design and the manufacturing or production of the shoes is absolutely perfect. And then that creates the sort of value that is then very, very difficult to replicate. So now, ALDO's have tried to replicate it and Amazon but it's not the same. In fact, we got this email from a guy in China who said— he went to the CEO of Rothy's, he said, it is my job to copy shoes. I do this for Nike and Adidas all day long. I have been trying for the last few months to copy a pair of Rothy's and I cannot do it. I don't know how you've made these shoes entirely seamless with such little material and it all made of plastic recycled bottles, but I can't copy it. And that was brilliant to hear because it's like wow, okay, we really have something unique and differentiated that customers love. And so that's what you know, I'd love for the founders in this call to think about because I'm sure you know you're also thinking about building your product which is unique and differentiated and that others can't copy. And that, to me, has so much value.

Luke Tubergen  21:03  
Yeah, I would second a lot of that. And I think Rothy's is a good example. You might say, shoes are a crowded space, and there's a lot of noise, and there's several brands going after it, but there's always going to be innovation. And I think if— if there's real value to the product, then there's a business there. And it doesn't really— so I think there's always kind of space in the market. There's always like, you know, changing consumer behavior, as Nicole mentioned, and then, you know, the market itself grows and changes. And you know, we've been really interested in brands that have a— have a real niche and, you know, might be in a place in the market that doesn't seem like there's much there, but actually, they kind of can grow a market as its— in its own sense. A good example of that is a company called Ballwash, and it sounds like a very like novelty product. It's kind of what it sounds like, it's a— it's a men's personal care product. And it is really unique, but they bootstrapped the business to two founders. And, you know, we were the only outside money in it because the unit economics were so good, they just needed money to really take advantage of holiday and a few other— a few other real big-spending days for them. But, you know, it's a niche product that seemingly now has a— has a market share of the personal care space. And, you know, it's soap, and now they've grown into a brand because the product is actually good and actually does have value. So they've created a whole brand around it and really been a big success story. So it's an interesting, interesting space, but I always think that there's room for innovation in the marketplace.

Noelle  22:58  
So I mean, please don't keep me in suspense, is this like a three-in-one like wash your face, wash your body, wash your hair for like people where two-in-one shampoo wasn't—? Like I'm just generally— I'm genuinely curious.

Luke Tubergen  23:10  
No, it's— it's— so the company— the— the company name is called Ballwash, right? So it's below the belt.

Noelle 23:18  
Oh, I heard "All Wash", sorry.

Luke Tubergen  23:22  
No sorry, "Ball"— and so they— but now they have shampoo, and body soap, and all the rest.

Nicole Quinn  23:31  
There's also the company called Manscaped, and it very similar, it's "scaping." And they're doing incredibly well.

Noelle  23:40  
That's— that's really great. I truly— I always learned something on these and I never know what it's gonna be. So you know, you brought up bootstrapping there, obviously and this is something we talked about a lot, you know, on our— on our prep call, the three of us. But bootstrapping versus raising venture capital, how that influences the way you grow your business, and your path to profitability and options for exit. All those things obviously being quite closely tied together. So I just want to open that up for discussion. We had a pretty like healthy debate around the topic and what— what that looks like and what founders should choose out the gate.

Luke Tubergen 24:17  
Yeah, what we— what we always try and ask founders is really what do you want? And I think that's going to be the driving force if a founder— you know, there's no there's— no right or wrong answer to it. It's really dependent on what business they're trying to build, and why, and you know, where they want to see it go. And sometimes that is the, you know— I have a product that I think can achieve hockey-stick growth, I'm going to take the resources needed to do that. Or there's— or, I want to build, you know, a solid business that grows a little bit more slowly, and I want to take the resources necessary to do that in— you know, in a way that makes the most sense and is responsible for the investors I do take on. And for myself, as you know, as a founder. I think COVID has really shown us something around personal care and just mental health, things like that. So I do think it's important to understand the pressures you're taking on, given how you're going to grow your business and what makes sense for the founder.

Nicole Quinn 25:30  
I mean, that's well said, it's like, what makes sense for the founder? What do they want? Because we always say not every business is right for venture capital. And so you really got to think about what your ultimate goal is. Because once you start taking VC money, then probably doesn't make sense to go for a go, you know, 50 million outcome. Whereas if you're bootstrapping a business, and you're driving that to 50 million outcomes, and you own nearly 100% of that, then wow! That is life-changing and good for you guys. That's terrific. Whereas if you start to raise venture money then you really have to be thinking okay, I'm taking this money because I want to grow much faster than anybody else. And maybe you thought it was competitors who are quick on your heel and you want to take money so that you can hire the very best executives you possibly can spend more money on marketing so that you can grow very quickly. And then you do have aspiration maybe for you know, like a billion-dollar outcome, then VC certainly is for you. Headspace and Karma are pretty interesting examples. Not D-to-C but within consumer where, you know, they were right up against one another and just like competing head to head and so it did make sense to take VC money early and then get to a point where you're like, Okay, great, you know, we're profitable, we don't need to anymore. I love the model where companies will take some VC funding at the seed and Series A stage where it is pretty tough to be profitable at that stage. And you do want to spend a little bit of money on marketing so that you know, with the K-Factor, you also have this really interesting organic presenters, this also driving business in addition to your marketing spend. But after that, you can get to profitability maybe, you know, in year— in Year Two, and so you don't need to raise any more money. That's an interesting model, I think. I think it's tough, obviously, we saw what happened with Brandless. I think it's really tough to raise such huge amounts of VC funding. I spoke to the company yesterday who acquired that business. And it was pretty much acquiring the inventory and the burn rate. I've never actually seen anything like it. And so I really admire businesses that think about the economics right from the get-go and are constantly thinking, Okay, well fine, I'll take a little bit of money now for this specific reason and just spend according to exactly what you said you were going to with a goal in mind and not get caught up in okay, well now I raised money I have to raise more money. It's more like no this is your business you keep it that way and you have the power to raise or not raise so that's the best position to be in. We're in a really terrific CBD company called Sagely which is omnichannel, both D-to-C, and they also sell across CVS, and Walgreens and Nordstroms. And I love the founders so much because, you know, they are both always thinking about okay, I'm gonna make this business profitable so that I control my own destiny and I decide if I want to raise or not want to raise, but I never need to raise and I love that mindset.

Luke Tubergen 28:56  
Yeah, I would agree. I think getting to profitability really changes what your options are. And you know, whether that's after you've raised from VC or not. If you're— if your business is profitable, then you're not beholden to needing the outside capital. And then it's really truly growth capital that you can take on because it's not going into— to sustain the underlying business if the underlying business is profitable, you have a lot of options at your disposal.

Noelle  29:29  
Yeah, definitely. And, you know, back kind of, to the Brandless example, in that race to a billion dollars, so you know, when you are taking on the VC money, and maybe you're not, you know, like to your point pursuing that route of being in that position of having the path to profitability and solid unit economics. You know, we've seen a lot of flops, Brandless is a great example. We've seen a lot of blow-ups on the way to that, you know, kind of lofty goal and a lot of companies that are maybe still around the billion-dollar mark, but still haven't made the unit economics work. Why do you— it feels like this space seems to breed that for a business where you're still selling a physical product like why do you think that is? And do you think that we're going to continue to see that in this space? Like will there be more Caspers, Warby Parkers, Brandless, Outdoor Voices? I know I'm sure that I can name another dozen that get to massive scale while still having really high burn.

Nicole Quinn 30:36  
I personally think that if you look at public market investors, they have been very clear on how they value companies like Blue Apron or Casper, and they're telling you listen, we want companies which are profitable. They always used to be those few with public investors that companies didn't need to be profitable at the time- they needed to have a clear path to profitability within 12 to 24 months after going public. And now that's changed. Now, public investors like no, it needs to be profitable now. The same is the view from private equity, they've always had that view that you know, it needs to be profitable. And I would say that VCs are also seeing that. We're seeing how strong brands are and how quickly they can grow while also being profitable. And so now you have these really terrific examples of what can be. You're looking at companies, like the ones you mentioned, Brandless, and Casper and Outdoor Voices, you know, you're like wait a second, if Rothy's can do it and always have terrific 20% EBITDA margins, then they can also do it. And so, I think that we will certainly see brands get to meaningful scale. I don't see that going away anytime soon. But I do think that investors and founders, just boards just generally will be pushing one another to think through, okay, so how can we do this profitably? Or how can we do this at breakeven? We still really want to grow, and we still want to compete with all the other nibbling at our heels, but we can now do this profitably. So that's where I think the world is gonna start to shift.

Luke Tubergen 32:22  
Yeah, I would agree with Nicole and saying that you know, it's starting to come further back into the founding of the company or the earlier stage of the company, where people are wanting to see profitability. You know, we operate a little bit sooner than Nicole does, and we still see profitability as one of the major checkpoints in due diligence, at least that they have a very clear path to get in there. And I think that that focus is really shifted from top-line growth to profitability and sustainability of the business. And so while the growth rate, hopefully, can stay the same, I think people are a lot more tolerant of a slower growth rate if the profitability is there, and I don't— and I think to Nicole's point, like, the scale will still be achieved. And again, I think that just goes back to— is the real value to the product and to the business. And if there is then should be able to be profitable and should be able to get to scale.

Noelle 33:28  
You guys also see, you know, we've talked about so these pressures existing if you're going to venture capital or private equity or public markets for funding. What about acquisition opportunities by incumbents for unprofitable but pretty large-scale brands? I think a good example of this is Bonobos, for instance, acquired by Walmart for quite a bit of money. They weren't profitable at the time of acquisition, do you think that those opportunities will continue to exist?

Luke Tubergen 34:04  
I think— I think you'll see— I think they'll be there, but I think it'll be rare. I think that the general market has already kind of shifted away from the Bonobos model. And like I was just saying, and so companies aren't being built the same way. And that will never really change, you know, that there aren't as many exits in that same scenario.

Nicole Quinn 34:35  
I agree with that point on profitability. I'm going to answer the question in a little bit of a different way. I think that if you're looking at companies like Walmart, or Amazon, there are often other reasons why those big conglomerates acquire these brands. And that might be on you know, the quality of the birth and leaving it. And so do I think that they— it made so much sense to acquire Bonobos because you got the brilliant Andy Dunn and the true brand with it? Yes. Do I think that Jet being acquired at 3 billion was a lot because of Marc Lore? Yes. Like 90% of it might be because of him. And so— possibly the most expensive acquhire in history. But that's also how I think that a lot of these acquirers are thinking about things. And like, let's not forget, like a lot of these CPG companies and these retailers have a lot of money on their balance sheets, they did before COVID. And now because of COVID, they are going to come through these times and have significantly more cash than they were projecting on their balance sheets. And so hopefully, they will think about that in terms of making acquisitions. And they'll be making acquisitions for many different reasons. Yes, maybe it's, you know, for the revenue, but also, you know, potentially, it's for the IP, for the founders, for the team, and for many other reasons, for the brand. So I hope that we do see many more acquisitions in the CPG and D-to-C space overall.

Luke Tubergen  36:18  
And I think that that might actually happen because of COVID. I think there could be an uptick in a lot of acquisition activity that we see in the space.

Nicole Quinn  36:30  
Yeah.

Noelle  36:31  
And so, I'm glad you brought up COVID— well, I'm not glad, it's not anyone's favorite topic, but it is, you know, obviously, quite topical. We had a lot of questions earlier when we were talking a little bit about COVID, and how that was gonna reshape this industry with regards to also discussion around omnichannel. So brick-and-mortar, you know, has proven to be useful, at least from like an experiential awareness-boosting perspective for a lot of businesses. You've got, you know the— what does Casper call them the Nap Shops, I think? You go in and you can take a nap and things like that. Really, really moving the needle for them. But how do you see that you know, shifting? Do you see startups having to move away from that and come up with more creative ways to get in front of consumers given that right now, omnichannels really— it's really hard to pursue an omnichannel strategy if you can't go outside.

Nicole Quinn 37:33  
We've seen companies leaning into, I would just say more of the digital channels. You're absolutely right, that there's this whole area that you can't lean into if people can't go outside. Although interestingly, yesterday we got an email from a company that focuses on out-of-home advertising. And they were saying that you know, if things start to open up, there's some really attractive prices being offered for you know, billboards and things like that. People are still driving. Sometimes, they're not driving anywhere, it's just to get out of the house, you do it just with people in your house. So I think that there are people who are now thinking about okay, so do we start spending on those areas again? But within the digital channels, I think it just makes sense to like double-down on what's working. So if TV's working great, really lean into that, you know, people are watching TV a lot more right now. So you can buy ads on the news channels, then that is really working very well for some of our companies. Facebook and you know, the digital channels also making a lot of sense. Podcasts, interestingly, people are listening to less podcasts in this environment because there's less commuting and so maybe that channel doesn't make as much sense for you. But those are some of the things that we're seeing. Luke what about you guys?

Luke Tubergen  39:03  
Yeah, I think you know, it is obviously uncharted territory, and no one has a crystal ball for the future. I don't think stores are going to go away. And I think it will have to be a part of strategy going forward. What— what it actually ends up looking like, you know, who knows? But I do think it's— it's not something to be ignored and I think also like in the most immediate— yeah, it has to be very data-driven and what makes sense for your business and there's definitely different channels that make sense. You know, Nicole highlighted a lot of them but it— I still— I still think omnichannel is gonna be the solution in the long term.

Noelle  39:53  
Interesting, and we talked a little bit about customer acquisition costs earlier going down I can't remember, which one of you mentioned that. But like just the way Facebook, your cost per click on Facebook actually going down in the middle of the pandemic. That is really interesting. I would not have guessed that and B had not heard that was customer acquisition costs, being especially advertising through Facebook and the Facebook family of platforms being such a huge cost for direct-to-consumer companies who's winning in the industry on that?

Nicole Quinn 40:31  
Do you mean which type of D-to-C companies are winning? Or—

Noelle 40:35  
Yeah, which ones are winning due to the yeah, lowered costs?

Nicole Quinn  40:41  
I mean, for me, I think it's about the ones who are really leaning into that and taking advantage of that, but it only makes sense for some companies to lean into that. So CPMs have come down by 50% but then there's also less people clicking on them so there is definitely also a slightly lower click-through rate, and depends again on where you are. So people are not buying apparel and shoes as much but they are definitely buying a lot of food and wellness products and Peloton, so the sort of like gym items for the house are doing really well and household items because people are working at home and looking around their house and thinking, oh, you know, I need to get a new desk chair over there. So definitely home is doing particularly well. And so I think if there is demand there, then for the companies who are leaning into the lower CPMs then the ones who can take advantage of this. To me the bigger question is like, even if your business is benefiting from a rise during these times, then how can you make that sticky? How can you emerge from this stronger than you went into this? And so one example I'd share with you is think about Instacart. I don't know if anybody listening is using Instacart, but, you know, I always used to do my own shopping. And now I'm using Instacart, at I'm nine months pregnant, so I really love the fact Instacart delivers to the door. And then maybe after this, I'll go back to doing shopping. But Instacart is so smart, they've introduced a subscription product. And so they're like, hey, you know what, why don't you just pay $99 and you get the free shipping, free delivery? And so then they can lock you in. And so I love that, I love thinking about like, how can you make this sticky? How can you lock customers in so that the changes in behavior that we're seeing now can stay a part of the behavior afterwards? And then your business is strong as a result.

Luke Tubergen  42:50  
Yeah, I think in a similar way, you know, email has done really well. People are open— opening up a lot of emails that normally they wouldn't. SMS continues to be a really interesting space for connecting with people. And so I do think that there's definitely opportunities right now in marketing in particular, and creating that retention or even community around the brand that is really unique for this moment in time.

Nicole Quinn 43:19  
Great point on the email, Luke. I feel like that is something that's just doing so well for companies. And they were sending like one a week and getting like a 20% click-through and now they're sending one a day and getting a 50% open rate. It's working really well.

Luke Tubergen  43:33  
Yeah.

Noelle  43:33  
It is amazing. my inbox has never been this low. I can't in recent memory— you're home all day, might as well— what's up? What's Snowe Home putting on sale right now? Just on the topic of home goods, you know, like I need like— it's really cold in here. But you know, so it's sort of on that topic actually, because that is actually something that happened the other day and I kind of went down the rabbit hole of home goods and direct-to-consumer brands, and that's a super-crowded space right now. And you know, it really feels like there's a lot of sameness in terms of they're all kind of selling to the same profile, very similar products, it's quite hard to differentiate. What does it— what does it take, you know, we talked a little bit about what it takes like a Rothy's is to stand out, but in some of these more like traditional categories is the way to differentiate yourself? Somebody wrote in asking about, you know, some of the brands that are going after just like a different segment. So let's say this question specifically references a mattress company that competed with Casper and targeted women, which I actually think is a product I worked on at Walmart. So, you know, I can't like speak to that. Interesting— it was interesting. But you know, anyways, what does it take to kind of differentiate yourself in those more crowded and like clearly defined categories, if you're not coming in like a Rothy's with four years of R&D behind you? Can you do it on the strength of your brand alone, like just brand design and positioning? Do you have to go after a different segment that's not millennials?

Nicole Quinn  45:16  
What we would look for when investing in any company is the key insights from the founders. And so that can be based around the product, or the customer or the go-to-market. That is something that really makes the approach unique or differentiated, doesn't always have to be necessarily the product. So I love this idea of founders who live in the future, and they believe that the world is gonna look a certain way. It's why I love my job so much, I feel like we're learning nuggets of the future every day because of the way that these brilliant founders think about things. And so maybe it is a different approach that you're taking on a mattress. Maybe a different customer that you're serving. Maybe there's, you know, some insight around the mattress that has never been thought of before, but that is the way that mattresses in 5, 10, 20 years are all going to look. So that's the sort of thing that we get really excited about. And so sometimes it can just be like a new spin on an existing product, because of that unique insight that you have. And so that's what we're always looking out for.

Luke Tubergen  46:30  
Yeah, I think— yeah, it doesn't have to be the product that's differentiated. You know, we like companies that maybe disrupt the supply chain, and can tell a story through that. Nota Cashmere is a good portfolio company of ours that you know, they remanufactured the whole supply chain from the Mongolian desert to create cashmere sweaters for a fraction of the cost that it would take, you know, these luxury brands to produce. And so sometimes it's the supply chain, it can be who, you know, the segment of the market you're going after and trying to really create an affinity for just the brand. I think that's a hard road to go down. But you know, it certainly can be done. I like personally that seeing a product or— or somewhere in the supply chain that you've— are really— are really delivering a value. And I think that's hard to do if the product itself is not differentiated that much, and it's just branding. And not to say that that doesn't exist or the brand, you know, brands can have a lot of value, but much harder to achieve that if the product itself doesn't really differentiate itself from other competitors.

Noelle  47:43  
I love that. I'm very interested to see kind of what the next batch of direct-to-consumer brands look like. And Nicole you mentioned earlier, a Business Fashion article that I missed, unfortunately, but just about sort of the world being less excited about investing in direct-to-consumer. Can you tell us a little bit more about why you think that's that's not true?

Nicole Quinn  48:11  
Sure. So, there definitely was this— well, it felt like a meteoric rise in popularity of D-to-C companies. And maybe people feel like okay, you know, we've already invested in several D-to-C brands and so there is that. That people definitely have exposure in their portfolio to D-to-C brands. But this, the time we're in is very different to say, you know, the last time we had a lot of love for e-commerce after 2000 because I think there was this huge rise and fall of e-commerce, lots of people got burnt by it. The businesses were in very different positions back then, you know, these businesses were being valued on these crazy multiples where the revenue wasn't there, and more importantly, the profit wasn't there. And so that's why people— investors did get burned in that space. But now we're looking at these companies where we haven't been burned, there have been exits, and there are really strong founders building these companies. And so we have great role model companies to look at and point out at that there's like, okay, great, you know, this is what I'm driving towards. And so, for us, I still think that they are terrific investments. I also think that this focus on profitability really changes the game. That shifts and from my perspective. So that means that these businesses are sustainable, that means that they are not constantly needing to raise more funding, it's only if they want to, and so that's why I personally think that the space is really interesting and will always be. But those— consumers are just you know, the— the percentage of retail sales this— in e-commerce is only increasing, you know, is increasing very steadily. I think because of COVID you're gonna see a step-change in it. And then you're going to continue to see that rise because it's just introducing new customers. Like, I don't know whether, you know, if you guys or any of your parents shopped on e-commerce before. Mine didn't and now they're doing everything online. So it's really bringing a lot more customers online. And that'll increase opportunities for, yes, the Millennials and Gen Z's that we've been focused on, but what about the older generation? Great, they're now online, and let's think about all the D-to-C companies that are going to target that generation. Like, that's pretty interesting to me and their propensity to spend is certainly a lot higher than Gen Z. So I think that there'll be more and more areas of opportunity that I'm super excited about watching out for.

Noelle  50:47  
That's a great point about the older consumers kind of getting more involved, which I love. My mom called me the other day to tell me that she bought some sheets from Hill House Home and I was like, wow! That's totally crazy.

Luke Tubergen  51:01  
Hillhouse is actually one of our portfolio companies. That's great to hear.

Noelle  51:05  
They're great sheets, I have them too, they're terrific, they're my favorite, actually.

Luke Tubergen  51:10  
Great to hear that, not surprised. But yeah, you know, I would second that the D-to-C companies are market share gainers. So even if in an environment like this, the market itself is not expanding, a lot of these brands were already gaining traction within the market and taking it from other players and were growing faster than the market itself. And so even in a downturn, you know, we have a lot of confidence in D-to-C brands being able to continue to perform well. And to Nicole's point only more people are going to start shopping online, continuing to shift, you know, that percentage of which sales are coming from online and so that gives us a lot of encouragement around this space as a whole.

Noelle  51:59  
Awesome. I know we're running short on time and I want to be considerate of everyone's hard stops. We're going to end with a lightning round question for both of you, which is, we've talked about a lot of brands on this call, but what is the most exciting direct-to-consumer brand that we haven't already mentioned that you've seen in the last, let's say in the last month or two?

Nicole Quinn  52:21  
I have not talked about Lady Gaga's Haus Labs yet, which I think is one of the most exciting beauty companies that we've seen. The company just, I mean, this is the benefit of having an influencer and celebrity attached to your brand, which we also haven't talked about. You can very quickly see, you know, not just in Casper's case where you do a million dollars in the first month, you can do a million dollars in the first day, if you have real authenticity around that product, a terrific founder/celebrity and, you know, just great products. And that's exactly what we found at Haus, we've got an eyeliner brought out which is now one of the best on the market. It's all through Amazon and direct-to-consumer right now, we will go into retail in the future. But definitely Haus Labs H-A-U-S, and it's Lady Gaga's beauty brand. So everyone check it out.

Noelle 53:16  
Very cool. I love that. And we actually— we are going to be— we're trying to put together a panel on influencers and data seed SAMSA. Don't miss it if you're listening and you want to find out when that's happening, go to Alley.com. But—

Unknown Speaker  53:30  
Mine would be Lalo which is the latest deal we've done, and it's a stroller and high chair for babies like 0-2. And I think it's a really interesting space. It's designed-focused, and so a it's really well-designed product. It's the official high chair of the MoMA and other like really design-heavy places. But it's a pretty interesting price point I think. It sits below a lot of the like very high-end strollers that are out there that a lot of people might have as a way to kind of— what's the word I'm looking for? Status symbol. And— but it sits a little— so it sits a little bit below those really high price point ones, but it's still aspirational, and I think better designed. And so it's a pretty exciting product for me. I have a young daughter, so I'm excited about anything in the space. But yeah, Lalo.

Noelle  54:33  
Lalo, very cool. That's awesome. Well, I think that is time for us today, unfortunately. I'd actually love to stay here and talk about this all afternoon. But just thank you so much to all of our attendees and Luke and Nicole, thank you for giving us your time, your insights. This was really, really fun. And I hope everyone else enjoyed it. You can access the recording at Alley.com starting tomorrow and feel free to share it with your community. And join us hopefully tomorrow for a talk about mental health and leadership. So thank you guys so much.

Luke Tubergen 55:13  
It was a pleasure.

Nicole Quinn  55:14  
Thanks so much, Noelle. Bye, everyone.

Noelle  55:16  
Bye.

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