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.
Last week, Alley’s CEO Noelle Tassey spoke with Nicole Quinn, an Investor at Lightspeed Venture Partners and Luke Tubergen, Co-founder and Managing Partner of The Ember Fund to get a glimpse into what investors consider when working with DTC brands, and to gain some insight on where the industry is headed.
A Little Bit of Background
Lightspeed and The Ember Fund both work with emerging brands, but each of them approach investment a little bit differently.
The Ember Fund recognized that the traditional VC model wasn’t the right fit for every brand trying to break into the DTC space, and they also saw a handful of brands experiencing a capital crunch when it came to inventory. The Ember Fund fills the gaps in the VC space by offering inventory funding that matches a company’s cash cycle, while also introducing them to a network of 300 mentors and industry experts.
Lightspeed targets brands mostly in the Series A stage—after the company is generating anywhere from ½ million to 1 million a month—and they look for a few early signs which indicate a strong brand is being built, such as:
- A strong referral rate
- A good repeat rate
- A high NPS score
- Strong organic word-of-mouth marketing
Combating The Crisis
There is no roadmap for building a brand in a pandemic-ridden economy, so we asked our panelists, what's the advice that you're giving to those in the DTC space, and what are some moves that you’re seeing other brands make to combat this crisis?
Our panelists both agreed that there isn’t a one-size-fits-all approach to this situation, because some brands—like those in the home and wellness space—are profiting from an organic need for their product during this time, while others are seeing a decrease in demand for their product, and need to trim costs to ensure the survival of their business.
There are two major things to consider right now:
- For companies that are taking a financial hit right now—because there isn’t a need for their product in the lifestyles that people are leading at home—it’s important to manage spend, decreasing wherever possible, and map out a financial strategy for survival.
- We aren’t sure how long this crisis will last, or what shape the economy will take when things finally start to recover, so having 18 to 30 months of financial runway gives you some peace of mind.
- For companies where there is a significant decrease in demand for their product, now is the time to cut back on marketing spend.
- The cost of CPMs on Facebook have gone down 50%—and viewers are paying attention now more than before—so for those who are seeing a need arise for their product, this is the time to lean into those lower costs and increase marketing spend.
- Look at channels that are generating high engagement right now, like TV and streaming platforms, and consider advertising there, too.
- There are opportunities in marketing right now to focus on reach, retention, and building community around your brand—these are all things that are unique to this moment in time, and should be taken advantage of.
- Email marketing is doing extremely well right now—brands are seeing higher click through rates and have pivoted from sending 1 email a week, to 1 email a day. Again, consider leaning into the channels that are getting attention.
Launching a DTC Brand
Believe it or not, this is an enticing time to start a DTC brand given the accessibility of digital audiences, and user-friendly platforms like Squarespace and Shopify.
We asked our panelists how they think the DTC space has evolved, how emerging DTC brands can break through market saturation, and how they can avoid others replicating their product.
There are a few things to consider when trying to break into the DTC space:
- Market Saturation: Copying is a tale as old as time. When a startup experiences exponential growth overnight, spectators quickly think to themselves, how can I do something similar? When building your brand, it’s important to identify how your product is different, and truly own your niche in the market.
- Consider Staying Under the Radar: Nicole pointed out that Stitch Fix—a personal styling service delivered to your doorstep—did a great job of staying in front of the consumer and fine tuning their product, without sharing too much information about their platform’s revenue. By comparison, Casper revealed that they generated $1 million in their first month, which can entice others to break into the home category with a product similar to Casper’s, further saturating the market and diluting brand value.
- Omnichannel: Pre-Covid, Omnichannel is what set brands like Casper and Warby Parker apart—Casper has their Dreamery, an IRL napping experience, and Warby Parker has a top of the line customer experience that translates across digital and retail channels. Ultimately, taking an omnichannel approach is the best way to keep an audience engaged with your brand long term.
- Investment: For anyone seeking investment, there are some key insights that investors look out for, which can be based on the product, the market, or the segment. Overall, they want to see strategy, which could take form in a different approach, targeting a different demographic, or coming up with an innovative angle about the product. Lastly, investors take to founders who have a vision for the future, with an idea of how the market will shift and a clear understanding of how there will be a need for their product when that happens.
Fighting For Space
On the topic of market saturation, our panelist Luke Tubergen pointed out that there are a few ways for brands to differentiate themselves in their respective sectors.
Let’s say, for example, that a DTC brand is fighting for space in a market where their product is a commodity—this is an opportunity to carve out a niche in the supply chain. Maybe the product is similar to others in the market, but if the manufacturing process is unique, and compelling to its audience, there’s added brand value.
Nicole agreed, and shared an anecdote about an email she received while working with Rothy’s:
“In fact, we got this email from a guy who said—to the CEO of Rothy's—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's all made of plastic recycled bottles—I can't copy it.”
There are a number of ways to take up space in DTC product categories, but the thing to keep in mind is that most brands are fighting for digital attention. So, instead of following suit, you can take that time to strengthen your manufacturing process, making it irreplicable.
Bootstrapping vs Raising Capital: The Path to Profitability
Whether you’re bootstrapping a business from the ground up, or raising money to build your brand, the end goal is always profitability.
Although their businesses are a bit different, both of our panelists agreed that profitability is one of the major checkpoints for them when working with brands. If a company is not already profitable, investors want to see that they’ve laid out a path toward getting in there.
In the DTC space, where investors once valued top-line growth, they’re now more interested in the path to profitability and sustainability of the business.
The question then becomes, how do you want to become profitable? We asked our panelists what they think about bootstrapping versus raising capital—these were the takeaways:
- Venture capital is not the right fit for every business, and so you really have to think about what your ultimate goal is—do you want to grow faster than anyone else? Do you want to grow slowly and steadily over time?
- If it feels like your competitors are quick on your heels, raising capital could allow you to hire the very best executives, or increase your marketing spend to differentiate your brand.
- There’s also the option to raise capital at the Series A stage—which is tough because the company most likely isn’t profitable yet—but afterwards, you can really increase your marketing spend and maybe even see a profit by Year 2, making it so that you won't need to raise additional rounds of funding.
- If your business is profitable, then you're not beholden to outside capital. However, if you choose to, you can confidently take on growth capital to expand your already profitable business.
There’s no way of knowing what the market will look like on the other side of this crisis, but for our DTC brands, it’s important to remember that there are options.
Noelle reminded us that yes, there are the venture capitalist, private, and public routes to funding—but, there is also an exit route if necessary.
Let us not forget about instances where incumbents acquire unprofitable businesses—instances which Luke predicts will occur on a larger scale as a result of the pandemic.
Our panelists left us with a few things to keep in mind for the months ahead:
- Profitability matters. If you’re seeking investment, it’s exciting to investors if your business is already profitable. If not, you’ll want to map out a pathway to profitability.
- For businesses who are benefiting from an increased demand for their product during these times, you then must think, how can you make that need sticky? How can you adapt that need so that it still exists on the other side of this crisis?
- Demographics that previously had not converted to the digital market, have now done so out of necessity. For example, think of the Baby Boomers who loved to shop at a physical store, but now are forced to purchase online. Now is the time to target other demographics, mainly because consumers are all in one place—online.
- Keep in mind that there will soon be competitive pricing for retail spaces, and physical advertisements, like billboards. It could be wise to take advantage of those prices and strategize on how to incorporate retail into an omnichannel approach after the crisis.
Lastly, we asked our panelists which DTC brands they think are doing a great job right now, and that maybe we should keep on eye on.
Luke mentioned Lalo, a modern baby and toddler brand rethinking the way parents shop for their little ones with a streamlined experience, thoughtfully-designed products, and unparalleled service.
Nicole said that she’s impressed by Haus Laboratories, a beauty brand by Lady GaGa whose mission is to spread kindness, bravery, and creativity by providing tools for self-expression and reinvention.