It's no secret that venture capitalists (VCs) are no longer pouring cash into direct-to-consumer companies / DTC brands. As a former investor & consumer brand strategist, I had the rare opportunity to witness the tumultuous affair as it started, peaked, and has now left the DTC startup landscape with lasting wounds.
Of course, there have been a few successes, but the reckless influx of cash paired with inflated successes, has driven up competition, challenged unit economics, and left many brands to figure out how to stay afloat with a lot less capital.
What happens when VCs Enter the Picture?
1. Competition skyrockets
Every VC knows that for every outsized success, there's a trail of failed companies that tend to die out quietly. It's simply how the industry works. However, for those outside the industry, the early signals of success were assumed to be a green light to haphazardly enter the industry. The formula seemed simple: 1) build a pretty brand 2) run pretty ads on social media 3) make lots of money.
As a result, we saw the advent of the "bland" -- a consumer company "claiming simultaneously to be unique in product, groundbreaking in purpose, and singular in delivery, while slavishly obeying an identikit formula of business model, look and feel, and tone of voice."
And in the background, "blands" were burning cash to capture consumer's attention in the hopes of making a lasting name for their brand.
The impact here is driven by basic economics: increased demand for ads drove higher prices and subsequently introduced the great villain of DTC: customer acquisition costs (CACs). As CACs began to skyrocket, profitability tanked, and aggressive growth expectations further challenged unit economics as venture capital poured in.
2. Aggressive growth expectations are set
Becoming a venture-backed company is virtually synonymous with adapting rapid growth expectations. In order to hit exit valuation targets, brands need to scale faster than ever. The unfortunate reality is that under immense pressure, many founders forget to do this strategically, and instead pursue growth by any means necessary.
What any fast-moving consumer goods marketer knows is the fastest way to drive sales is by offering discounts or free shipping. The perpetual hope and expectation is that consumers will try the product, fall in love with it, and continue to repurchase it.
However, there are 3 obvious dangers with this strategy:
- Discounts only work when you have a product that is truly great and customer retention is high
- Consumers tend to anchor to certain price points, so offering discounts too regularly can erode brand perceptions
- In B2C, convenience is King. So in a world where Amazon is the most convenient distributor, consumers have to love a brand’s products A LOT in order to wait even long (or pay even more for it).
For every dollar spent on discounts, a brand loses money in the long run, which only exacerbates the issue of CAC versus lifetime value (LTV).
The great pull
VCs look for companies that have the potential to be worth $1bn+ within 10 years, which is incredibly difficult for an inventory-heavy business with tricky unit economics.
Direct-to-consumer brands that were venture-backed are now struggling to raise follow-on rounds of capital. This means they've suddenly been forced to cut costs as quickly as possible to become profitable, or risk dying out due to a lack of cash flow.
Brands that never received VC funding are still forced to deal with the externalities -- as they continue to face high CACs due to increased competition.
What happens now?
Though the VC influx left bruises on the DTC landscape, there's still so much hope for brand owners. More recent research clearly shows that the post-covid demand for online goods is here to stay. According to Bazaarvoice, 62% of U.S. shoppers say they shop more online now than they did before the pandemic. While hybrid shopping was quite popular pre-pandemic, now only 5% of shoppers plan to try a product in store in the next six months.
That’s all to say, online shopping is definitely here to stay and abundant in opportunities.
So, to the ecommerce brands still left standing and the ones brave enough to launch today, we applaud you and believe in you. The trick is selling something consumers actually want and reaching out to customers in the most effective ways possible. We'll continue to strategize ideas for doing so in the coming months, but in the meantime -- look forward to supporting you throughout the ride.