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1/ Over the last 9-12 months I’ve noticed a somewhat fascinating trend in my conversations with successful consumer tech investors:
Many are out on DTC only brands.
Many are out on DTC only brands.
2/ What was a category these investors were extremely excited about just a few years ago, now is getting very little attention from some of the most high profile investors that would publicly be considered DTC experts.
3/ First let’s re-calibrate on why they were excited in the first place.
Then let’s talk about why the train came off the tracks.
Then let’s talk about why the train came off the tracks.
4/ Why tech investors were loving DTC for a hot minute:
Hmmm….this might take a few tweets. So I’ll just link to this guy instead.
Hmmm….this might take a few tweets. So I’ll just link to this guy instead.
5/ CPG = Large market, stale incumbents, big profit pools, ripe for disruption.
Simultaneously: Tech vc = overcrowded, larger funds and had to “put money to work”. (Ugh I hate that expression)
Simultaneously: Tech vc = overcrowded, larger funds and had to “put money to work”. (Ugh I hate that expression)
6/ Thesis goes that DTC only brands (those that only sell through their own website) are the savior to the problem in CPG. They can bypass the stale retailers and get great products to the hands of consumers. (note difference btwn DTC and ecommerce through Amazon etc.).
7/ So what happened? “I thought Dollar Shave Club had a great exit and there are other big ones coming……” [insert Charlie Brown’s inaudible teacher’s voice from the old cartoon]
8/ Rising CACs (Macro)- across all of DTC Customer Acquisition Costs (CAC) are rising. That’s a fundamental truth that makes the industry less attractive today than in 2011. More competition for same eyeballs.
9/ Rising CACs (Micro)- VCs are waking up that when they invest at a $20 CAC and the co. is $2m in revenue, that CAC often goes up to $50 by the time the co. is at $10m in revenue.
Exhausted early adopters.
Exhausted early adopters.
10/ For DTC to work at scale you’d have to imagine that a consumer goes to 1 website to buy dog food then another website to buy dog toys then another website to buy [XXX]. The brand loyalty for each would have to be massive.
11/ Declining efficiency- more on CAC, more on general marketing (if there is a difference), more on everything. The companies are less capital efficient today than 5 years ago. Drives returns down for VCs.
12/ Valuations coming down to Earth: “Wait so you’re telling me my mayonnaise company is not worth 25x revenue?”
13/ Tech co's can own 85% of a mkt. That's why valuations can be so high. In CPG that isn't realistic and every tailwind is towards greater fragmentation. Valuations are much more reasonable. 3-5x rev common. Are there exceptions? Yup - and good luck with that game of roulette.
14/ Realization that product market fit matters (product uniqueness in a way that matters)- successful consumer companies have a) a brand that resonates with the consumer in an intense way, b) product that is unique in a way that matters
15/ Product can’t be a meeeeeee too product. VCs are sort of waking up to that realization.
16/ Brand - without a differentiated product- is a really inefficient way to create equity value. It masks a lack of product market fit and costs a ton of money.
But at least the pitch deck looked sexy.
But at least the pitch deck looked sexy.
17/ To quote @seanlinehan in a corollary to software: Basically, since the launch of the iPhone, all manners of companies have taken Apple's "Design is King" approach and tried win markets with that premise.
18/ Most conflated good design with "looks really nice" and mostly failed. Turns out ugly but more useful software is more desirable.There's certainly categories where aesthetics reign supreme….but typically only where the aesthetics add functional value.
19/ So some of the “best” DTC investors are saying to me (privately) they aren’t that interested in it anymore. Don’t believe me? Try jumping on @crunchbase to see who funded what you think are the most successful DTC brands in the last 8 years.
20/ Then see which of those GPs (not just funds) led other DTC investments. Yes there are a few - but the repeat participation rate is amazingly low -particularly over the past year or so.
21/ Many of the larger DTC-only rounds are now being done by investors that have no prior experience.
Gulp.
[awkward sip]
Gulp.
[awkward sip]
22/ Let’s be clear- I love DTC. It changes the game for consumer entrepreneurs and iterate on products - much like a software company can a/b test products.
Also to be clear there are still a few awesome DTC investors interested in the space of DTC only.
Also to be clear there are still a few awesome DTC investors interested in the space of DTC only.
23/ I just like it a lot more as part of an omnichannel strategy and less as a standalone channel. DTC is an exceptionally hard channel to scale but fantastic for iteration. I’ve said that before right?
24/ I look for companies that have an omnichannel strategy. The 2014 adage “DTC helps to strip out costs by removing the retailer and letting the co. scale” is so out of date it is now laughable.
25/ [For the record there is no logic for when I use d2c vs. dtc]
Fin.
Fin.
