Within the past few months, the retail industry has seen the rise of several new direct-to-consumer unicorn companies (brands that reach a $1 billion valuation or more). Rent the Runway, Glossier and Casper all reached that status in March, and now Away’s joined the club. Harry’s, on the other hand, was bought for $1.37 billion by Edgewell Personal Care, proving $1 billion dollar acquisitions can still happen.
Although more funding means these brands can explore new means of revenue, such as expanding into retail or entering new categories, it also means they now have to prove their brand value with less ownership of their own brand with more investors seeking an eventual return on the funding. As some experts note, more capital can be both beneficial and detrimental.
“From an investor standpoint, brands who take on so much capital have nowhere to go unless they go public,” said Sapna Shah, an angel investor focusing on the future of retail. “It really comes down to how much you can raise without getting to a place where your brand gets too expensive for an acquirer.”
Shah said two types of DTC brands exist right now: those that create a unique supply chain or technology and those that rely too heavily on branding and what’s special about a product. She said brands that fall into the latter category shouldn’t necessarily raise a lot of money because then, there’s no strong exit strategy.
Asher Hochberg, managing director of credit at CircleUp, a fin-tech company, said brands that don’t offer both an “extraordinary product and product experience” are merely paying to acquire customers through ads on digital platforms—but those consumers won’t become repeat customers. Some examples of companies excelling in selling something “extraordinary” include Spanx, Warby Parker and Dollar Shave Club.
“Brand is a mission and an identity, and almost a lifestyle,” Hochberg said.
Then there are the companies that don’t even raise huge rounds—or participate in small ones. Companies like Native and Tuft & Needle, two DTC companies that took on little to no venture capital, found strong exits—a story not often sold to DTC brands as another possible path to success. However, that’s not to say taking on venture capital is bad, Hochberg said. In the case of Away, it worked out for the company to actually have capital when the TSA issued a ruling against unremoveable rechargeable batteries in suitcases. Two of Away’s competitors folded, whereas Away had the means to quickly change its product and talk to its customers.
An acquisition might not be in the cards for Away. As Hochberg noted, the company’s latest round included funding from investors more geared toward going public. But, according to Shah, an IPO isn’t easy to undergo, and DTC brands are more likely gunning for an acquisition. Going through an IPO means releasing public metrics and being subject to shareholders, something nimble DTC brands won’t go through if they’re acquired instead. And while tech companies like Uber and Lyft went to market despite being unprofitable, Hochberg said, the same concept wouldn’t apply to DTC brands.
“The IPO process is very risky, and you really have to be excellent at telling your story and going to market at the right time,” Hochberg said. “People will be looking for the DTC brands to have a very strong path towards profitability, if not already be profitable. A brand, by the time it goes public, should have high enough gross margins and should have a bottom line.”