The Faces of Unicorns Have Wrinkles
Venture Capital and Next Generation of DNVBs
“DTC was an insight 10 years ago,” said Ben Lerer (of Lerer Hippeau Ventures). “There is still a lingering idea that DTC is innovative. That simply isn’t the case anymore…It’s about how you do it now that’s innovative.”
There have been a spate of articles and blogs in which Venture Capital (VCs) catalog and express their disappointment with the Direct To Consumer (DTC) business model of Digital Native Vertical Brands (DNVB — brands that were formed online) over the most recent couple of years. Headlines highlight “Fatal Flaw[s]”, and “Bloody Disappointments”, speaking of “implo[sions]”, and to what end?
As VCs look to 2021, they are asking this overriding question of themselves about DNVBs: “To Invest, Or Not To Invest?” Aubrie Pagano of Alpaca.vc gives us an insider perspective of the prevailing sentiment observing “Many VCs, whether explicitly on Twitter, or in the back breakout rooms on Zoom pitch days, have sworn off DNVBs.”
There is good reason for upset and caution with regard to DNVBs. Being well informed about the complexity of Venture [Capital] Deals myself, understanding their operations and fiduciary responsibilities, picking a winner is vital both to the fund and future fundraising. The imploding of these heavily capitalized DTC brands warrants the critique and even harsh scrutiny. Their challenges, both VC and DNVBs alike, have only been exacerbated by the all-encompassing environment of uncertainty given to 2020.
Still, amidst the challenges and disappointments, this is not the time to put DNVBs on the back burner. Perhaps lowering the flame to reduce the burn to bring out their best? With e-commerce showing no signs of retreating, having accelerated 4 to 6 years as a result of covid-19 according to Forbes, this doesn’t appear to be the time to put an entire business model on pause. The Business of Fashion in conjunction with McKinsey reports “that the recovery everywhere will be driven by online sales”.
In the same way that DNVBs pivot repeatedly to succeed in achieving market fit and build customer retention, perhaps a pivot on the perspectives and approaches that have put forward these first iterations of DNVBs will help to overcome their inherent limitations. Herein lies the problem, and subject of this blog.
It has to be about picking a winner. If we were to look at the case of Ty Haney and her brand, Outdoor Voices, as a possible paradigm in patterning, some would argue that the failure was one-off, summed up as “an inexperienced founder who mismanaged her way into overspending”. Is it really just one- off? Does age and experience have any bearing on the economics, control, and performance of DNVBs? (In our paradigm, it is noteworthy that this is not about gender, even though gender bias is equally real. Gladly in the world of fashion, there are no shortages of aspirational women CEOs.)
Age is at issue, and a thing in Venture Capital. Let’s just talk about it. This happens to be most notable within “the consumer facing IT industries, such as [those that rely on social media marketing], observes the Harvard Business Review, “[more so] than equally consequential pursuits in heavy industry or business to business sectors.” In the world of Venture Capital, not being “blue enough” is an age bias statement referring to the hottest part of a flame: the blue flame. It conveys a connotation that “investors [want] Founders in their twenties with no kids, no personal life, willing to work all hours.” While this seems oversimplified, there is basis. A broad survey of US founders polled by First Round Venture Capital disclosed that “37% said age is the strongest investor bias against founders, while 28% cited gender and 26% cited race.”
Studies have proven that “older entrepreneurs have a substantially higher success rate” with the Harvard Business Review amongst others aligned. Inc. reports findings of two MIT Professors, using US Census, and Tax Data to conclude that “a 50 year old Founder is 2.2 times more likely to found a successful startup than their 30 year old counterpart, and a 60 year old Founder is 3 times more likely to succeed at the same.”
What if the next generations of DNVBs were multigenerational, and included Founders with significant technological and merchandising experience? I would defend that hundreds of millions of VC dollars will not be necessary to get DNVBs to scale and profitability. Investors’ expectations could shift from the prodigious revenue growth at all cost approach to a more sustainable unitary economics based on sales and profitability. VCs could further leverage caution tying investment tranches to performance milestones. These approaches help to mitigate the risks of overcapitalization, compressed growth expectations, and over accelerating beyond sustainable growth.
The Merchandising Gold Standard And CAC:
For Mickey Drexler, (dubbed the Fashion Industry’s “Merchant Prince”) the Gold Standard that was central to GAP Inc’s massive expansion in the 90’s is about vertical merchandising. By vertical merchandising he meant having a secure end to end control of the brand. In today’s world, flexibility and agility are attributes of control. It’s still about keeping your eye on the ball: from concept, to design, development, through manufacturing (the entire industrial process), to finished product, marketing, and distribution. The point of strong merchandising, Drexler would advocate, is to deliver a consistent “product point of view and purpose that resonates with a consumer base that can cause long term affinity.” It builds trust. Herein lays the path to profitability. This is the tonic for CAC malignancy that has proven fatal for 1st generation DNVBs. It is truly great product that ultimately engenders customer loyalty.
Image Credit @ techfunnel.com
In the world of fashion, this doesn’t get old. In fact, this marriage between technology and merchandising and its maturity is what ensures the newness we all come to expect of the Fashion, over and over again. It is a page from this playbook that could enlighten DNVBs. What has become their traditional DTC playbook with its “refreshing branding, [along with the] unboxing experiences touting a deeply meaningful founder’s story, buying social ad space and using influencers are no substitute for great product.” Merchandising is the repeatable framework that governs this complex process to create material and product innovation and diversification. It is about supplying and managing flow and momentum. It is about delighting each and every time. Herein lays the value of organizational intelligence — it is money in the bank.
What is the future of Next Generation DNVBs?
What began as Millennials selling to Millennials, has grown to include everyone. The prospects for DNVBs has just gotten bigger. As a result of the global pandemic, every generation is online shopping. McKinsey reports that an “astonishing 75% of US consumers [are] trying a new [online] shopping behavior in response to economic pressures, store closings, and changing priorities.”
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Opportunity in Emerging Markets and The Rise of Gen Z, “Zillennials”:
More interesting still, this shift in shopping behavior is not a phenomenon that is exclusive to the United States and it also embraces the rising populations of “Zillennials” (those who are born between 1996–2012) who have the highest concentrations (9 out of 10) in emerging markets. In a Bloomberg’s News Segment with Bank of America, they observe that “ the rise of Zillennials will change the face of investments forever. “ If ever there was a need for multigenerational and multinational thinking and approaches in DNVBs, it is now.
Bain and Flipcart report a shift in consumer shopping behavior in India “foresee[ing] 350 million online shoppers by 2025.” (As a significant side bar here, the Boston Consulting Group observes that India will have 850 million online users with a retail sector already worth $850 billion.)
Brazil, touts Lucas Abreu (VC Analyst with Astella Venture Capital), “has become one of the most dynamic markets for DNVBs.” Having worked in Brazil’s Fashion and Home-Store Markets over the last 15 years, I also can attest to this dynamic opportunity. Abreu observes that “Brazil is the most undisputed economic powerhouse of South America with a GDP that tops $2Trillion USD. It has a relatively young population of 208 Million, and it is Instagram’s second largest market with 70 million users.” (To put the top three in order, they are: 1st USA with 110 Million users, 2nd Brazil with 70 million, and 3rd is India, 69 million). In the new world of DNVBs, this is not something to be dismissed. (Sidebar: China is not an omission, it is just a tougher nut to crack.)
Finally, the sustainability market is rapidly expanding having been driven into mainstream consciousness by Millennials, and now even more so by “Zillennials.” Both of whom want access and affordability to sustainable consumer goods. This market is ripe for DNVBs like my own, Truth Alone Clothing: For Life & Earth which is mission driven to give access and affordability, both to delight and cause lasting sustainable awareness with consumers and our supply chain alike.
This market is expected to reach $12 trillion by year end 2030 according to the European Business Review. While this precise number will likely need to be adjusted as a result of the global pandemic (which it did not foresee at the time), the rapidly increasing market potential of sustainable consumer goods will be un-impacted. If anything, it has become more important as a result of the pandemic and shifting consumer interests.
Sustainability in fashion is an industry renaissance moment, and it is already making concerted efforts at cutting a piece of this pie for itself. Looking at just three of our competitors as a case in point, they have sold over $500M in sustainable apparel between 2018–2019. This benchmark and others figure in our own extrapolations of market and target customer potential. In short, this is a burgeoning marketplace. One does not have to pirate or steal. With organizational intelligence, and by doing the business well, DNVB’s in the sustainable space can still absorb market share.
Wrap Up: It’s about how you do it now that’s innovative.
The “Traditional DTC Playbook” should not get tossed out. Next generation DNVBs must continue being hyper focused on data, technology, purpose, relatability, and the customer experience (both as data and delighting).
Experienced Leadership and optimizing Organizational Intelligence, to impassion leadership, diversity, and unity, that ignites performance, amasses knowledge, and builds value.
Unitary Economics, Very simply, DNVBs need to understand a) How much direct revenue is coming in. b) What are the costs associated with the business and c) What is the unit of measure? Only then can they understand CAC and their path to profitability.
Diversity and Multigenerational Approaches are valuable for DNVBs to be relatable across multigenerational and multinational boundaries enabling expansion with the strongest future growth potential.
Omni Channel Distribution: there is value in being everywhere the customers frequent — omni channel distribution remains a real and viable opportunity in optimizing scale and recognition.
Merchandising, all of the above get rolled into this one all-encompassing science, process, and system. In the end, there is no substitute for great product.
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