Five thoughts on the future of VC-backed D2C brands

By Amanda Herson

This tweet is a reminder that D2C and VC aren’t always a great mix.

You can put venture dollars into D2C, but you can’t always expect venture-style returns.

A few thoughts for those building new brands in 2022.

First, to be fair, the entire market is down by 25% plus, so these declines aren’t as dramatic as they first appear.

Also, many of these are strong companies that are generating nine figures of revenue 🤑. They’ve indisputably uncovered consumer demand.

That said, investors and founders need to ask themselves a few key questions as they build new consumer brands (we have many incredible ones in our portfolio).

❓ Is it a sales channel or a company?

VCs are used to asking “Feature or company” of software businesses, and they should ask a similar question to most D2C upstarts.

Can this product/line *really* stand independently?

Many VC-backed D2C startups have essentially built out digital storefronts and ecommerce fulfillment infrastructure that makes more sense as part of a legacy brand.

That’s not a criticism! On the contrary, there is enormous value in that act, but there is a ceiling.

👁 ️Are the founders clear-eyed?

It’s not enough to beat the incumbents online. These upstarts also need realistic plans to achieve the scale and efficiency of the prominent brands; growing off a large base is tougher.

✌️ Do you have a second act?

Many of these businesses struggle because they can’t find logical expansion opportunities or their brand is hot… and then it’s not.

Niche product lines can make beautiful businesses but rarely compelling public market companies.

Often, line extensions lack the compelling economics or the ability to deliver an obviously superior product. Casper’s pivot to a “sleep” company via extensions into consumer electronics is a case in point.

🏰 Do you have a moat?

One of the leading killers of D2C companies is category crowding. For example, look at the meal kit market. It’s become challenging to find long-term success because there is so much competition.

With every new entrant, CAC rises. Your novel arbitrage advantage gets commoditized in quarters, if not months. Building a billion-dollar brand with a leaky bucket is an immense pain. “We’ll out market them” is not a sustainable strategy.

⚙️ Do you have fundamentals?

Micah Rosenbloom identified that underlying business logic was more important than branding for D2C startups many years ago, and it still holds in 2022.

Mattress startups have high AOV, poor LTV/ low frequency of purchase. Sure, you can tell a story about how people will buy them and buy multiples, but compared to nurse scrubs.

Contrast that with nursing scrubs, like those made by Figs. Healthcare workers need clothes daily.

This structural reality allows the team to truly model an LTV and build their CAC model around it. Very few consumer businesses have such apparent demand.

All that being said, I still believe there are category killers out there — expectations on valuation and $’s in + discipline around differentiation will be key for Founder/VC alignment.

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Our mission is to be the most aligned VC for founders at seed. #ProudInvestor in @Uber @TheTradeDeskinc @Buzzfeed @Cruise @Diaandco @PillPack @SeatGeek & more.

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