Eric Hippeau discusses D2C growth, brand value and advice for early-stage founders

'As much as you can, in terms of timing and resources, build something'

Eric Hippeau is the founding partner at Lerer Hippeau Ventures, whose portfolio companies include the likes of Axios, BuzzFeed, Casper, Warby Parker, Allbirds, DocSend, Fundera, Everlane, Giphy, Genius and the recently acquired fitness company Mirror.

It would not be an overstatement to say that Hippeau is well-positioned to discuss startups across a wide spectrum of industries, from media to D2C to telehealth to edtech. We spoke with Hippeau for a full hour on a recent episode of Extra Crunch Live to discuss all of the above and get his tactical advice for early-stage startups looking to catch their break.

Below, you’ll find a video of the entire episode and highlights from our conversation. Enjoy!

Advice for super-early-stage founders

As much as you can, in terms of timing and resources, build something. Don’t just talk about building something. Build it. It’s not gonna be perfect, and it might not work the way you might do, but build it because that will give me, as a VC, an indication of what you’re trying to accomplish. It also tells me a lot about you, and that that this is something that you really care about. You’re going to ask your family, and even ask your friends, and you’re going to get resources any way you can because it’s that important to you. And, the product that you build, while not perfect by any of stretch of the imagination, will go a long way for us to figure out what it is.

On the growth of direct-to-consumer

I think that DTC is becoming the norm, and as soon as it becomes the norm, what you’re going to see is more and more types of products that you couldn’t even imagine in the past being sold direct to consumer, like automobiles. It’s almost infinite, the number of services and products that you can sell direct. And it’s going to be necessary because the retail sector is deeply affected and will be affected by COVID. It will definitely take years before it comes back to what it was, if it does.

The department store is likely to disappear, by and large, and so on. So if you think that everything is going to be direct to consumer, then your brand and the way you present your brand has to be inspirational. It has to fit a strong need for the particular product. DTC really depends on repeat customers for the way the economics work. Upfront costs have to be amortized over repeat buys.

The sky’s the limit. We continue to make DTC investments. We expect to continue to make them two years down the road. We see this as becoming really the way that shopping is going to be done. Maybe only 15% of sales were shopped online before the crisis. That number is going to be much bigger as we emerge from this crisis.

The right ingredients for a D2C company

I think every product is going to be successful online, as long as it has a broad appeal. That doesn’t mean that every brand is going to be successful online, and there are some common denominators between all successful brands, independent of where the product is in the early days of you selling a product online. You cannot be spending money. Why? Because your product has to go viral. It has to be widely adopted by really passionate users and buyers who will convince others, through their social media and other ways, to also buy this product. If you don’t have that viral aspect of it, it’s going to be very, very difficult for you to build a long-lasting brand. That might be masked by the fact that you’ve just raised money and maybe some of that money is going to go to creative marketing. We tell our companies that that’s a mistake. You can’t do that. You could do some tests, and you can do a little bit of marketing, but you cannot depend on your customer acquisition through paid marketing. If you do that, you will not succeed.

Has the pandemic changed marketing strategy?

At the very beginning of March and April, the advice was to stop and figure out what’s going on. Save your cash. We had a good number of companies that have physical stores, like Warby Parker and Allbirds and Casper. We had to shut them down, obviously, so we didn’t really know what the effect of that would be. But it became clear pretty quickly that revenue that was in the stores had moved or was moving online, so there was really no real consequences for them. Then, pretty much all of them started to really boom, as people realize that we’re going to be in this for the long haul and that people still want to buy product. Then it became a question of what we do around marketing. Maybe do marketing that you know works well and do maybe a little bit more of that.

But my rule about “do not do paid marketing” is really applicable to the early-stage companies. At some point, when you reach a certain size (and typically that would be, let’s say, about $100 million in revenues), then you need to be a little bit more traditional in the way that you market, and you are going to have to spend money and advertising to do this. I don’t know that any company has really changed their marketing strategy dramatically as a result of COVID. They just are doing more of the things that really work.

How he evaluates brand value

You can not just say “I see a hole in the market and I went to Harvard Business School and I’m going to analyze all this and I’m going to be the founder,” because that doesn’t typically work. What works is a founder who has a close connection to that particular community and the product that that community wants to buy. Typically, these are products that are very different than the products that come before.

Is this a brand that we feel conveys the values of the founder and that is likely to resonate with the audience. It’s clearer when we feel that. So, we kind of do a little bit more by elimination. There are some brands that we feel are not quite there, but we still want to invest. We will refer them to a really good branding agency. There’s nothing wrong with making changes before launch. You’re going to make some transformation or you might even change the name of the brand. We might change the imaging of the brand. There’s nothing wrong in making those tweaks before launch.

Telehealth’s sustainability post-pandemic

We have definitely seen a compression, whereby most big health groups only had one or two percent of their patients on telemedicine applications before COVID. At the peak, in April, we saw some of these health groups serving as much as 75% of their patients via telehealth. Now, it’s coming down to a level that we think is going to be sustainable after COVID, which is around the 30% level.

The biggest challenge facing health tech startups

The biggest challenge is the structure of the health care business, which is opaque and expensive and complicated. Everybody has their hands out to take money off the system, and we may not even know who they are and why they’re there. That’s the biggest challenge: To combat this inertia that comes out of a lot of money being taken out of the system for no real practical reasons.

I do believe that that’s going to go away to some degree. But, there’s also the whole Medicare system. Whenever you’ve got a big involvement on the part of government, and you have a government that’s allied with a few big pharma companies and a few big providers, that could be a bit of a toxic alliance.

The future of edtech

If we go back to school too soon, it’s going to be a disaster for kids and a disaster for the future of our country. The system that we have in place is not really good at educating kids. What we have is a unique opportunity to make changes. I’m not saying that everything should be remote because that’s not good for the kids, either. But the hybrid model is promising. Some select classes are in person — maybe it’s the more social classes like history and grammar and geography and sports, all of these things which are better done in a group and better done with kids who are socializing together and learning from one another and having fun. We can’t do away with that. But on the other hand, you have other subject matters like STEM, which are really tough subjects. A lot of kids have a hard time in the classic classroom system where one teacher speaks to all these kids and not all the kids are developing at the same pace. Some of these subjects are better probably done online with a different way of educating kids.

Our kids are digital natives. They were literally born with a phone in their hands. We have to educate them using that device with content that is made for that device. It probably has to have a lot of video, and it has to have a lot of interaction. It can keep track of the progress of the kid, but also you can have superstar teachers, people who really connect with the students using those formats, who can teach 100 kids or 1000 kids, simply because of the technology. If we don’t take advantage and if we don’t reinvent our education as a result of COVID, we are we are really really putting this case in jeopardy.

On movement in the social space

We’re finally starting to see some movement in the social space, which is why I’m not in favor of being heavy-handed in terms of regulating those platforms. I think that regulators tend to look in the back mirror and not forward and you end up regulating yesterday’s problem and not tomorrow’s problem.

I also believe that the social platforms are basically adopted by a generation. Facebook today skews old. It’s not that attractive to the young new users that love TikTok. Twitter has had a real issue going beyond 250 million or 280 million monthly active users. I’m one of them. I rely on Twitter for my news. But it’s very hard to to get a Gen Z person to be fascinated by Twitter.

What all this means is that there will be new platforms that will come to serve these younger generations who are not interested in the older platforms. As we’ve seen in the case of TikTok, they can really go viral very fast. So, let the market decide.