It wasn’t that long ago that digitally-native, vertically-integrated brands (DNVBs) were the talk of the startup world.
Venture capitalists and founders watched as Warby Parker, Casper, Glossier, Harry’s and Honest Company became the belles of the D2C ball, trotting their way towards unicorn valuations. Not long after, the “startup studio” was unmasked as the elusive unicorn breeding grounds (think Hims). Today, there’s yet another buzzword that’s all the rage and it goes by the name “D2C Holding Company.” And it’s not going away anytime soon.
What are DNVBs?
In 2017, DNVBs were a game-changer. Different than e-commerce, DNVBs sell products online directly to consumers and maintain control and transparency through each stage of the production and distribution process, all without the involvement of middlemen. This allows DNVBs to determine where and how their products are sold and to collect customer data that helps optimize their marketing strategies.
DNVBs have exploded over the last decade, growing sales and venture capital funding at a rapid pace. These brands use digital engagement strategies to create stronger relationships with consumers, which — when implemented alongside captivating content — contribute heavily to brand success by increasing customer LTV and creating compounding unit economics.
The problem with DNVBs
In the last three years alone, more DNVBs have launched than in the entirety of the previous decade.
While this growth is encouraging, the problem is that these DNVBs are raising so much venture capital that in order to meet the return requirements of their investors, they need a significant purchase offer or IPO valuation. With more than 85 percent of acquisitions happening below $250 million in purchase price, strategic acquisitions offers that meet investor expectations are few and far between.
This ultimately creates a state of startup purgatory where DNVBs have no choice but to take a downround to find a lifeline — sorry, Honest Company — making it difficult to develop disciplined operational habits and achieve sustainable growth. With these challenges becoming more glaringly apparent in recent years, there came a need for a new approach to D2C at large. Enter the modern D2C holding company.
Make way for the D2C holding company model
Today’s version of the holding company model takes what companies like Procter & Gamble and Unilever did in the 1950s and modernizes it for the existing D2C market. Instead of taking a siloed approach, brands pool resources, operational costs and institutional knowledge to accelerate growth and achieve profitability at a faster rate.
DNVB darlings Harry’s and Glossier are great examples of this. Harry’s diversification efforts have been centerstage as the company works to grow beyond men’s grooming to include personal care for men and women, household items and baby products. In May, Edgewell Personal Care, which owns brands like Schick, Banana Boat, and Wet Ones, acquired Harry’s for $1.37 billion. Glossier is also working to diversify its portfolio, with the launch of Glossier Play, a younger, more colorful sister brand to its original.
For DNVBs to successfully pivot to a holding company model, they will need to prioritize 1) diversification to satisfy customers’ short attention spans, 2) a data-first mindset to deliver the best possible customer experience, and 3) operational and capital efficiency to not only stay afloat, but thrive.
An evolving landscape
The landscape for D2C holding companies is just starting to take shape, but here are some of the key players who have adopted this approach and are finding early success:
The design darlings
Very Great: Originally a design agency, Very Great built a D2C holding company after launching their first brand W&P in the food and drink market. They used what they learned with W&P, combined with capital from 8VC, to launch two additional brands — Wild Ones for the pet market and Courant, a line of high-end wireless phone chargers. Very Great takes a platform approach to building brands by keeping core functions like design and creative shared across all brands but structures individual teams and brand leaders for eventual graduation. They are focusing on incubating three new ideas per year and accelerate their model. Wild Ones has been their breakout winner and is on the verge of achieving standalone, “left the mothership” status.
Bottom Line: Very Great was able to translate its in-house product and design expertise into a successful formula for incubating and launching beautiful brands. Their core strength has been an unfair advantage in knowing what consumers will love.
Pattern: As the creative force behind brands like Hims and Harry’s, Gin Lane’s decision to shut down their agency operations sent shockwaves through D2C and VC circles. The core Gin Lane team formed Pattern and pivoted their entire business into creating wholly-owned D2C brands that help consumers get more enjoyment and fulfillment out of life. After closing a $14 million venture round which includes RRE Ventures, Pattern set its sights on revitalizing the kitchen with its first product line of high-quality cookware called Equal Parts.
Bottom Line: While its branding and creative expertise continues to shine, Pattern still has a lot of work ahead of them to differentiate their cookware brand from the myriad of other recently launched cookware brands (e.g., Made In, Caraway, Great Jones, etc.), without clear success on its debut brand, there’s pressure to prove out their model with the next brand launch.
The star-powered
Beach House Group: Beach House Group has found success building brands around influencers that have a clear personal connection to a brand’s ethos. For example, hair care line Pattern (not to be confused with the aforementioned holding company born out of Gin Lane), is designed for individuals with curly hair and partnered with Tracee Ellis Ross, the daughter of Diana Ross who stars on ABC’s “Black-ish.” Influencers are contractually obligated to perform certain activities (e.g., social posts, appearances) in exchange for brand equity. This ensures alignment of strategic objectives and immediate brand awareness. Venture arms of powerful talent agencies like Endeavor William Morris and CAA have tried to use their celebrity relationships to pursue similar models but have not achieved any success comparable to Beach House Group.
Bottom Line: Beach House Group figured out that attaching a celebrity influencer to a brand early on creates a lot of immediately brand awareness and decreases customer acquisition costs during the very difficult early stages of launching a brand. They’ve demonstrated a keen ability to match brands with influencers with exceptional fit. They give up a piece of the pie in doing so but end up with a much larger pie.
Brandable: Backed by Lightspeed Ventures, one of the strongest D2C venture investors in the space, Brandable focuses on brand-building using influencers’ passions and works through big box retailers like Target and Walmart, and other exclusive distribution deals. Brandable generally utilizes lesser-known influencers, but a larger quantity of them than Beach House. For example, social media-savvy veterinarian Evan Antin partnered with Brandable on the dog health brand Happy Pet, and crafting guru Karina Garcia is affiliated with Brandable’s craft kit brand, Craft City. Both influencers have strong social followings but are a more accessible tier of personalities.
Bottom Line: While tight retail margins can be challenging for Brandable, they’ve benefitted from massive top-line revenue from retail relationships and figured out how to use that momentum to accelerate other sales channels. Given they start with retail first — thin margins and high working capital requirements — the challenge will be to see if their business model can yield operating profit so that the business can control its own destiny or if they inevitably must sell off brands to create shareholder value.
The lead-generation experts
Innovation Department: Innovation Department developed a vertically-integrated, technology platform for acquiring customers, engaging audience and building consumer brands from the ground up. The company built DojoMojo, a partnership marketing network with more than 9,000 brands that have acquired, to date, over 220 million customer leads. Beyond developing this proprietary lead generation tool, it continues to master the difficult task of nurturing acquired leads by utilizing a powerful blend of content and commerce through owned media assets like digital publications and newsletters. Innovation Department uniquely embraces Amazon from the outset of launching a brand as they leverage Amazon’s vast ecosystem as a tremendous catalyst to fuel omni-channel growth. Its first wellness brand, WellPath, has generated nearly $10 million in run-rate revenue in two years and is getting ready to launch a second brand called Finn, a pet wellness company.
Bottom Line: Innovation Department harnesses the power of a proprietary growth acquisition engine and owned media assets to fast-track lead acquisition, generate high-quality audience engagement and scale next-generation brands without a dependence on traditional paid marketing channels.
The venture shepherds
M13: With the recent close of their $200M flagship venture fund, M13’s Launchpad turns exciting ideas into enduring businesses. Ideas are mostly developed in-house but will also come already developed, tested, and validated as products. In February 2019, P&G Ventures and M13 entered into a partnership to leverage P&G’s strengths in new brand creation, innovation, and scale with M13’s talent, D2C capabilities and network of advisors. The plan is to move multiple brands created by P&G Ventures into M13’s Launchpad and then eventually fold them back into P&G. For example, P&G Ventures recently moved a menopause care brand and skin condition brand to M13’s Launchpad to be elevated and readied for D2C launch.
Bottom Line: M13’s unique capabilities enable P&G to defend against D2C disruption and maximize their expansive IP. With M13 being the launch partner of one of the world’s largest CPG companies, newly created brands have a potential streamlined path to exit established at the point of conception. Bravo!
The growth agents
Win Brands: Win Brands is a D2C holding company that aims to acquire brands that have reached at least $5 million in annual sales and provides financial backing, marketing and ecommerce technology expertise. The core team behind Win Brands came out of digital marketing agency BVAccel, which focused on building brand sites on the Shopify platform as well as providing paid marketing services. The growth agency experience makes customer acquisition a core advantage for Win Brands to scale D2C channels. Backed by billionaire Chris Burch (Win’s CEO previously led Burch’s investment team), Win Brands has acquired four companies so far, including Bow & Drape, Stowaway Cosmetics, and Homesick Candles.
Bottom Line: Most consumer brands will never break $25mm of revenue yet they’ll accumulate remarkable brand equity and customer loyalty. Win Brands takes aim at these “in-betweeners” and acquires them using a strategy commonly known amongst private equity firms as a rollup. Integrate each D2C brand into a shared platform of resources, remove redundancies, trim the fat, and scoop up the synergies!
The category disruptors
Redesign Health: Backed by Declaration Partners (David Rubenstein’s Family Office), Redesign Health’s mission is to reinvent healthcare for modern consumers by focusing on a singular dated industry to innovate and disrupt. The company has taken a diverse approaching both building and investing in companies. Their portfolio includes a broad range of products and services that fall under the health category, including Vault (men’s health), Lively (hearing aids), EverBody (skincare) and Candid, (simpler teeth straightening).
Bottom Line: By broadening its focus and product portfolio, Redesign Health is improving accessibility and elevate the patient experience across a sector primed for rejuvenation and innovation.
Resident: Originally DreamCloud Holding, Resident emerged as a D2C holding company to tackle the home goods category more comprehensively. Instead of launching their six brands under a single brand name, Resident markets its brands separately to more clearly communicate its value proposition. For example, one of Resident’s mattress brands, Awara, is marketed for eco-friendly consumers, while Level Sleep is positioned as a mattress designed for customers with back pain.
Bottom Line: Through Resident’s holding company model, the company is better positioned to expand their reach via their rug and furniture products after successfully securing entry into consumers’ homes through mattress sales. The ability to expand Lifetime Value of the same customer by offering a variety of products is at the core of what makes a holding company structure valuable.
Arfa: Founded by former COO of Glossier, Henry Davis is aiming to build a beauty and self care-focused holding company called Arfa. Looking to become something akin to a contemporary P&G, Arfa’s consumer brands span everything from dental floss and deodorant to dishwashing detergents and all-purpose cleaners. Arfa focuses on minimizing the delineation of individual brands within the company but rather maximizes cross functional duties so that all brands are operated holistically across the organization. Backed by the highly-regarded D2C investors at Forerunner Ventures, Arfa’s organizational structure suggests a desire to keep the brands together forever versus other holding company models that are structured with the intent of spinning out individual brands to become independent companies.
Bottom Line: Arfa knows that diversification of their product line is critical to winning over customers but value consistent integration of their team members to operate as one uniform entity. Davis’ exceptional operational track record scaling Glossier makes funding options plentiful, a huge advantage in the early life cycles of D2C Holding Companies.
Iris Nova: Iris Nova, Latin for “new lens,” is working to disrupt the beverage industry with a fresh perspective. Leveraging early success with its first brand, Dirty Lemon, Iris Nova decided to create a D2C holding company to launch and invest in other differentiated beverage companies as well as an experiential retail property called The Drug Store. The company views SMS texting and mobile connectivity as a core marketing tool and built a marketing platform that offers a frictionless ordering and customer service experience.
Bottom Line: Interestingly, Iris Nova isn’t looking to build billion-dollar brands, but rather million-dollar LTV customers, which they believe offer smaller, sustainable growth opportunities. This strategy maximizes the potential of exit opportunities in a beverage space where acquisition activity is plentiful and yields tremendous production and distribution synergies.
What’s next?
While the D2C holding company model is still evolving, there’s strong evidence that this approach can help brands expand their portfolio of products quickly and efficiently, bolstered by existing resources and institutional knowledge. And while D2CHC may be the newest acronym you start hearing about, taking the proper, optimized-for-longevity approach might just give rise to another: HTS – here to stay.