Ali Kriegsman
In 2020, venture capitalists unceremoniously broke up with D2C brands and product-based businesses.
Many watched as the consumer brands in their portfolios rushed to make hefty layoffs and eke out more runway and grew more concerned with their business models.
Some simply monitored the “lackluster” Casper IPO or skimmed articles about Brandless and others “imploding” and started pulling a slow fade on D2C brands — not taking pitches, not following up.
Last year, investors adopted a wait-and-see approach to all new investments and prayed portfolio brands could cut their burn significantly enough, stay relevant and ride things out.
Product-based businesses fell out of favor and venture capitalists, if they did invest last year, mainly focused on AI startups, or companies focused on data collaboration, data privacy and healthcare (mostly founded by men, might I add).
From a distance, it sounds like direct-to-consumer founders were left destitute and desperate for financing, wounded by every slow fade or hard pass, beholden as ever to the whims of Silicon Valley.
But as Hal Koss so eloquently shared in his “DTC playbook” post-mortem, this wasn’t a one-way breakup; this parting of ways is actually mutual. Many product-based brands, as it turns out, are no longer interested in chasing venture capital, playing the “grow-at-all-costs” game and relinquishing partial control to investors, despite the pandemic and the uncertain circumstances many founders find themselves facing.
Through my work running and scaling Bulletin, I’ve followed thousands of product-based businesses ranging from indie beauty brands selling clean serums and cleansers to sex tech companies making couples’ vibrators and foreplay accessories. I’ve followed them on Instagram, in the press and across various platforms, and in many cases, I’ve spoken to their founders directly.
Over the past two years, I interviewed executives at more than 30 women-owned businesses for my upcoming book, “How to Build a Goddamn Empire,” and had long phone calls with dozens of independent brands and makers as Bulletin got a handle on how the pandemic was impacting customers. And I noticed something new and remarkable about what founders want now, in 2021, compared to what they wanted in years past.
Back then, I’d get dozens of cold emails and DMs asking how I successfully raised VC and what the unspoken rules might be. I’d hear from business owners who were considering a raise or gearing up for one. Product-based entrepreneurs approached me at panels or Bulletin events and say they wanted to be the “Glossier for X” or the “Away for Y.” Many younger founders didn’t even know what venture capital really was, but they saw it as symbolic validation for the business, or the only way to get “big.”
Now, brands would rather scrape by than pursue an injection of funding on someone else’s terms; just ask the Gorjana founders or Scott Sternberg. Many brands that saw astronomical growth in 2020, like Rosen, Golde, Entireworld and others that spurred similar growth for Etsy and Shopify are fully bootstrapped businesses, and proudly so.
Some founders I’ve spoken to have even outright rejected offers for investment. A lot of D2C brands are interested in learning about alternative forms of financing like bank loans, lines of credit and crowdfunding, and ask about iFundWomen or Kickstarter, observing the success of other fully crowdfunded brands like Dame and Pepper.
Venture capital, from my vantage point, has lost its sheen for a lot of product-based brands. They’re not destitute and desperate for financing. They’re actually scoffing at the prospect and trusting they can succeed, scale and maintain long-term profitability without swapping equity for cash. They’re tripped up by what they’ve been reading in the media, or they’ve survived or even thrived during COVID, as a fully bootstrapped company, and feel more conviction than ever that the “grow slow” approach is the right move.
They’re reading the same stories about layoffs and tenuous unit economics at massive D2C companies and agreeing with Sam Kaplan that the old playbook — pricey customer acquisition practices, rapid scale, endless rounds of funding — is out of date. It’s 2021 and we’re midpandemic. These brands want to turn a profit.
Broken business model aside, many consumer founders don’t want the lifestyle that comes with running a growing D2C brand. They want a reasonable enough work-life balance, weekends and a team that’s carefully crafted based on what the company needs, not how much funding it has. They don’t want to deal with the stress of balancing investor incentives and what’s actually best for the business, and they don’t want to scale at the expense of company culture or community.
Community, especially, has become the most low-cost, organic way to acquire more customers — and keep them. Anything that threatens an authentic sense of community, and the authenticity of the products or brand, threatens the very thing that bolsters the business.
As such, there’s rising interest around “anti-VC” firms like Indie VC and Earnest Capital, which focus on profitability over blitzscaling at all costs, which is usually the thing that kills the community or dilutes the product. According to The New York Times, Indie VC “offers startups the option to buy back the firm’s shares as a portion of their total sales,” which means Indie VC may only make back 3x its investment. This is unheard of in traditional venture capital, where portfolio companies often need to draw a 10x return or more for the model to work. Like Earnest Capital, Indie VC focuses on helping founders build long-lasting, sustainable businesses.
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While this approach to financing is quite new, some of the brands in my orbit have already taken to this new model. Curie, an all-natural deodorant and hand sanitizer brand that sells on Bulletin’s marketplace, is backed by Indie VC. In an interview on the Indie VC site, when asked why she didn’t vie for traditional venture capital dollars, Curie founder Sarah Moret said, “I didn’t really want that life. I didn’t really want the lifestyle.”
Moret worked at a venture firm prior to starting Curie, and said she’s “seen and met those [venture-backed] entrepreneurs and I know the pressure they’re under, and that’s just not the life I want to live.”
What kind of life does she want? “I want to live a good life. I want to be able to enjoy my life. And be proud of it. And not succumb to the pressure that comes with those big venture rounds and incentives.” I’ve heard a variation of this from dozens upon dozens of other founders that once considered venture financing the holy grail.
But beyond lifestyle preferences, many D2C founders have been systematically discriminated against because of their race or their gender, and they’re (rightfully) not interested in giving up a seat on their rocketship to the VC system. They’re appalled by the lack of diversity at VC firms. They’re discouraged when an investor says he’ll “show the sample to my wife,” as a way of validating product-market fit. They feel uncomfortable when they do Zoom pitch after Zoom pitch and realize every single partner they’ve met is both white and male.
They don’t see the value in giving up equity to an investor, or group of investors, who don’t know anyone in or can’t fully understand their customer base. They don’t believe they’ll be treated with proper respect, or truly supported by these investors, when the investors don’t have a proven track record of supporting Black, Latinx and/or female founders. Or don’t have Black, Latinx or female equals in the workplace. Silicon Valley has, for many, been seen as an insular, exclusive group with golden keys to a bigger and brighter future. Now, that insularity and exclusivity is working against VCs and creating a sense of mistrust amongst founders with booming businesses.
Of course, there are founders who are still pursuing venture capital for their product-based businesses, whether to build on their boot-strapped successes earlier this year or to launch with capital in-hand, like so many of the D2C players of yore. I’m not here to judge either strategy — I have the utmost respect for product-based entrepreneurs, especially because I have no personal experience building a supply chain or doing any manufacturing, fulfillment or consumer customer acquisition at scale.
While we live and breathe in the same industry, I am not one of them, and, unlike Twitter people, I won’t weigh in on what’s right or wrong, good or bad, true or false, without knowing enough or having enough experience to do so.
However, there are so many other ways to finance a product-based business, and I think we need to start glorifying the ones who took out bank loans, or bootstrapped, or crowdfunded, so these methods have the same cache as venture dollars. We need to put them on magazine covers, get them on “How I Built This” with Guy Raz, and feature them as headliners for panels and other virtual events.
We need to see more Jaime Schmidt — she bootstrapped her way to a Unilever acquisition. And more MVMTs — the watch company that crowdfunded with Indiegogo and then sold for $200 million dollars. Tuft & Needle took out a $500,000 loan before its alleged $400-$500 million dollar merger with Serta Simmons.
While the 2010s positioned venture dollars as the “it” form of financing for innovative brands and their aspirational founders, the “D2C Reckoning” is in full effect, and brands, like investors, are now thinking twice about the outcomes for venture-backed, product-based businesses. In 2021, we will see platforms like IFundWomen and Fundable become the go-to resource for product-based businesses looking to launch and scale, and founders will grow more transparent — and proud! — about using traditional financing vehicles like loans and lines or credit to fuel their dreams.
If we’re lucky, those founders will be applauded, elevated and magnified like the “household name” D2C founders we all know so well, so that aspiring and existing entrepreneurs know they have options and can make the most informed, educated decision on how to grow their empires — and who to let in.
Eric Hippeau discusses D2C growth, brand value and advice for early-stage founders
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