It’s brutal out there for DTC companies

News that Haus, a consumer beverage brand looking to bring down the ABV in booze, had failed to close a funding round and was being forced to sell took many — this publication included — by surprise. Perhaps we should have been less taken aback.

Tracking the value of recently public DTC companies is an exercise in zooming in as their valuations shrink. Shares of consumer shoe brand Allbirds, for example, a company beloved by many in the technology world, reached a 52-week high of $32.44 before falling to around $4.50 today. Shares of DTC consumer glasses brand Warby Parker similarly peaked at $60.30 per share in the last year and retreated to roughly $13.60 per share today.

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Those declines are not unique. Peloton has taken nearly historic levels of public-market punishment after its pandemic-fueled run pedaled itself out of steam as COVID-19 waned from the public consciousness and masks in public settings like restaurants and gyms morphed from ubiquitous to rare.

A simple perspective is that we saw the value of DTC companies rise as the market itself sent the value of many asset classes and groupings higher. A rising tide and all that. But that’s likely only part of the story.

Tech? Or tech-enabled?

A never-ending issue with reporting on the startup market is defining what a technology company is. Not every startup is a tech company, though you won’t hear that from the startups that aren’t. Why? Because tech companies can often trade at a premium to other companies, with investors anticipating more growth from tech shops than businesses involved in more traditional efforts.

Inside the technology world, being a software company is essentially the Holy Grail. Why? Because among tech companies, software concerns often sport the best gross margins and the stickiest revenue.

A DTC company that uses digital channels as its main method of selling its products is certainly tech-enabled, and in some extreme cases could be fairly construed as a tech company. But DTC companies are far from software businesses in that they sell physical goods instead of access to hosted code. Their margins are different.

That fact has not stopped some investors from valuing DTC companies like tech companies, or in extreme cases nearly like software companies. YCharts data indicates that in the immediate aftermath of its IPO, Allbirds was worth nearly 15x its revenues (price/sales). That’s a multiple today more associated with the stronger deciles of SaaS concerns.

Data from the same provider indicates that Warby Parker peaked at a more than 6x multiple (price/sales) after its own IPO. Today they are worth 2.2x and 2.4x their revenues, respectively.

In light of that valuation catastrophe, the upside in DTC deals likely appeared smaller. Therefore, seeing Haus struggle to raise just isn’t that much of a shock. The math is pretty brutal:

  • At a 10x multiple, a $35 bottle of Haus Strawberry Basil would generate $350 worth of corporate value.
  • At a 2x multiple, that same bottle generates just 70% of $100 for Haus in revenue terms.

And because Haus isn’t selling software subscriptions, better known as SaaS, it has to sell that same bottle again the next year perhaps to a new consumer just to stay flat. That’s not an easy thing to do.

Investing in startups is a multithesis game. Not every investor wants to or is prepared to invest in the enterprise software market. It’s good that some investors covet consumer deals instead of their corporate-focused siblings. And it’s also a good thing for consumers, I reckon, that some of those consumer-focused investors backed companies like Warby and Allbirds. I say that as someone who owns a pair of TechCrunch-branded Allbirds and has bought Warby Parker prescription sunglasses in the past.

It’s just that great consumer products and their supporting brand experiences aren’t tech, per se. They are tech-enabled versions of traditional enterprises. They should have never traded at software-like — or nearly software-like — multiples. The math just doesn’t add up. But the temporary boom in DTC valuations likely did help direct a host of capital into similar businesses. Some will succeed, certainly, but we shouldn’t view the Haus example as more than a trend continuation, given changing market conditions.

Tracking how many DTC startups will survive without venture capital access is akin to a natural experiment that we will get to watch up close. However, it won’t be as fun as DTC brands getting more respect than what their gross margins and revenue repeatability could truly support.