SKU’d Thoughts 13: Are VC firms putting too much money into DTC?

Hims, Glossier, and Casper (to name a few DTC brands) are each valued at $1 billion as a result of their latest funding rounds. This got me thinking whether these consumer companies are being overfunded by VC firms. Per CB Insight, since 2012, VCs have poured $3 billion in DTC startups, with a third of that funding happening in 2018.

The influx of venture financing increases the pressure for these companies to exit in a big way, whether it’s going public or getting acquired by Big CPG. It seems the majority of VCs value these consumer brands like technology companies. Meaning they fund consumer goods startups with a DTC model as though there will eventually be one dominant player in a particular sector; most tech sectors are winner take all markets (Google > Yahoo, Facebook > MySpace, etc.) but in consumer goods, multiple players can be dominant (Coke = Pepsi, Ben & Jerry’s = Häagen-Dazs, etc.).

Just because a consumer company initially sells its products exclusively online does not mean they will scale like traditional software companies. DTC is a channel to sell products and not necessarily the best way to efficiently grow a business into these lofty VC valuations. The cost of acquiring a customer is on the rise as the DTC space is getting crowded with new entrants who are vying for a piece of that venture capital. Increasing customer acquisition cost means the path to profitability is more difficult and what was an advantageous route to cut out the traditional retail middlemen (distributors, wholesalers & retailers) is now becoming as costly as those traditional margin takers.

In short, there are drawbacks to being overvalued as a startup. Potential acquirers won’t write a purchase check at the inflated price tag nor will VC firms typically agree to sell at a significant loss. DTC would be better served creating key product differentiation that consumers can vote on with their dollars.

Cross-posted on Medium