SKU’d Thoughts 41: What can we learn from consumer & retail startup exits in the 2010s?
I first gained a fascination with the consumer products industry 15 years ago during my first college internship at Hasbro Toys. I realized the innovation upside in the space was limitless because of varying and evolving consumer preferences. There have since been countless headlines about the demise of the consumer products and retail industries (Kraft-Heinz write down, retail store closings outpacing new store openings, etc.), but in spite of that narrative, we’ve also seen consumer products & retail startups that have been able to cultivate loyal customer bases by focusing on niche products and improved customer experience.
So, I wanted to pose and answer some questions that I have often wondered about; hopefully, others have as well.
Are consumer products and retail startups viable enough to go public or get acquired?
Nowadays, startups rarely go public. Before the 2010s, it was about an even split between startups having a liquidity event via acquisition or IPO but it has since shifted to about an 80/20 split, acquisition versus IPO, respectively. In the case of consumer products and retail startups, the split is even more weighted towards acquisitions. My theory is that potential acquirers, who are often times larger consumer products and retail companies, have not done a great job keeping pace with changing consumer preferences. With this realization, they swoop in and acquire up-start consumer products and retail brands before they can blossom into publicly traded companies. (Read more about this here)
How much capital is needed to scale these companies to an exit?
For most startups to reach the level of scale needed to make an impact, they need to raise capital from private investors. Consumer products and retail startups are no different, however, I believe the amount of capital needed for those startups is much less than a pure technology company, that is highly dependent on expensive engineering talent. According to CB Insight, investors have poured over $3 billion into consumer brands in hopes of capturing a return if those startups got acquired or went public. Some of those companies were overvalued but I also found a significant number of startups in the two sectors achieved more with less capital which proves that the amount of capital these startups raise is not correlated to their acquisition or IPO price tag.
And who is starting these companies?
Startup founders often launch their companies to solve their own problems or that of people close to them. With this in mind, one would assume that founders, particularly consumer products and retail founders, are a diverse bunch. Unfortunately, underrepresented and female founders have not been given a fair shot at scaling their solutions; there is a disparity in resources, especially venture capital dollars. A 2019 study showed only 2.8% of venture-backed founders were Black or Latinx, while 77.1% of founders were white.
Since the consumer products and retail space is highly dependent on consumer preferences, which often have a correlation to race and or gender, this funding disparity is a missed opportunity for investors. The purchasing power of minority and female consumers is more than $7 trillion and potential acquirers have been looking for ways to capture and or retain a share of that spend. Procter & Gamble’s recent acquisitions of Walker & Company (a black-consumer focused personal care company), L. (feminine-care organic line) and Native (nature personal care company) are examples of an established company filling the consumer preference gap in their portfolio through acquisitions. The founders of these three companies are underrepresented or female founders.
To dig deeper into and provide a quantitative perspective for the above questions and others, I researched and analyzed 163 consumer and retail-retail startups (defined by me as companies who make products and companies who facilitate how consumers get those products), that were founded and exited (acquisition or IPO) in the 2010s.
Download Full Research Report Here.
Cross Posted on Medium