I’ve been reading a lot of commentary recently on tech companies that took PPP loans during Covid. Was this right? What’s definitely not right is our government bailing out bloated corporations during the pandemic. If you believe in capitalism then we should let the free markets take their path and prune the weak. One would argue that this infusion of cash saved jobs. Not sure how true that ultimately will become in October when the stipulations attached to the loans disappear. I bet we’ll see more layoffs, lots of them. US airlines have already made announcements for layoffs as soon as they are legally able. So basically taxpayers have funded a short term experiment on borrowed time that was setup for failure from the beginning. Harvard economists agree, the program has had little impact on employment at small businesses to date.
I’ve always had a strong viewpoint that digitally native vertical brands are a dime a dozen and those who will have successful exits are the ones who are vertically integrated, own manufacturing, strong defensible positions and/or are durable/consumable businesses built on recurring revenue and more enticing LTV metrics. With the recent news on Lululemon acquiring Mirror for $500 million it proves there is still an appetite for strategic buyers to pay premiums for DTC startups. In this case, I estimate LULU paid 5x-6X revenue which is a phenomenal outcome for the founders and investors. LULU was already a minority investor in the company which gave them intel into the business that other competitors likely didn’t get. Why corporate VC gets a bad rap sometimes, a good strategic investor can bring a lot of value.
If you look at the majority of venture backed DTC brands in the market today, they all could benefit from diversifying their revenue streams. As this cohort scales and eventually becomes omnichannel (since that’s the playbook most are following), gross margins will inevitably suffer. When startups expand into new product categories it’s still often challenging to get >50-60% landed margins if you’re selling physical products. This is where services come in.
I’ve been thinking a lot recently about why much of the venture capital ecosystem hasn’t invested in innovation that could really help stem some of the challenges we are facing during this pandemic; areas around synthetic biology, contract tracing, vaccine development and even our antiquated unemployment systems. The fact that millions of Americans haven’t been able to access unemployment benefits due to systems that are 20-30 years old is mind boggling, especially when 75% of venture capital dollars goes to software that ultimately could alleviate these challenges. The main culprit: Privatization of US innovation.
A VC once told me that 50% of some of their portfolio companies’ growth is coming through partnerships. I wasn’t surprised, but I found this quite interesting, because successful structure and execution seems to be the achilles heel of many organizations.
Through the marketing lens, there’s no shortage of content and advice on how to grow your startup. The thing is, most startups look at marketing as a cost center (which it usually is) but there is white space here that is more efficient than marketing and that is through partnerships. Now, I know “partnerships” is a broad term, but let’s try and narrow it down by focusing purely on revenue generating initiatives. In my previous roles with Casper and Newell Brands, I oversaw our global partnerships and here are some lessons I learned as well as some thoughts on why this space continues to be undervalued.
For US brands that are considering testing out Asia before jumping head first into the market, they should consider the rise of e-commerce live streaming options that are proliferating in the far east, especially in China.
Back in October of 2019, I wrote a piece on how all the value creation was essentially being captured in the private markets and retail investors were being left out. It wasn’t always this way (think Amazon or Neflix’s IPO). Over the last 3-5 years, startups have been staying private longer as late stage capital keeps funneling in. Blame traditional firms like TRowe and Fidelity, and Softbanks massive Vision fund among others, for providing the cash. Venture has always been an alternative asset class and fund managers are seeking growth in areas outside of traditional channels.
I love to travel so when an opportunity comes up I head somewhere international. This year, my trip was to Peru which I had never visited before. As the Coronavirus pandemic was just building in early March, I started to think will my fight be cancelled for March 10th. In the week prior, I had started to see people buying hand sanitizer but for the most part things were calm and it was just another day commuting on the subway in New York. The idea of social distancing didn’t exist and virtually no one wore face masks. So the night before my flight, I made a final decision that I was going to go.
Less than half of the S&P 500 invest any money in R&D. Instead, they are pumping dollars into stock buybacks that ultimately provide no real tangible value to the productivity of the enterprise (sorry Warren). I’m convinced this is stifling innovation and giving startups more room to eat their lunch. Wall Street has no patience when it comes to waiting around to see innovation bare fruit which can sometimes take 4+ years. The unfortunate reality of this is management must then live by a quarter-to-quarter clock which hurts internal innovation. This myopic perspective is further reinforced by hedge funds and activist investors who are chasing short term gains. Allocators of capital need to recognize that management has to be given more leeway to invest for the long run. If they don’t, a heavily funded lean startup will be glad to take their customers.
Startups usually focus on pain points that consumers have found with large bureaucratic companies. The old guard typically misses the signs when an insurgent brand comes on their turf, or they simply believe it’s not going to be a threat. Meanwhile this gives the entrepreneur time to build up a small loyal group of customers. As a result of corporate venture capital teams, and an increased interest in following startup land closely, corporations are no longer sitting back idle while startups take share.