It’s been interesting to watch Q2 play out in VC land – especially given the disconnect between Wall Street and Main Street throughout the Covid pandemic. While initially a cataclysmic drop-off in funding was expected, the industry overall was not as affected as originally thought. Similar to the public markets, many investors continued to see a buying opportunity and had re-allocated their portfolios to support their likely winners. A key takeaway – early stage funding continues to face some challenges while late stage appears to have fared better. Many early stage B2C companies, however, are struggling.
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.
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 roles at Casper and Newell Brands, I oversaw numerous innovative 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.
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.
If you haven’t read the Innovator’s Dilemma by the late Clay Christensen I highly recommend it. For those who work in innovation, this book is a wealth of knowledge on how to structure your company to embrace new technologies. Prior to joining the startup world, I spent nearly 9 years at a large S&P 500 corporation where I witnessed firsthand how slow and cumbersome these giant companies are. We held significant market share in many of the niche categories we dominated but slowly it became clear that insurgent brands (startups) wanted a piece of the pie. When large incumbents want to innovate it can sometimes take years to get a new product to market and ultimately the customer (which sometimes can be a buyer at a large retailer) may not even want it. A Harvard Business Review study estimated that at least 75% of internal new business endeavors fail – and this assumes R&D is even a priority. In 2018, less than a half of the S&P 500 companies recorded any R&D expense. The reason for this? Blame share buybacks. Over $200b more was spent on buybacks in 2018 than R&D and one would argue that this has little to no influence on the productive nature of the company. Hedge funds and activist investors chasing short term wins are further enabling this behavior.
Meanwhile tech companies who are spending in R&D are reaping the benefits. Startups are getting products to market 3x faster than incumbents (Bain & Co: 2018). So as a corporation, you must refine your innovation strategy into three parts under a buy, partner, build scenario or be left like one of these folks.
This piece from the NYTimes highlights that B2B (or B2B2C) can be sexy again. Consumerization in this space recently led by Slack, Zoom and Affirm, among others, has shown that there is an increased interest in the sector both from investors and enterprises/end users.