Brands aren’t built overnight. Some of the most successful brands (Nike, LVMH, etc) have taken years to achieve the awareness (and more importantly relevance) they have now. In the case of LVMH, there is a key element to owning a piece of European heritage that has driven the company to be the largest luxury goods company in the world. Louis Vuitton owns much of their own supply chain. As an example, over the past couple of years they opened a manufacturing center in Texas to create leather goods here in the US that further allows them to create local stories around their products.
If you have a small but growing business selling on Amazon or even direct-to-consumer (D2C) you’re bound to hit a point where you require money to scale. For as much as the media talks about venture capital, the reality is that less than 1% of startups here in the US are able to raise money from VC’s. The challenge, however, is that consumer brands often have working capital needs associated with carrying inventory or affording increasingly expensive paid media. So where do these types of businesses get the cash to grow? Traditional lenders, such as banks, often have strict covenants in their terms and have not historically catered their products to this cohort, but a growing number of new, innovative solutions are disrupting the model. I should note that pre-revenue/pre-product startups are likely not going to be a candidate for institutional debt – but a convertible note, SAFE or crowdfunding remain a viable alternative at this early stage. As a side note on crowdfunding, the SEC recently increased the cap for fundraising via this channel to $5m (from $1m) which I suspect will open up more activity in this space.
Venture capitalist Marc Andreessen coined the term “Software is eating the world” nearly 10 years ago. His argument that software would be at the heart of every business moving forward could not have been more astute. For example, Amazon’s not a retailer; their primary capability is their software technology enabling sellers around the world to get their products to consumers. The same could be said for their AWS cloud business; again a software play. Uber, Google, Facebook, Netflix, and to some extent Apple’s app store business, are all examples of companies that are fundamentally software first. Interestingly, this same software has empowered a foundational shift in business model. It has enabled disintermediation. The complex network of intermediaries that have existed historically have been circumvented which has led to the world of everything being direct-to-consumer (D2C) or direct to source. Many think of D2C as mainly having an impact on consumer goods, but the theme permeates into numerous industries. Here are some examples:
As tech companies descended on Capitol Hill this week, the ongoing debate around antitrust continues. Startups have long lamented about the anticompetitive business practices adopted by the big 4: Apple, Amazon, Facebook and Google. If you build a business that relies on the Apple or Google app stores then you automatically know you’re going to pay a ~30% toll to access consumers. The debate has further been heightened as some startups like Classpass have been hit with this toll as they roll out virtual classes due to COVID. The founders argue that they are forgoing their normal take rate from providers (gym’s, etc) they work with during COVID so why is Apple charging them 30%. Apple is in an interesting situation, because if they make exceptions for one business, they need to make for others. They also would face potential legal battles from previous customers that did have to pay.
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.