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Can DTC Brands Prove Profitability in 2019?
By: Digiday
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When Walker & Company, the direct-to-consumer men and women’s health and beauty brand (formerly Bevel), sold to P&G this month, it was bittersweet.

The company will now have the distribution network, budget and resources of one of the industry’s biggest corporations, elevating a brand designated for people of color to much more mass exposure. But after raising $33.3 million in four rounds of venture funding, Walker & Company is said to have sold to P&G at a price that earned its investors the majority, but not all, of their money back, according to Recode.

In the history of the DTC era, there haven’t been enough exits, successful or not, to gauge whether or not the category is a good investment. Bonobos sold for $310 million after raising $128 million, but it was to Walmart, a move that made fans of the brand cringe. The Honest Company, which has raised a staggering total of $500 million in venture capital, has been said to be exploring both a sale or an IPO but has been held back by a number of lawsuits over product claims. Dollar Shave Club did hit the jackpot, by selling early: It sold to Unilever after five years in business for $1 billion, nearly 10 times the amount it raised, in 2016.

 

For Walker & Company, the underwhelming payout was due, at least in part, to the fact that brand has never been profitable. Thanks to a newfound interest in consumer brands and large pools of capital due in part to low interest rates, venture capital has flooded the space at an unprecedented volume: According to CB Insights, $3 billion in venture funding has gone to DTC brands since 2012. More than $1 billion of that investment was made this year.

With that, top-line growth has been the priority — profitability could come later. But more and more, that engine is running out of fuel. Companies now operating on borrowed cash are facing disappointing payouts. VCs aren’t shutting off the pipes, but they are looking for more proof that a business is viable before they invest money.

“You used to be able to get through multiple rounds of funding losing money, and that’s how you were supposed to do it. Now the main concern is how we can get to profitable growth,” said Andrew Dudum, the CEO of telemedicine DTC startup Hims. “Investors we’re talking to, they’re asking different questions now with different expectations.”


The gold rush
According to Adam Winters, CEO of Merchant Financial Group, a finance company that backs small and medium-sized consumer businesses, it’s not the fact that young, well-funded consumer brands are unprofitable — many consumer businesses, as they invest in growth, don’t automatically achieve profitability. It’s the misalignment of expectations between investors and founders that causes trouble. Investors want big returns, relatively quickly; founders typically want growth, of course, but also long-term sustainability.

“We’re now looking at the tricky situation where tech multiples applied to consumer-driven businesses is not an equation that always works out in everyone’s best interest,” said JB Osborne, co-founder of the agency Red Antler, that specializes in digital branding. “Maybe some brands can grow fast enough and get to scale and exit at the pace of tech companies, but many of them can’t, and shouldn’t. For must consumer brands, VC pressure erodes what was special about the business in the first place.”

With millions in investment funding, brands like Casper, Hims and Thinx have made a lot of noise in the form of subway takeover ads and performance marketing. With increased competition, the cost of customer acquisition has skyrocketed, so the path to profitability has become even harrier. If a brand spends more to recruit a customer one time than the customer spends in that one purchase, it’s doing so on the faith that the customer will love the brand so much, they’ll buy again, and again, and then tell a few friends about it. That’s the only way the math adds up.

But that’s a gamble that doesn’t always work out.

“You can be unprofitable with a healthy business. If you’re not turning a profit on every single order, you can make up for that with customer profitability — the lifetime value of customers is profitable. You’re not spending more on getting customers than customers are spending on you,” said Richie Siegel, the founder of retail advisory company Loose Threads. “It can be OK to make bets that customers will eventually become profitable, but what typically happens is investors and founders is they get stuck. They sprint, then they don’t notice they’re out of gas until the motor stops running. Then they have nothing to do but sell off what’s left of the motor.”


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About the Author
This article was published on Digiday.com.  A full link to the original piece is after the story. www.digiday.com
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