At the beginning, the direct-to-consumer (DTC) model was disruptive. Sell to customers online only and advertise on new (and cheap) social media channels. This daring approach was a winning formula for brands like Dollar Shave Club, Warby Parker, Bonobos, and Allbirds.
Since then, there’s been a flood of DTC brands across all categories, fueled by venture capital (VC) firms trying to cash in on their success.
A decade and millions of VC dollars later though, the DTC model is proving hard to scale for everyone.
Leading startups like Outdoor Voices, Casper, and Brandless didn’t pay out to investors as expected.
Trying to avoid the same fate, DTC brands in 2020 are taking a step back and asking, “is taking VC money the right move for long term success?”
Are DTC Brands a Good Investment?
Globally, DTC startups have raised between $8 billion to $10 billion in known venture capital across more than 600 deals since the start of 2019.
But, it’s hard to tell at this point whether DTC brands are good investments for VC firms. There’s been mixed results.
There are big success stories:
- Dollar Shave Club sold to Unilever after five years in business for $1 billion, nearly 10 times the amount it raised in 2016. 
- Allbirds reached a $1.4 billion valuation and brought in over $100 million in revenue in just its first two years of operations. 
- Warby Parker has raised about $290 million from VC investors and, with estimated annual sales between $400 million and $500 million, is valued around $1.75 billion. 
There’s also been disappointments:
- Before going out of business, Brandless raised $52 million from investors like Google Ventures, and an additional $240 million from SoftBank. 
- Casper recently made its IPO valued at $470 million, about half of what was expected in 2019. 
- Outdoor Voices fell to a $40 million valuation down from $110 million in 2018, and ousted their CEO in the process. 
- The Honest Company has raised over $500 million, but lawsuits over product claims are delaying either a sale or IPO. 
After initial high valuations, brands have fallen flat of expectations, even going out of business. It’s been a reality check for all.
The DTC market is proving to be unpredictable. High valuations and multiple rounds of funding can cover up financial woes, operational inefficiencies, and poor product-market fit.
Why DTC Brands are Avoiding Venture Capital Funding
Learning from others, DTC brands are now weary of using venture capital funding to fuel their growth. They don’t want to grow under the high-pressure of investors who want large returns, as fast as possible.
VC firms expect returns of 10 to 15 times their investment. 
VC firms want to see constant high-growth – causing companies to focus on top-line growth, not necessarily profitability.
Growth at all Costs
This leads most brands to spend the majority of their funds on paid marketing to acquire new customers.
Casper spent over 73% of its gross profit in 2019 on sales and marketing costs, which led to about 20% growth. 
While focusing on ad spend worked for others, it’s not that simple anymore.
Customer acquisition costs are higher than ever. Advertising on platforms like Facebook isn’t a novelty and overall ad costs are rising.
Advertising research in 2019 showed that Facebook CPM rates have grown 90 percent year-over-year for marketers. 
But, DTC brands are willing to spend the money to gain new customers, even if it’s not profitable for them. Then, they cross their fingers and hope that the customer buys again sometime down the road.
Growth at all costs though leads DTC brands to eventually hit a wall, and hard.
At its highest point, Nasty Gal had around $100 million in revenue and $70 million in VC money. They still couldn’t reach profitability and filed for bankruptcy. 
This sets many brands up for failure. When backed by VCs, it’s either reach your growth numbers, or go out of business trying.
Growing at Your Own Pace
Not wanting to follow in the footsteps of Nasty Gal or Brandless, brands are throwing the normal DTC playbook out. They know you can’t take shortcuts to build a loyal (and profitable) customer base in just a year or two, especially amid ever rising ad costs.
They’re avoiding VC funds and using a long term strategy to grow at a slower (and manageable) pace. They’re cutting back on aggressive paid ad spend. They’re opting out of short product development lifecycles.
Instead, growth objectives and marketing budgets are smaller. Operations run lean and efficient. They’re hyper-focused on customer feedback and thorough product research and development, even if it takes months longer.
The goal is to build a loyal audience that genuinely loves their high-quality products and wants to tell others about them.
For some brands, finding ways to scale without VC money is working:
- Richer Poorer, apparel: After cutting ties with VCs, they dropped marketing spend to just 30% of their overall budget. Since re-evaluating their product assortment, conversion is up 25% year over year, customer acquisition costs are down 10%, repeat purchase rate is up 50% and average order value is up 35%. 
- Dagne Dover, handbags: Reported that 50% of their customer acquisitions are unpaid, with customers finding the brand via Instagram and word of mouth. 
- Tuft & Needle, mattresses: Merged with Serta Simmons in 2018 and did $170 million in sales in 2017 without funding. 
- MVMT, watches: Acquired by Movado for $100 Million upfront without ever taking on VC funding. 
- Rothy’s, shoes: Rothy’s posted $140 million in revenue in 2019, with every order being profitable and not losing money on customer acquisition. (Rothy’s waited a few years until 2018 to raise any rounds, allowing them to maintain control over their brand and decisions today.) 
Want to hear from merchants themselves? Watch this on-demand financing webinar that features brands like Dagne Dover as they talk in detail of scaling their businesses without raising a round or taking on debt.
How to Grow your DTC Brand without Venture Capital
Unfortunately, these scrappy DTC businesses still face high advertising costs and competitors backed by VC money. Scaling a brand in this type of environment takes creativity, efficiency, and transparency.
However, these brands are finding ways to win, without depending on cash injections from VCs to seemingly make their problems go away.
Payability offers revenue-based financing to eCommerce businesses, including many DTC brands. Our Instant Advance offering is a capital advance based on your future projected eCommerce sales (usually 75-150% of your monthly sales). We also offer Instant Access or accelerated daily payouts for eCommerce businesses paid on terms by marketplaces such as Amazon. So you can grow your brand by getting your own money faster.
Learn more about growing your DTC brand without venture capital in this insightful article 5 Ways to Grow Your DTC Brand that considers financing options, automation, fulfillment optimization, and more!
Sources and Citation Info:
To be clear, none of the statistics above are based on research by Payability. This post is a compilation of statistics from various web sources that are cited below. We hope to give you one, convenient place to find data about the DTC market.
For any formal or academic purposes, please cite the original source of the data.
The links below are where Payability found the statistics and we encourage you to check these sites for more insights.
- More like reality’: In 2019, hot DTC brands face pressures to prove profitability, Digiday.
- Comfy Shoes Helped Allbirds Become a $1.4 Billion Company, but It’s Never Been Just About Shoes, Inc.
- How Warby Parker emerged from the pack to become the “it” online eyeglass startup, Fast Company.
- Why All the Warby Parker Clones Are Now Imploding, Marker.Medium.
- Casper IPO puts $1B unicorns in crosshairs, Yahoo Finance.
- How Outdoor Voices, a Start-Up Darling, Imploded, New York Times.
- Why venture capital doesn’t always make sense for fashion, Vogue Business.
- Casper files to go public, shows you can lose money selling mattresses, Tech Crunch.
- A Majority Of Marketers Worry About Rising Cost Of Facebook Ads, A.List Daily.
- ‘Allbirds is an outlier’: Why VC-backed direct-to-consumer brands are hitting a wall, Glossy.
- ‘The winds are changing’: Why more DTC brands are rejecting VC capital, Glossy.
- How bootstrapped DTC brands navigate a VC-saturated market, Digiday.