The D-to-C Funding Landscape Has Changed. Here’s What Matters Now.
It’s been more than five years since direct-to-consumer (D-to-C) legends like Warby Parker, Away, and Everlane came of age and completely upended the retail ecosystem and forever changed the way we think about building brands. Barriers to entry collapsed. First-party data and social media forged ongoing, direct relationships between new brands and their customers. It was a heady bunch of years to be a D-to-C startup.
Hundred-year-old brands like P&G and Unilever (and a bunch of “middle-aged” ones like Nike) found themselves suddenly ripping a page from the D-to-C playbook to forge their own direct relationships with customers. These days, however, everyone’s a D-to-C brand (or they should be) and starting a new D-to-C brand is harder.
It's also harder to get funding.
Part of that is competition. Applications to start new businesses hit 5.4 million in 2021, a new record. However, a bigger part of that is the new macro-economic environment.
Retail is always volatile, but in an inflationary world rocked by supply chain problems and soaring costs, it’s downright combustible. A lot of people have been burned by overinvesting in D-to-C startups.
The landscape has changed.
D-to-C retail startups look to raise money when they don't have the money to self-fund their own business initiatives. Some of the initiatives that require lots of money are category expansion — i.e., when you have to build that product nine months to 12 months ahead of when you begin to realize revenue, and so you've got to put a big cash outlay to be able to expand into new product categories. Or you need to open retail stores. And everything these days is more expensive. Marketing is expensive, raw materials are expensive, and people are expensive. Those are the biggest reasons most D-to-C brands look to raise capital.
And when they do, investors are going to be looking at two big things:
- How healthy is your customer file? Is your customer file growing? Are your customer metrics either steady or improving?
- How effective is your marketing across all channels? Do you have customer metrics reporting? Do you know how your customer file is growing? Do you know what your repeat purchase rates are? Do you know what your customer lifetime value is?
You need to have all your business intelligence in order, including customer metrics reporting and cross-channel marketing reporting. Investors of all stripes are looking for trends that are either steady or positive. And you've got to make sure that you have right-sided anything that could be a red light or a yellow light to investors. A red light is if you're carrying too much inventory — you've overbought inventory and it's dragging down your P&L. Make sure you’re not sitting on excess inventory when you look for investors.
Gone are the days when people invested in unprofitable businesses. That’s true of both venture money and private equity. Most private equity firms won't even talk to you if you don't have $5 million to $10 million in EBITDA.
And, of course, timing is everything. The old adage that the best time to look for money is when you don’t need it is truer than ever. It can take six months to 12 months or more to raise the capital you need in the current climate, and if the last few years have shown us anything, things change fast. However, if you’ve got your metrics and P&L in order, you’ll be ready when they do.
Polly Wong is the president of Belardi Wong, a leading direct marketing agency based in New York and San Francisco.
Related story: D-to-Cs Proved Resilient in 2020. Here’s How They Can Sustain That Momentum.
Polly Wong is the President of Belardi Wong, a leading direct marketing agency based in San Francisco.