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Distressed investors sense opportunity in DTC's fallout

Illustration of a stack of money and a handshake surrounded by abstract shapes and money elements.

Illustration: Gabriella Turrisi/Axios

Distress in DTC is presenting opportunities for investors with the stomach for risk.

Driving the news: Firms such as BlackRock and Oaktree are raising structured equity funds that may be better described as distressed venture funds, says David Spreng, CEO of Runway Growth Capital.

  • The funds would invest in digitally native companies to fix their cap tables, though the minimum check would have to be $100 million for the deal to make sense, he says.
  • Such funds are not unlike the distressed debt funds firms like PIMCO raised to take control of retailers like Neiman Marcus during the early days of the pandemic.
  • Another example is the lifeline Silver Lake and Sixth Street threw home-sharing company Airbnb at the onset of the pandemic, Spreng says.

Zoom in: Among potential investment opportunities include Warby Parker, Allbirds, Rent the Runway, Wayfair and Care/of, which is owned by Bayer, a turnaround specialist says.

  • These companies could be acquired at a relative value, and new management teams and strategies could be deployed to turn them around, the source says.

Yes, but: DTC's troubles don't mean that all venture investors will want to abandon existing investments, Spreng says.

  • Some firms will want to move forward with some of the more promising, even if struggling, parts of their portfolios.
  • Those financings, however, will include a pay-to-play provision. The fellow VC firms who don't want to participate in new financing will be wiped out, he explains.

Threat level: Struggling DTC companies have a few tricks to stay relevant, Meitner says.

  • That includes partnering with retailers and expanding into wholesale.
  • In some instances, like Madison Reed, they could deploy a strategy for opening stores, such as utilizing small footprints and flexible leases, Spreng says.
  • "When you blend it in with other channels, DTC's challenges can be mitigated," Meitner says.

State of play: According to Meitner, some bright spots exist in the DTC landscape.

  • These include scrubs maker Figs, sneaker brand On Running, earbuds brand Studs, and T-shirt maker True Classic.
  • Additionally, Meitner cited hair coloring brand Madison Reed, skin care provider Droplette, cookware seller Maidenware, clean luxury brand Merit and skin care startup Rhode Skin.

BlackRock and Oaktree declined to comment.

Go deeper: DTC faces a reckoning in 2024

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