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DTC faces a reckoning in 2024

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Illustration: Gabriella Turrisi/Axios

The direct-to-consumer sector — perhaps more accurately referred to as digitally native businesses — is facing a reckoning this year as venture capital flees the category.

Why it matters: It's a fact that leaves startups with fewer options for survival.

Driving the news: Last year, investment in the space plunged to over $130 million as of November from its peak of more than $5 billion in 2021, per Crunchbase.

The big picture: "It's been an accident waiting to happen," Howard Meitner, a managing director at advisory firm Carl Marks.

  • Funding hysteria was partly driven by the pandemic and the presumption that store closures of nonessential retailers would bring the end of brick-and-mortar.

Yes, but: While the pandemic underscored the necessity of digital sophistication, it also highlighted the limits of e-commerce.

By the numbers: A 2023 report from VTEX says that 37% of retailers report that e-commerce is not meeting profit goals. Plus...

  • 38% have seen a reduction in digital ad effectiveness.
  • 22.5% are experiencing falling demand and increasing average inventory volume.

The most stunning of all, 69.8% of e-commerce shopping carts are being abandoned by shoppers.

  • "It shows you how difficult it is for DTC business to be profitable," Meitner says.
  • The business model struggles without large cash infusions because of high customer acquisition costs, low customer retention, costly returns, and inventory issues, he says.

Meanwhile, many DTC companies were errantly valued like software companies.

  • Startups were feeling market pressure to raise loads of cash at astronomical valuations, and founders were incentivized by the prospect of cashing out of a percentage of their positions.

Catch up fast: Some of the fallout began last year. Underwear brand Parade sold to Ariela & Associates International, a licensee of Fruit of the Loom, the lawyer says, likening it to a liquidation.

Go deeper: DTC investors are evolving their playbook

Go deeper