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DTC investors are evolving their playbook

Jan 29, 2024
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Illustration: Gabriella Turrisi/Axios

Amid a new DTC environment, investors have become wiser on what works and what doesn't.

Why it matters: This is crucial to separating the wheat from the chaff, a dynamic that will play out this year as more startups shake out.

What they're saying: There's this whole shift in the "permissible playbook," says IRL Ventures founder Taryn Jones Laeben.

  • IRL's portfolio included Parade and virtual fitness provider Mirror, which sold to Lululemon for $500 million in 2020.
  • "When there was a lot of capital to be had, it was very easy to build vanity strategies, as opposed to really building a durable consumer business," says Laeben.
  • That means ensuring efficient headcount, employing low-cost approaches to customer acquisition, leveraging new tech, and building a multi-channel strategy, she says.

For VMG Partners general partner Robin Tsai, a multi-channel strategy isn't a must-have — but companies have to meet consumers where they are.

  • "You want to build your business with maximum flexibility so that you can be pure play DTC if that's what your consumers want, or you can be more omnichannel," he says.
  • They also should have products that are highly repeatable purchases and that draw a loyal following.

What we're watching: Several DTC companies have gone public in the past couple of years trading at a fraction of their IPO valuations.

Zoom out: But there's another side to this equation, and that's M&A, she adds.

  • It could "present some opportunities for earlier stage businesses who have quickly gone to profitability during this time to seek transaction opportunities."

The big picture: Consumers want a curated buying experience, says Tsai, whose firm's portfolio includes popular brands Kosas (on the auction block) and The Honey Pot (acquired by Compass Diversified) and troubled baby brand Hello Bello (acquired by Hildred Capital Management out of bankruptcy).

  • "They want to be able to walk into an environment and actually be very confident that what they're going to be selecting from is somewhat pre-vetted," he says.

Meanwhile, channels like TikTok and Instagram Live have proved to be effective ways of building DTC offerings, says Michael Jones, CEO of Science Inc., whose companies include Liquid Death, Dollar Shave Club, and Rover (acquired by Blackstone).

Be smart: Many DTC companies face a steep learning curve in manufacturing, distribution and marketing, says Jones.

  • "Some of those companies just literally can't figure out those components to become a margin-positive growing company before they run out of money," Jones warns.

The bottom line: All investors agreed that profitability is king (or queen) — and, as Tsai notes, serves as a good indicator that consumers value a brand at a premium.

Go deeper: DTC faces a reckoning in 2024

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