The Great D2C-VC Breakup: What’s Driving the Funding Shift?

One of the main reasons D2C brands garnered so much interest from VC firms during the movement’s peak years (2010-2018) is because many perceived digitally native brands as legitimate tech companies. What’s changed since then?

A tectonic shift is changing the way direct-to-consumer (D2C)  brands are accessing capital.

Compared to the D2C “honeymoon” period — in which numerous brands amassed millions of dollars in venture capital money and reached sky-high valuations — investors have entered a new era of renewed diligence. 

As of September 2020, VC firms invested just $1.9 billion in retail, compared to $3.4 billion in 2019 and $3.7 billion in 2018. 

However, that doesn’t mean D2C companies are languishing without capital.

Instead, this breakup has been largely mutual. In the last year, many D2C brands have proactively veered away from VC funding in favor of bootstrapping their way forward or seeking alternative methods of financing.

So, what’s driving this shift? And how will this trend continue in the future? 

Understanding the Initial D2C Hype

One of the main reasons D2C brands garnered so much interest from VC firms during the movement’s peak years (2010-2018) is because many perceived digitally native brands as legitimate tech companies. 

For those that could provide a unique customer experience through the use of technology and data, this perception held up. 

Take Glossier, a D2C darling that launched in 2014 with only four products. Despite its limited initial inventory, the beauty brand promised a different kind of customer experience — one that was digital-first and customer-centric, and even involved customers in the creation of its products. That, combined with highly resonant branding, earned Glossier immediate success. 

Today, the company has sold to more than 3 million customers, it has raised a total of $186.4M in funding, and boasts a valuation of $1.2 billion. 

Through their approach to technology and customer experience, brands like Glossier managed to set a new standard for customer experience that rapidly raised the bar for brands across industries. 

D2C funding

D2C as a Disruptive Force

The other main reason D2C brands often received higher valuations and heftier VC injections than typical retailers is because they disrupted an age-old industry. 

In the early 2010s, when iconic D2C companies first began cropping up, the business model was seen by investors as extraordinarily innovative and even revolutionary. 

The idea of going straight to the manufacturer then straight to the consumer and eliminating the middleman was completely new. And, with this business model, D2C companies were uniquely positioned to offer superior products and customer experiences at lower prices. 

On top of this, being digital-only increased D2C brands’ growth potential. Unlike traditional brick-and-mortar stores, online growth isn’t linear or limited. With physical retail, growth occurs by opening more locations. This requires time, real estate, construction, materials, etc. But with eCommerce, growth rates correspond to the speed at which a brand can become a market leader.

While in the past, it could take decades to reach $200 million in revenue, it could take just a few years with a digital-only approach. 

After Initial Growth, Some D2C Brands Are Changing Gears

Following years of enthusiastic investments, many VC firms realized they couldn’t continue investing at this rate — especially as a number of D2C brands were beginning to abandon the traits that set them apart from regular retailers. 

Due to increasing competition in a saturated eCommerce market and the rising costs of customer acquisition, many D2C brands have begun embracing the traditional business models they previously rejected. 

No longer digital-only, D2C brands began opening physical storefronts and even brought back the middleman via partnerships with big box department stores. In this Insider article, you’ll find 22 iconic D2C brands — including Glossier, Allbirds, Everlane, Away, Casper, and more — who now operate brick-and-mortar stores. 

Suddenly, the D2C darlings that promised to revolutionize retail have begun adopting a more conventional stance. Although many D2C shops have opted for smaller, showroom and experience-first store models, they still may not appear as disruptive to investors as they once did. 

D2C funding

D2C Brands Are Turning to Alternative Sources of Funding

While VC firms have pumped the brakes on D2C funding, many D2C brands have also become disenchanted with the conditions that can acompany funding. 

In the past, founders pursued VC money because they viewed it as a symbol of validation. And, of course, accessing millions of dollars in capital allowed them to take risks, expand headcount, and fund new products or features. However, the VC money also brought with it expectations for high-speed growth, providing a high ROI, and relinquishing significant ownership. 

Now, no longer in pursuit of a unicorn valuation, D2C founders are becoming more interested in alternative sources of financing that allow them to grow at a more sustainable rate, enable them to reach profitability, and afford greater ownership retention. Bank loans, lines of credit, crowdfunding, and private equity have all emerged as more favorable sources of funding for D2C companies. 

Where VC Money is Heading Now

As D2C brands increasingly shift their focus to new means of financing, VC companies are also steering their financing power in new directions. While they haven’t completely abandoned D2C brands, the goal of “grow at all costs” has been largely replaced by the pursuit of calculated scalability. 

According to a recent report by Modern Retail, investments in D2C brands in 2021 have favored companies in particularly attractive categories like home fitness and those building their own expensive hardware, including “intelligent home gym” Tonal, which raised $250 million in a Series E round this past March.

At the same time, investment in eCommerce technology companies — most notably payment and logistics solutions, as well as those focused on creating more engaging and personalized customer experiences — is becoming most desirable to VC firms. To investors, these companies have a greater potential to turn a profit than consumer-facing companies that are product-based. This pivot in focus also speaks to the growing importance of brands’ eCommerce tech stacks and the experiences they enable. 

Investors’ other main priority is identifying the companies they believe can retain the sales gains they achieved during the pandemic-fueled eCommerce boom. Though shoppers increased online spending while staying at home, the brands and retailers with the highest potential for ongoing success are those that can stay profitable while meeting the needs of the post-pandemic shopper.

The Future of D2C Funding

Over the last couple of years — and particularly, during the COVID-19 pandemic — many D2C brands have proved that they can succeed without VC money. 

Founders of companies that thrived during the pandemic have firmly departed from the pursuit of endless funding rounds and rapid growth, and instead, trust that they can maintain long-term profitability without relinquishing ownership. They have largely converted to the “slow and steady growth wins the race” philosophy.

And, most importantly, they have adapted their businesses to become resilient and agile enough to overcome the unpredictable — a strategy that will serve every brand.

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