Direct-to-consumerEcommerce brands

Sal Cangeloso 1

What

The number of direct-to-consumer brands have exploded. The exits have not.

Two major distinctions:● Producers vs. resellers vs. platforms● Does it have a barcode?

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Direct-to-consumer challenges

● Capital intensiveo Supply chain, product

development, etc.● Distribution● Discovery

o Lots of marketing o Constant promotion

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Macro Trends

● Brick-and-mortar is slowing (not dying, it’s still huge)● Major ecom players don’t change (they do buy though)● If it has a UPC, Amazon owns it● Investors smell blood (retailers’)● Not an advertising-dependent

business model

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Micro Trends

● VC-backed ecom-related companies saw the most exits in 2013● 2012 and 2013 marked huge investments, but ecom investment slowing● YoY deal activity by 20 top VCs fell 35% between

2012 and 2013

6CB Insights

They get big...

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● One Kings Lane - $225M raised● Harry’s - $212M raised● Quirky - $185M raised● Bonobos - $128M raised● Honest Company - $122M raised● Warby Parker - $116M raised● Rent the Runway - $115M● Beachmint - $75M raised● Birchbox - $72M raised● Teespring - $60M● Julep - $56M raised

Important distinction: You make your own product or you don’t.

Ecom Unicorns

Greg Bettinelli (UpFront VC & HauteLook) on

identifying ecommerce unicorns:

1. An authentic founder/team

2. Early organic growth

3. Proven/potential operational excellence

4. Attractive market and margins

5. Companies that are in a position to excel in a changing world8

Notable exits

● Zulily IPO● Wayfair (Joss and Main) IPO● Toms Shoes Bain Capital (50% at

$625M valuation)● Fanatics Kynetic ● Tonx Blue Bottle● ShoeDazzle JustFab >$40M

($66M raised)

● HauteLook (flash sales) Nordstrom for $180M ($41M raised)● Net-a-Porter (retailer) Richemont ($500+ million, >4x GMV,

35x EBT)● Jackthreads (retailer) Thrillist● Tiny Prints (mass customization) Shutterfly for $333M (~$59M series A)● Drugstore.com (retailer) Walgreens● Quidsi (retailer) Amazon for $545M ($79M

raised)● Zappos (retailer) Amazon for $1.2B ($63M

raised)● Trunk Club (subscription shopping) Nordstrom for $350M

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D2C ecom...

Related...

Who today?● Harry’s Shaving● Everlane Clothing ● Casper Bedding● Warby Parker Eyeglasses● Mott and Bow Jeans● Cotopaxi Outdoor gear● Keen Home Smart home● Hello.is Smart home● Luna (Morphy) Smart

bedding● Naja

Underwear● Julep

Make-up● Brilliant Bikes Bikes● Aloha

Health food● Petflow Pet food● J. Hilburn Men’s

clothing● Poppin Office

supplies● Indochino Men’s

clothing● Frank and Oak Men’s

clothing● Good Eggs Food delivery

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● Nasty Gal Women’s clothing

● Moda Operandi Clothing retailer

Industries

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Brick-and-mortar● Where most shopping happens (Over 90% of retail doesn’t happen online)● Established distribution channels● Fewer returns● Personalized customer support● Example: Toms Shoes

12Census.gov

Why not brick-and-mortar

● Startups need distribution but at what price?

● Can you achieve startup growth after losing markup?

● Offline sales means no customer data

● No customer ownership● Brick-and-mortar still has

costs involved

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Retail in reverse

Start online and then move to brick-and-mortar for branding, prestige, access to customers, PR (and ego). ● Harry’s (SoHo)● Warby Parker (SoHo)● Everlane (SoHo)● Bonobos (SoHo)● Birchbox (SoHo)● Plus Google, Samsung,

and Amazon

14Image via Warby Parker

Why ecoms are acquired

● For brand● Startups innovate and experiment

o Julep: 52 different products in a year (300 says PR)● Outsource innovation (and risk)● Buy online disruptors● Better shopping experience

o Fun, streamlined, something to believe in...

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Who will acquire?

● Retailerso Losing market or flat, while online grows rapidlyo Fear the future

● Brands - Who can’t innovate at the pace of startups

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The exits

● Lack of public data and IPOs means a lack of information● Andrew Mitchell, Brand Foundry Ventures:

o D2C: “1-5x [revenue] mostly” depending largely on product margin o Marketplaces (many users, low margins): 2-2.5x

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The multiples

Vertically integrated D2C companies with high margin products have the highest valuations*

● Lululemon: 7x EV/Revenue● Michael Kors: 6x● Asos: 3x● Under Armour: 3x● Crocs: 1.2x

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● OpenTable: 5.75x● Rakuten: 2.25x● Blue Nile: 1x● Blue Fly: 0.25x● Overstock: <0.25x

vs.

* At time of IPO

The multiples in practice

Goal: 10x return (after dilution)

Casper (mattress startup): ● Raised: 2M seed ● Valuation (guess): 15M● 20x post-money (for 10x exit after dilution): 300M exit goal● Necessary revenue at exit (2-3x): 100 - 150M

● 2014 revenue: 15M● 2014 raised another 13M, valuation unknown

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IRR: 86% (5 years)

Summary

● Brick-and-mortar can help, but it isn’t the answer● To get adequate return, revenue has to be quite high● There are buyers, but they aren’t buying● Alternative exposure to ecom: Shopping support not

shopping (Shopify IPO, payments, mobile shopping platforms, Bigcommerce) and marketplaces

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VCs - First RoundFirst Round Capital

● Aloha - https://aloha.com/home - Health food, tea● Birchbox - https://www.birchbox.com/ - cosmetics● Bloomthat - https://www.bloomthat.com/ - flowers● Blue Apron - http://www.blueapron.com/ - food boxes● Boxed - https://www.boxed.com/ - food● Fab - http://fab.com/ - home decor● Homejoy - https://www.homejoy.com/ - home cleaning● Kiwicrate - http://www.kiwicrate.com/ - sciency gifts for kids● Modcloth - http://www.modcloth.com/ - women’s fashion● Moveloot - https://www.moveloot.com - secondhand furniture● Realfoodworks - http://www.realfoodworks.com/ - cooked food● TheBlackTux - https://theblacktux.com/ - tux rentals● ThreadFlip - http://www.threadflip.com/ - women’s clothes● True and Co. - https://trueandco.com/ - bras

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VCs - MaveronMaveron

● Drugstore.com - http://www.drugstore.com - online drugstore● Everlane - https://www.everlane.com - high-end clothes● Julep - https://www.julep.com/ - makeup● Madison Reed - https://www.madison-reed.com/ - hair color● Zulily - http://www.zulily.com/ - stuff for people with kids● Goodbelly - http://www.goodbelly.com/ - probiotics

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VCs - Index VenturesIndex Ventures

● 1stdibs - https://www.1stdibs.com/ - Second-hand luxury goods● Good Eggs - https://www.goodeggs.com/welcome - food deliver● Tracksmith - https://www.tracksmith.com/ - athletic clothing● Blue Bottle - https://bluebottlecoffee.com/ - coffee● Wool and the Gang - https://www.woolandthegang.com/ - knitting● Swoon Editions - http://swooneditions.com/ - Furniture (UK)● Shapeways - http://www.shapeways.com/ - 3D-printed goods● FarFetch - http://www.farfetch.com/ - clothing retailer● Abe’s Market - http://www.abesmarket.com/ - natural products● Nasty Gal - http://www.nastygal.com/ - women’s clothing● Brit.co - http://www.brit.co/ - DIY jewelry● StylistPick - https://www.stylistpick.com/ - women’s clothing ecommerce (UK)

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VCs - ForerunnerForerunner

● Aloha - https://aloha.com/ - health food● Alvin Valley - http://alvinvalley.com/ - woman’s pants● Birchbox - https://www.birchbox.com/ - makeup subscriptions● Cotopaxi - http://cotopaxi.com/ - hiking gear● Darby Smart - http://www.darbysmart.com/ - diy stuff● Dollar Shave Club - http://www.dollarshaveclub.com/ - razors● Into the Gloss - https://www.glossier.com/#!/products - makeup● KiwiCrate - http://www.kiwicrate.com/ - toy subscriptions● Drink Soma - https://www.drinksoma.com/ - water filters● Serena and Lily - http://serenaandlily.com/ - home goods● Sproutling - http://www.sproutling.com/ - baby monitor● Warby Parker - https://www.warbyparker.com/ - glasses● Zozi - https://www.zozi.com - outdoor gear

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Source links● Julep: http://www.julep.com/presspage/wp-content/uploads/2014/10/Press-Page_Julep_9_26_14.pdf,

http://techcrunch.com/2013/02/28/julep-beauty-raises-10-3m-from-andreessen-horowitz-and-maveron-to-disrupt-the-160b-cosmetics-industry/● Harry’s: http://www.nytimes.com/2014/12/04/style/investors-bet-big-on-harrys-the-warby-parker-of-shaving.html?_r=4● Online sales for US: http://www.census.gov/retail/mrts/www/data/pdf/ec_current.pdf● Why is ecom hot: http://www.quora.com/Why-is-e-commerce-such-a-hot-area-in-venture-capital-now/answer/Elizabeth-Knopf● CB Insights: https://www.cbinsights.com/blog/ecommerce-venture-capital-investors-2014/,

https://www.cbinsights.com/blog/2013-ecommerce-rankings/● Ecommerce growth is driving retail:

http://www.businessinsider.com/the-future-of-retail-2014-slide-deck-sai-2014-3?nr_email_referer=1&utm_source=Triggermail&utm_medium=email&utm_content=emailshare#-12

● Relationship-based ecom: http://venturebeat.com/2015/01/08/if-e-commerce-is-dying-then-why-are-consumers-spending-more-online-than-ever/● Warby Parker stores: http://www.wsj.com/articles/warby-parker-adds-storefronts-to-its-sales-strategy-1416251866● Pg 4 Lumascape: http://www.lumapartners.com/resource-center/lumascapes-2/● Pg 13 Business Insider: http://www.businessinsider.com/the-future-of-retail-2014-slide-deck-sai-2014-3

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