New Economic Realities   //   January 2, 2024

After a bumpy year, consumer investors begin planning for 2024

As deals continue to trickle in, funding series are set to make a comeback in 2024.

Investors have acknowledged that the past two to three years have been a challenging environment for startup brands. But with interest rates stabilizing, consumer spending going strong and funds needing to be spent, founders are likely to see activity to ramp up. The last few months signaled that investors are itching to write checks — for the right company, that is.

A number of venture capitalists spoke to Modern Retail to outline what they’re seeking out in consumer brand startup prospects in the coming year. 

A new focus on fundamentals

Overall, investors are happy to slow down and carefully consider the company’s overall health before participating in a round.

Anna Whiteman, principal at Coefficient Capital, said a lot of investors have focused less on consumer brands in the past couple of years as tech-geared firms cut back on backing retail startups. This led to the so-called DTC reckoning, forcing many companies to shift priorities by cutting spending and focusing on profitable sales channels, like brick-and-mortar. 

“Businesses aren’t growing as fast, but they’re growing more efficiently and profitably,” Whiteman said. “So what we look at is organic customer acquisition,” said Whiteman, which she said better lends itself to achieving profitability within the first 12 months. “What that means is not losing money on your first order as a DTC business.” 

Whiteman said retention is another major factor in prospecting a brand. That doesn’t necessarily mean pushing for marketing callbacks, like retargeting the customer to get them to repurchase. “It has to be a great product that fits into the consumer’s life, and it feels necessary and irreplaceable,” Whiteman said.

And if a digitally-native brand’s revenue has already shifted toward retail, Coefficient’s expectations change based on the retail partner and category. “We go retailer by retailer, and look at whether the brand’s velocity is holding up and what the competition on that category’s shelf looks like,” Whiteman explained. “Those are table stakes when it comes to metrics,” she said, along with checking the overall consumer sentiment around a buzzy brand. 

Categories expected to pop

As the trends from the past few years showed, the appetite for better-for-you food and beverage and clean beauty is expected to grow.

Consumer packaged goods, while expensive to scale, are still luring investors. Earlier this year, two prominent CPG-focused funds launched to back early and mid-stage brands. In September, the $50 million Alethia Opportunity Fund I was announced, with a focus on the alcoholic and nonalcoholic beverage space. That month, a new investment firm called Humble Growth also launched, with a $312 million fund dedicated specifically to CPG startups.

Mike Jones, co-founder and managing director of brand accelerator Science Inc., said, “in 2024, with a shifting consumer health consciousness, the market spotlight will intensify on better-for-you snacks,  beverages and consumer products.” Science Inc.’s portfolio includes Liquid Death and Grove Collaborative. Jones also expects a “thawing IPO market in 2024,” accompanied by a surge in VC funding. Furthermore, there is also optimism around economic stability. “The Fed announced interest rate cuts are on the table in 2024,” Jones said. “This will lead to a push in spending in the coming year, creating an elevated and sustained business environment.”

Whiteman said her firm is consistently doing outreach to businesses it deems to be category leaders — especially in these hot categories, like beauty and pet. “We’re targeting doing a deal or two per quarter, so not a rapid deployment cycle — but we’re trying to be very concentrated and we prefer to lead a round,” Whiteman said, and that Coefficient’s parameters for underwriting have not shifted. “We’ve done more or less as many deals over the past couple of years as we had prior.” 

Not everyone, however, is bullish about future prospects. Taryn Jones Laeben, founder and president at go-to-market think tank IRL Ventures, is more matter-of-fact about the fundraising environment. “2024 will be a bloodbath for venture-backed consumer businesses seeking funding,” she told Modern Retail. Venture has largely soured in the consumer space, Laeben added, which has made funding incredibly hard to come by for founders in this sector. Laeben noted that according to Crunchbase data, in 2023 only $130 million U.S. venture capital dollars went into the DTC sector vs. the $5 billion in 2021, or a 97% drop. “2024 will only compound these headwinds.” 

As many investors have been repeating, the focus now is largely on profitability. “VCs will only consider consumer businesses that are either already profitable or have a clear path to profitability,” Laeben said. “Ideally, these businesses should also offer unique, ownable differentiation.”

At IRL Ventures, Laeben said, “we’re also excited about businesses that integrate content and experiential elements to drive loyalty, high repeat and create multi-channel distinct experiences.” Examples of these include the Museum of Ice Cream or experiential children’s retailer Camp, whose collaborations include Disney and Paramount for in-store ticketed events. “We like Camp’s ability to always evolve with new media partnerships giving families reasons to come back again and again,” Laeben said.

Celebrity brands continue to attract investors 

Celebrity-backed brands are expected to continue attracting investors. In December, Springdale Ventures announced Fund II, dedicating $40 million in capital to invest in early-stage consumer brands; The new fund follows Fund I, which launched in 2019 and did around $25 million in deals – with the average check between $500,000 to $1 million. So far, the new fund has invested in 14 companies across the food, beverage, pet, health, and beauty sectors. Notable investments include Mr. Beast’s snack brand Feastables, Gal Gadot’s Goodles, healthcare workers-geared footwear Gales and Nectar, an Asian flavors-inspired spiked seltzer.

Jocelyn Florence, partner at Parallel, a celebrity talent partnership studio & strategic investor, said the firm seeks out mission-driven companies in the wellness space. “So we’re not deploying capital just to deploy, if we don’t spend everything we’ve allocated that’s okay,” she said. “We’d rather reserve cash for companies that speak to our mission, and we haven’t had issues finding those.” 

Interest in celebrity or creator-led brands continues, but investors are looking to better leverage their talent for customer acquisition. Having a famous name at the helm doesn’t always translate to business success, as evidenced by baby products brand Hello Bello. The company, founded in 2019 by actress Kristen Bell and actor Dax Shepard, recently filed for bankruptcy despite having Walmart as a retail partner. 

Parallel specializes in bringing on talent to leverage it for brand growth, such as marketing strategies. For instance, the company is an early investor in plant-based protein drink Happy Viking, co-founded by Venus Williams. As such, Florence said the trend of profitability and not prioritizing growth at all costs is helpful for the firm, “because I don’t want to bring someone on and ask them to stake their reputation for a company that’s going to flame out in six months.”

Put together, many investors are cautiously optimistic about the landscape ahead — but they’re going to be very choosy.

Coefficient’s Whiteman said there are reasons for retail brands and their backers to be hopeful. “You’ll see people step out of the fog of war and start putting capital to work next year,” she said. And while everyone has been cautious in the past few years, “you’ve got all this pent up capital that needs to go out into the world because there are time limits, funds have life cycles and return parameters.”

Much of this also depends on the economy. If inflation continues coming down and consumer spending remains extremely resilient, Whiteman said, “I think we’ll see more funds getting off the sidelines.”