This is the latest installment of the DTC Briefing, a weekly Modern Retail column about the biggest challenges and trends facing the volatile direct-to-consumer startup world. To receive it in your inbox every week, sign up here.
2021 was a banner year for direct-to-consumer companies going public. But this past year saw this group of DTC startups face sober economic realities — and their valuations are suffering.
By the beginning of 2022, retail startups’ were already feeling a decline in sales and a drop in stock following a record number of IPOs last year. But by the end of 2022, companies like Warby Parker and Allbirds saw their market valuations decline by roughly fivefold. Companies that went public before 2020, like Peloton and Stitch Fix, are also having difficulty with customer retention. Even profitable companies like Figs are facing business headwinds caused by the current economic downturn. Figs’ adjusted EBITDA was $21.0 million for the third quarter, a decrease of $1.2 million year-over-year.
Money-losing DTC brands are nothing new, as companies like Casper showed by going public and then back to private over the course of a year. For years, these online-first companies chased hyper-growth, with the intention of achieving profitability later. But after receiving a lifeline during the early pandemic’s e-commerce boom, many DTC brands are attempting to diversify distribution and cut back on expensive marketing spending to grow more sustainably.
These current market caps highlight the headwinds that many retailers are currently facing. But according to industry experts, they also prove that VC-fueled valuations were over inflated over the past five to 10 years.
Here’s how some of the market valuations of top digitally-native brands have changed over the course of 2022, based on what their market cap was the day they went public, versus their valuation on Dec. 22.
- Rent the Runway: At the time of its IPO in October 2021, Rent the Runway’s valuation was estimated at about $1.3 billion despite ongoing pandemic struggles; This month, the company is closing out the year with its shares down by 90% since its public debut. This comes after the company laid off nearly 24% of employees in September to achieve profitability. Now, its market cap is down to $177 million.
- Warby Parker: The 12-year-old eyewear brand — which debuted on the New York Stock Exchange in September 2021 — has also seen its shares plummet since. At the time of its public debut, Warby Parker’s valuation was roughly $6.8 billion. Today, that figure is around $1.58 billion.
- Allbirds: Footwear brand Allbirds is another alum of the class of 2021 DTC IPOs. The company has experienced a decline in sales, and consistently recorded losses since going public in November 2021. At the time, Allbirds’ stock began trading at about $15 per share, with a whopping valuation of $4.1 billion; Today, the company’s stock is down to about $2.30 per share, giving it a market cap of $345 million.
- Brilliant Earth: Jewelry brand Brilliant Earth was another company that went public in 2021, garnering a $1.1 billion market cap at the time. While the company continues to grow sales — its latest quarterly revenue grew 17% over the prior year — Brilliant Earth’s valuation has dramatically dropped in the past year. The $1.1 billion figure has been slashed to less than half, and currently sits at around $381 million.
- Figs: Medical wear maker Figs has been one of the brighter spots among newly-public brands, continuing to generate healthy quarterly sales. Still, the company’s market cap has significantly softened. The initial sum has dropped from $4.4 billion at Figs’ May 2021 IPO to the current $1.11 billion.
Digitally-native consumer packaged goods makers didn’t fare much better.
- The Honest Co.: Jessica Alba-founded The Honest Co., which had its initial public offering in May 2021. The CPG company’s market cap has fallen from $2 billion to $345 million in the past 17 months.
- Grove Collaborative: The home essentials company was founded in 2012, and went public via SPAC in June with a $1.9 billion market cap. That number has since dropped to about $37.19 million. Last month, the company received a delisting notice from the SEC due to its average share price falling under $1 for over a 30-day period.
What this means for the future of direct-to-consumer
According to long-time DTC watchers, the deflated valuations were inevitable.
“You could have seen this coming, but hindsight is 20/20,” said Dan McCarthy, assistant professor at Emory University’s Business School. “If you don’t have great financials, the capital markets aren’t always forgiving.”
He added that future growth among these companies will vary, based on their value proposition and ability to scale at a sustainable rate. “A company like Warby Parker has a good underlying unit economics that can help it get to the next level,” McCarthy said.
Simeon Siegel, an equity research analyst at BMO Capital, argued that the current market volatility is impacting both DTC and traditional retailers. Indeed, this year even big-box retailers like Walmart and Target struggled to keep profits up as inflation ballooned.
Still, venture capital-backed plans have a long road ahead if they want to survive a looming recession.
“This shows the reality, which is that DTC isn’t all it’s cracked up to be and the love affair with these businesses has faded,” Siegel said. At the same time, Siegel explained, “discretionary spending has gone down, which is impacting almost all companies selling these types of products.”
McCarthy agreed, saying that time will tell whether the current market correction will ease in a few years to help valuations bounce back. At the same time, McCarthy warned, it will be difficult to achieve profitability when demand for these brands’ products is continuously shrinking.
Next, the question for these businesses is whether going into new channels, like wholesale and marketplaces, will be enough to generate substantial sales. “Now that the VC dollars have faded, they’re going to have to show why their products are actually worth buying,” Siegel concluded.
What we’ve covered
- A look at what led to the rise and fall of 15-minute delivery startups last year, as told by former Fridge No More and Buyk employees.
- Executives at DTC startups including Stix, Kokada and Verlas share how they had to rethink their digital marketing playbooks in 2022.
- Why 2022 was such a bruising year for Amazon.
- What’s in store for buy now, pay later providers like Klarna, Afterpay and Affirm in 2023.
- Why teen apparel retailers like Forever 21 and Pacsun were among the quickest to embrace the metaverse in 2022.
- The Modern Retail guide to what’s in and what’s out in 2023.