Member Exclusive   //   May 28, 2024

DTC Briefing: Startups are pursuing a mix of credit and equity amid fractures in funding

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. More from the series →

​​To run a consumer business today, founders have to be prepared to tap more sources of funding than ever before. 

There are a variety of ways to fund a DTC startup, but the problem is that many of these sources are being squeezed by various macroeconomic conditions. While venture capital and private equity firms have a significant amount of capital they can invest — and are investing — in startups, VCs have become more trepidatious about backing consumer startups in particular. Overall, the amount of venture capital being invested in startups is still significantly below 2021 levels. At the same time, high interest rates continue to make vehicles like debt less palatable. Meanwhile, recent funding challenges that venture-backed fintech providers like Ampla have run into underscore the drawbacks of relying on too much on these companies.

In turn, the big challenge many startups face is thinking through what financing sources they want to tap to fund initiatives like retail expansion and new product lines. If, say, Walmart comes knocking on their door one day expressing interest in carrying a startup’s product in thousands of stores, how should that startup fund expansion into Walmart? Do they use that to go out and raise a new venture capital round? Or do they tap a line of credit?

These are the questions DTC founders are thinking through right now. 

For many, there’s a greater emphasis on ensuring they have a mix of both credit and equity they can tap if need be. Asset-based lenders like Dwight and Rosenthal & Rosenthal, as well as SG Credit Partners, are among the firms that mature startups are working with. Rosenthal & Rosenthal, an 86-year-old family-run asset lender, has recently started working with DTC startups like Truewerk and Margaux, underscoring how much demand there is for capital among these startups.

One CPG founder I recently spoke with said that if their startup — which has raised a small amount of venture funding — goes out to raise another round, it will be from family offices, not VCs. Or, they will work with more traditional debt providers.

It underscores the trepidation many startup founders have right now about being too reliant on VC funding. While many startups have no choice but to raise some equity funding, they are cautious of continuously banking on equity financing to fund the business, as the past three years have underscored how quickly VCs’ expectations of consumer startups can change. Thus, they want to have a line of credit or loan that they can tap, especially if equity funding conditions change. 

Mike Duda, managing partner at Bullish said that today’s DTC founders “have to spend even more time thinking about the different [funding] options.” 

Because there are so many more funding options, “it makes investor relations and the investor side of these things more time-intensive and more crucial,” he said. Founders have to spend more time talking to potential future investors and potential future lenders, which can take away from other aspects of the business.

“You have to talk about this much further in advance,” Duda said, explaining that one of his portfolio companies started holding meetings last August about how to prepare for a fundraise that is kicking off now. 

It also means that lenders have to start building relationships further in advance with startups that may tap them for a line of credit, say, three or five years down the road. Dwight Funding is one asset-based lender that’s increasingly becoming popular among DTC startups, having worked with brands like Dagne Dover, Chubbies and Rhone. 

Dwight launched in 2015, at a time when the firm’s founder, Ben Brachot, said no asset-based lenders were really “tackling consumer in a dedicated way.” 

At the time, among consumer startups, “there wasn’t a lot of interest in credit back then,” he said. This was because “people were raising large rounds, and they prefer to finance their business through equity… and then over the last several years, I think founders realized they can tap into credit like this.” 

Dwight works with brands at a variety of stages, including some pre-launch startups. However, generally speaking, the firm prefers to work with brands that have at least $5 million to $10 million in revenue. 

The main funding vehicle Dwight provides is an asset-based loan, which is essentially a revolving line of credit that brands can tap to fund things like inventory financing or retail expansion at various points in time. And, startups only pay interest on what they use, when they use it. 

As Brachot described it, Dwight sits between a traditional bank and venture-backed fintech companies. While the exact terms will vary depending on the company — Brachot said that, generally, bank financing typically offers around a 7% to 9% APR. Dwight’s financing typically runs between a 9% to 15% APR. Venture-backed fintech companies typically offer a higher APR, anywhere from 15% to 25%, according to Brachot — though, it can be difficult to calculate because the lines of credit generated through those fintech companies are typically paid off as a percentage of sales. As a result, if a company beats its sales expectations, it pays off these lines of credit faster. 

“I think the biggest difference between us and [the venture-backed fintechs] is that they’re more volume-driven,” Brachot said. “We prefer to be more relationship-based. That was our philosophy very early on — that a growth stage business is not just looking for capital, they’re looking for relationship lending.” 

Brachot declined to share growth numbers, adding that Dwight is “not the volume shop.” However, he said that Dwight has funded over $4 billion since its inception and works with close to 100 companies today — many of which are venture-backed. 

In an ideal world, Brachot said, Dwight-backed companies are using investor capital for long-term investments — for example, growing their team. And, they are using Dwight financing to fund quarterly expenses like inventory POs or marketing investments. 

It’s indicative of how the modern DTC startup is being funded through multiple mechanisms. The challenge for later-stage startups — particularly those that raised money in 2021 during peak valuations for consumer brands — is that they have more right-sizing to do, often through down rounds. “You can only do so much,” Bullish’s Duda said.

But for brands just starting out — or for those that have not raised significant amounts of venture capital — there’s growing awareness around keeping their options open and maintaining relationships with as many investors and debt providers as possible.

“I think the pendulum is swinging back to… a more healthy mix of equity and credit,” Brachot said. 

What I’m reading

  • Prebiotic soda brand Olipop said it is projecting $500 million in sales this year, up from $200 million in 2023.
  • Rothy’s is now selling its shoes on Amazon.
  • The stock price of Hims neared a record high on news that it will be selling an Ozempic competitor, starting as low as $199 per month for compounded GLP-1 injections.

What we’ve covered

  • A mouth tape startup called Hostage Tape (yes, really) said it is set to do $40 million in revenue this year on the back of Meta ads.
  • Toms, the shoe brand, is experimenting more with podcasts and live events in its marketing mix.
  • Scrubs brand WonderWink has rebranded as simply Wink as it seeks to roll out new products with design touches that are more mindful of all the tasks health care providers need to accomplish in a day.