Member Exclusive   //   May 14, 2024

DTC Briefing: Startups risk being hung out to dry as key business partners hit funding challenges

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 →

It’s been a difficult start to the year for many of the vendors and retailers that work with direct-to-consumer startups. 

The explosion of e-commerce startups has resulted in a glut of businesses over the past 10 years, looking to serve these startups in areas ranging from email marketing to 3PLs to fintech lending. But now, there’s a rightsizing going on. In turn, not all of these startups have been able to survive.

There has been a flurry of retail closures, from Neighborhood Goods to Boisson to Foxtrot, leaving startups scrambling to chase down unpaid invoices and figure out where to redirect inventory. Meanwhile, other types of vendors, from 3PLs to financing providers, have also run into challenges. Fintech startup Ampla is reportedly considering a sale, BevNet reported, as Snaxshot spoke with brands that had their lines of credit cut. Airhouse, a venture-backed 4PL, also stopped servicing clients earlier this month, transferring customers to partner 3PLs instead. 

Many of these challenges are the result of one issue: funding. Venture capital funding remains hard to come by; the amount of venture capital dollars invested globally during the first quarter of 2024 was down 20% year-over-year, according to Crunchbase data. The statement shared by Airhouse founder Kevin Gibbon, explaining his company’s predicament, will sound familiar to any venture-backed founder: “We were on the brink of closing a round that would have put us in a great financial position, and that fell through at the last minute,” he wrote on social media.

This situation underscores the importance for startups to have a contingency plan in case a key vendor or partner goes out of business.

Founders and retail executives say that much of contingency planning boils down to making sure that a company isn’t too reliant on any one vendor. They also suggest periodically keeping in touch with contacts at competing vendors. That way, they can more quickly move their business if a key partner starts to go down. Many sources stressed the importance of vetting vendors in the first place. And with VC cash being less plentiful, more people are asking tough questions about how well-capitalized these vendors are. 

For startups that only launched within the past couple of years, it’s been a baptism by fire to adjust to this new vendor landscape. Kai Lim is the co-founder of Reprise Health, a startup that sells gummies infused with traditional Chinese herbs like ginseng and goji. Within the past year, two of Reprise Health’s retail accounts have gone out of business: Showfields last year, and now Foxtrot. 

Lim said that the bankruptcy of Foxtrot didn’t drastically change how his company plans but rather, served as a “great reminder that we should not be overly reliant on one retailer.”

Drew Fallon, the co-founder of AI-powered finance platform Iris, thinks that contingency planning has become more top of mind for startups since Silicon Valley Bank collapsed last year. Fallon, who at the time of the bank’s demise was working as the CFO of tattoo aftercare brand Mad Rabbit, recalled that more investors were suddenly asking their portfolio companies, “Who are you banking with? And what’s your backup plan?” 

Fallon said that once a business gets to, say, $50 million in writing, they likely have written contingency plans in place. But when businesses are just starting out, “there is no backup plan — when you are really, really small, it has to work.”

When a brand begins to take off — reaches, for example, $10 million in revenue — they can start investing more meaningfully in contingency plans. Even if they can’t afford to build in a redundancy for, say, every part of their supply chain, they can keep in contact with multiple vendors. Fallon said that one thing he used to do was “lap through the market” every quarter and schedule periodic catch-ups with contacts at various vendors to see what new products they had released or what new terms they were offering. 

That way, if it’s a truly dire situation where a vendor is going out of business, “you can pick up the phone and call [your contact] and say, ‘hey I’m going to give you my business right now,” Fallon said. “That’s how you pull it off pretty quickly.” 

Getting smarter about contingency planning also involves getting savvier about how to vet these startups in the first place.

Richie Mashiko, startup consultant and head of growth at She’s Birdie, a startup that sells safety alarms, said one of his clients recently switched from Ampla to a competitor. “I think when you’re looking at these, lenders or credit facilities, part of the analysis has to be, OK who’s backing them?” Mashiko said. 

Deepa Gandhi, the co-founder of bag brand Dagne Dover, said that, first and foremost, she vets vendors through recommendations from sources she trusts. Dagne Dover chose its first-ever 3PL, for example, based on a recommendation from someone she knew at Harry’s. She also tries to “speak with as many people who have worked with [that vendor] as possible,” rather than solely relying on customer testimonials the vendor has provided. 

As the company has gotten older — Dagne Dover has been in business for over 10 years now — Gandhi said she has also gotten smarter about how she vets certain vendors. When it comes to lenders, for example, she now more closely scrutinizes their underwriting process.

She also said for any vendor — but especially financing providers — “it is absolutely appropriate to ask how strong their financials are.” She added, “I think a lot of times people don’t think that that’s appropriate to ask, but there’s a way to ask it.”

Fallon agreed. “It isn’t always well received by the vendor, but it’s important,” he said. And sometimes, he added, you can get the information you need “based on their reaction” to that question. 

Even as venture capital funding gets harder to come by, the reality is that, in most cases, there is still a glut of vendors willing to work in startups in every area. Settle, for example, is running targeted ads right now on Google going after businesses that are “looking to switch from Ampla.” 

But startups can quickly find themselves in a precarious situation if multiple of their vendors run into a funding crunch — or, if there is a case like the Silicon Valley Bank collapse that creates a domino effect. 

“There are a lot of companies out there selling you a dream,” Gandhi said. When it comes to vendors, she went on, “You have to have multiple options, or you have to work with partners that are that have really strong reputations and really get to know the ownership or leadership.” 

What I’m reading

  • Ten years after publishing an essay about how the “growth hacker is the new VP of marketing,” Andreessen Horowitz’s Andrew Chen has a new newsletter on how growth marketing has changed.
  • Target is scaling back its Pride collection this year, to the disappointment of startups like Humankind that have previously been a part of Target’s Pride assortment
  • Allbirds sales continue to slump. The footwear retailer reported sales declined by 28% in the first quarter, though new CEO Joe Vernachio said the brand is “executing with urgency.” 

What we’ve covered 

  • Athleticwear brand Popflex got a sales lift after one of its skorts was featured in a Taylor Swift teaser video. But since then, the brand has had to contend with AI-generated copycats trying to sell counterfeit versions of its product on Amazon and TikTok. 
  • How Australian luggage brand July grew its U.S. sales by 400% in three years
  • Interest in energy drinks continues to explode and entrants like Key and Odyssey Elixir are trying to stand out by experimenting with new ingredients and rolling out lines with varying degrees of caffeine.