‘Everybody’s doing their best with what we can’: How consumer startups are adjusting to a new VC landscape

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Each week, it seems like there’s a new statistic about how tough the fundraising environment is — especially for consumer startups. 

On X, formerly known as Twitter, Carta Inc. shared some statistics about what it’s calling “the Series A traffic jam.” Of a subset of 2,188 startups, just 10% of companies that raised their Series A in the first half of 2022 have raised a Series B so far. Direct-to-consumer startups have experienced one of the steepest drop-offs in funding, with Crunchbase declaring late last year that “VCs no longer do DTC” — these businesses saw a 97% drop in funding between 2021 and 2023. 

Founders and venture capitalists say that the funding environment remains challenging for consumer startups in 2024. In 2021, when venture capital funding hit an all-time high, startups were told to focus on growing at all costs. But over the past three years, as venture capital funding levels have slowed, they are now increasingly being told to focus on growing profitably.

Startups are still adjusting to this new mindset, resulting in fewer, smaller funding rounds. Founders are getting accustomed to bootstrapping or making a pre-seed round last longer. And when they are meeting with VCs, they now spend more time talking up how they are reaching customers organically in their fundraising pitches. 

To be sure, there are still rounds to be raised. But, the biggest rounds right now are coming from repeat founders who are also hyping some of the hottest tech trends, like AI. On Thursday, Daydream, a startup that aims to build an AI-powered search engine that’s designed for e-commerce queries, announced that it had raised a mammoth $50 million seed round, that was co-led by Forerunner Ventures and Index Ventures. Daydream’s founder, Julie Bornstein, is a veteran of companies like Sephora and Stitch Fix, and sold her last startup to Pinterest. 

Fundraising news like Daydream’s remains few and far between. As such, many of the founders who have gone out to fundraise over the past year have been prepared for a slog. Lisa Guerrera, the co-founder of skin care brand Experiment, said that she went out to raise her seed round last July, “I was kind of prepared for the worst.” She went on: “The advice and the notes we got time and time again [were] be prepared for a really long process… I had multiple friends who were struggling to raise — some of them ended up raising, some of them did not.”

Guerrera, however, was able to successfully raise. Experiment announced the close of its seed round in April, which totaled $3.3 million and was led by Greycroft. 

Rethinking the metrics of success

Part of the issue is that there’s been a recalibration over the past five years in regard to how to properly value consumer startups. Egged on by early exits like Dollar Shave Club’s acquisition by Unilever for $1 billion in cash in 2016, venture capitalists believed that more DTC brands could become unicorns. 

But, by and large, the venture-backed companies that hit a $1 billion valuation on the private market have not lived up to that as they have struggled to turn a profit while keeping up sales growth. Allbirds, for example, which reportedly hit a $1 billion valuation when it was privately held, now has a market cap of just under $87 million after going public in 2022. 

Additionally, inflation and continued economic challenges over the past two years have made some potential strategic acquirers wary of buying startups right now. Even in hot sectors like beauty, investment bankers are skeptical that many of the beauty brands that are trying to sell this year will find a buyer, The Information reported

That’s led to more venture capitalists getting retreating from consumer. As Ben Lerer, the co-founder of venture capital firm Lerer Hippeau put it in an interview with The Information, more talent is getting scared away from the space because “it just feels like you need to stick the landing harder and tighter. And it’s more difficult. There’s more places where it can go wrong.” 

Not every venture capitalist, however, has given up on consumer startups. But, it can be challenging for consumer startups to figure out what venture capitalists want right now. “I think venture investors are sending very mixed signals about what we want,” Mike Duda, the co-founder of the venture capital firm Bullish, said. “We want to see strong growth, something in the realm of profitability and not a lot of burn.”

And how every investor defines “something in the realm of profitability” will vary. Duda — who invests at the pre-seed, seed and Series A round — said he is OK with companies being unprofitable, he just doesn’t want to see a crazy burn rate.

While the venture landscape remains frustrating, there are other sources of funding to be found. For example, “family offices are picking up,” Duda said. Overall, he said, in this new funding environment, more companies are “raising less money and in different tranches.”

The new consumer startup guard

What this shifting landscape has also done is inspired a new generation of talent that wants to build and fund consumer businesses the way that they believe they were meant to be built. Chip Longenecker is a serial e-commerce entrepreneur — he previously founded RompHim, a line of male rompers, and the men’s jewelry brand Podium. He is now the founder of a fund called Tonic Ventures, and has invested in consumer startups like the refillable capsule startup Cadence and nonalcoholic wine startup Oddbird. 

Longenecker said he was inspired to invest more in startups because “there was a lot of negative activity around investing in consumer,” and he felt that there was room for more of the type of investors that he wished he had partnered with while he was building his two companies. That is: “someone who understood how to build sustainable, scaleable businesses.”

While bigger venture capital funds pull back on consumer, Longenecker said he’s seeing more interest in “more smaller, founder-operator funds.” 

During the DTC boom of the 2010s, Longenecker said, it felt like there was too much focus on how startups were going to get to become billion-dollar brands. “There was only sort of binary outcomes, either we become a billion-dollar business, or we totally implode,” he said.

Longenecker believes there’s still plenty of opportunity for, say, $100 million or $200 million exits. But to make it a successful outcome for both founders and investors, rounds will need to be recalibrated — from a pre-seed round all the way up to a Series A or B. 

For startups that have been very careful to keep their burn rate low, some find that the environment is less doom and gloom than they have been warned. 

Guerrera, for example, said that she planned to spend at least six months raising Experiment’s seed round. But within month, she received three term sheets.

Experiment launched in 2019, and had previously raised a $1 million pre-seed round in 2021. This time, when she went out to fundraise, Guerrera said that she centered much of her pitch on the fact that Experiment had managed to completely grow the brand through organic marketing efforts and word-of-mouth. The brand only just started spending on paid marketing around a month and a half ago. 

Guerrera, a chemist by trade, has a TikTok following of over 60,000 people on her personal account, where she takes a science-backed approach to explain solutions to common skin care challenges. Many of Experiment’s early customers found the brand through her personally. She has tried to keep a personal touch as Experiment has scaled. She still replies to comments on Reddit and posts personal videos on the brand’s Instagram account — including one of her dad opening one of Experiment’s skin care boxes. 

But at this point, she said “[we have] grown so much larger, there are plenty of people who love Experiment that have nothing to do with me on TikTok at all.” Other influencers, like Mikayla Nogueira, have posted organically about the brand.

She says a few key attributes have been critical to Experiment’s growth. “We have a really unique brand voice [and] we’re not afraid to joke around with our audience,” Guerrera said. “I think that really helps us create really shareable content.” It also helps that Experiment’s core products — like a bright blue, gooey face serum, and a bright green reusable sheet — are visually striking, making people more likely to share them on social media.

And — perhaps most importantly — the brand sells products that tap into current skin care trends. She said recent exits, like K18’s sale to Unilever, show that there is demand in the beauty space for clinically backed products. Much of Experiment’s social media copy and website content is focused on talking up the clinical benefits of the ingredients in its skin care. “That’s a great marketing story,” she said.

Experiment had other data points to show investors too. At the beginning of 2023, the waitlist for Experiment’s serum, called Super Saturated, totaled more than 10,000 people. Guerrera said she was able to further prove out that the brand had a strong and engaged community by showing engagement numbers with emails.

“It was those kinds of critical moments for the brand that allowed us to show seed investors [that] we might be small right now in terms of seed stage brands, but there’s so much room to grow here that it would be silly not to invest,” Guerrera said. 

She added that the lesson she took after raising her seed round is that great businesses can still get funding. “Will it be exactly at the valuation that you could get three years ago?” she said. “No, probably not. But will you be able to get money at a good with a good deal with a good partner? Yes.”

Longenecker, for his part, believes that “the people that are really, truly passionate about consumer are going to survive.”

“​​There still are amazing companies being built, [and] everybody’s doing their best with what we can,” he said.