New DTC toolkit   //   March 4, 2019

Bullish’s Mike Duda: ‘Raising a lot of money isn’t a trophy’

Mike Duda, the managing partner at hybrid accelerator agency and venture capital fund Bullish, doesn’t believe a brand’s new round of funding should necessarily be celebrated. But as an investor, he benefits when it is.

Venture capitalists investing in the consumer brand category right now can ride the hype cycle, pointing to the amount of a buzz a brand creates as an indicator of success, even if they haven’t gotten an actual payout. While there’s more money going into consumer brands than ever before, there’s been little proven about the category by way of big exits. But for now, that’s still no matter: Duda said that for Bullish, having made past investments in a brand like Casper, which still has yet to turn a profit, can be pointed to as a win when the firm goes to raise its next round.

“As much as we romanticize the ringing of the bell, that’s just not going to be the outcome for a vast majority of these companies, but that doesn’t mean they’re unsuccessful,” said Duda, whose firm has invested in DTC brands like Casper, Harry’s, Birchbox, Warby Parker, Peloton and Function of Beauty. “VCs need to have ROI, but so far, VCs have been happy to get a return on hype. The return is what we need to make money, but we look smart for the investments that have a lot of heat.”

Duda discussed why he’s still eyeing new consumer companies as potential investments, why digital brands have struck a chord with customers, and what will happen as traditional retailers and DTC companies make more arrangements. Answers have been lightly edited for clarity.

How do you make sense of the DTC boom in retail?
Direct-to-consumer retail was born because it was offering value where a lot of CPG brands couldn’t.

New direct-to-consumer companies aren’t just a value equation, it’s a value-and-better equation. They’re being transparent or purposeful in their mission statements and representing a purpose to the people they want to serve, beyond just a business model. Most DTC companies weren’t really out to wage war with traditional retailers, but rather the brands that didn’t have a direct connection to customers. Harry’s was born based on a flawed customer journey to buy razors — locked plastic cases in CVS stores. Glossier, Warby Parker, Everlane were all predicated on a broken, inefficient, or opaque consumer path and journey. It’s obvious in hindsight. They could position themselves as direct brands about then learn how consumers work and what they’re looking for.

As an investor, how do you gauge success?
VCs get involved in brands because they want an outcome. The expectation is there. What happens in that trajectory, we’ll see come to roost. If a company has five to seven years behind it already, there’s a track record to point to profitability, returning revenue, etc. Not all DTC companies have stayed truly DTC. Casper is a [regular] business now. They killed the biggest retailer in the space with Mattress Firm. For us, that shows success. Still, at a certain point in time, you have to see a light at the end of the tunnel for viable, long-term success. But if we’re talking about something that’s fetal stages, it’s about what we think we can get to a certain point. At some point, you have to answer: Is this a business that can stand on its own and keep growing, or is it a business that someone else is going to buy?

Do you look at potential investments differently now that the DTC category has matured?
Our standards haven’t changed when it comes to who we’ll invest in. You buy into the people and the plan. We had no idea Casper would be as much of a success as it is. There’s a democratization of information now, which is good and bad. If you’re starting now, you can benchmark other companies and what they did along the way. I’m as interested now in a DTC brand as I was five years ago. We’re evolving our own strategy, and it’s all DTC or bust. We invest in brands. We look for great business propositions as retail is changing.

What’s important to note is raising a lot of money is not a trophy. It’s not a win, but it’s passed off as one. You can see why there’s a lot of frothiness and FOMO and irrational valuations and expectations. Corrections always come through, and they benefit the strong companies and not the weak.

What does that mean moving forward for all the VC-backed companies?
Strong businesses will be able to pick the path that’s best. Weak businesses won’t have as many options. The more capital you raise, the more expectations there are and you close some doors on the way. Legacy companies are embracing what direct-to-consumer companies launch, to offer something new to consumers. Look at Foot Locker: It’s made sizeable investments in some cool companies. That’s the way forward. Early stage DTC companies that were like, “We’re going to kill Foot Locker,” are now like “Foot Locker is our friend.” So what we’re going to see happen in retail is these strong companies getting together.

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