Member Exclusive   //   February 22, 2022

DTC Briefing: Despite a pandemic boom, consumer VCs are looking beyond DTC brands

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 →

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

For many venture capitalists these days, direct-to-consumer brands no longer hold the luster they once did.

It’s a refrain that’s been said before, particularly right before the pandemic hit in 2020. But in recent interviews I’ve had with both venture capitalists and angel investors, many have said they’re investing less frequently in direct-to-consumer brands.

There’s a few caveats to this: notably, that an aspiring entrepreneur still has access to more capital than ever before. There’s still a record amount of venture capital up for grabs. Or, if a startup doesn’t want to take on VC funding, low interest rates (for now) have made some financing options like convertible notes more palatable. However, many venture capitalists that have been previously known for backing DTC startups are increasingly investing more in the business-to-business startups that power these e-commerce brands, as well as getting in on buzzy sectors like the creator economy or the still-fuzzy “Web 3” space

Put together, there’s still a steady drumbeat of DTC startups still announcing that they have cobbled together new rounds of funding — but they look different than the rounds from the heydays of the DTC boom in the mid-2010s, in terms of the mix of debt and equity, as well as the investors involved.

For example, better-for-you consumer products are gaining traction, and venture firms with more of a focus in food and beverage are leading these rounds, as was the case with Monogram Capital Partners leading Olipop’s $30 million series B earlier this month. Newer names like Prelude Growth Partners and Pendulum are also popping up, leading the rounds of Blueland and Clare respectively in the past few months. 

Another example is Forerunner, the venture capital firm known for being the earliest investors in some of the most notable modern e-commerce startups, such as Bonobos, Warby Parker and Dollar Shave Club. In honor of its 10-year-anniversary, founder and managing partner Kirsten Green published a blog post last week about where she thinks the future of consumer is headed. 

In the post, Green lays out what she thinks has been the biggest shifts in the commerce space over the past 10 years. In 2012, she wrote that while legacy retailers were stalling, e-commerce sales were going up, “creating a growing opportunity for modern brands…to come to life online.”

Now, in 2022, she writes that “the next revolution in commerce starts with the seller — digital tools are enabling a generation of new entrepreneurs to attract & transact at scale.” 

As Forerunner general partner Eurie Kim put it in a phone interview with me, the firm has been associated with investing with direct-to-consumer brands — but at the time, what the firm saw was a “new consumer experience, when investing in startups like Bonobos and Dollar Shave Club.

“Ten years ago when we started our firm — it was really just the start of social media,” Kim said. Therefore, channels like Facebook and Instagram had created “this white space for new brands to come to life in.”

Kim insists that what Forerunner looks for when evaluating brands hasn’t changed — but she echoed her colleague’s sentiment that Forerunner believes the next big shift in the consumer space “is about the seller.” That is, as more people seek to become sellers — whether that’s an influencer with a million followers launching their own brand or someone with an Etsy storefront as a side hustle — Kim said Forerunner is interested in investing in the companies that aid these new sellers. What people describe as the creator economy or Web3 also falls into this bucket, Kim said.

Forerunner does still invest in brands — Kim said that two of her most recent investments in what some might consider to be more traditional “DTC startups” were in Oura Ring and plant-based ice cream brand Eclipse Foods.

But, take a look at the new investments announced on Forerunner’s website within the past four months, and they’ve largely been in business-to-business companies. In December, the firm announced an investment in Ampla, which provides funding to commerce businesses. In January, Forerunner also invested in Stan, described as a Shopify for creators, through which people can sell multiple products like e-books or coaching sessions.

Meanwhile, PopSugar co-founder Brian Sugar said that when he launched his venture capital fund in 2020, the makeup of portfolio companies was roughly 50% brands, 50% business-to-business or software startups. Over time, he expects the fund makeup will inch closer to 70% B-to-B, 30% brands.

“We are very specific in the brands that we like,” Sugar, who is an investor in companies ranging from cookware brand Caraway to one-click checkout provider Fast, said. “But part of it is just [the fact] that the B-to-B businesses grow faster, take less capital, and create very scalable, profitable businesses, whereas the brands…it’s a bit longer journey.” 

The idea that software businesses scale more quickly than consumer products businesses has been repeated for a while now. But over the years, there’s been a variety of favorable economic factors that at times have fueled more investor interest in consumer startups. There was the era of cheap Facebook ads in the 2010s, followed by these ad prices skyrocketing, which led some investors to sour on consumer startups. Then there was the increase in online shopping during the pandemic that led some brands to double and triple their sales, and piqued the interest of investors once again. 

What’s happening now is that even though more people are shopping online than ever before, the peak Covid sales bump is starting to decline. Meanwhile, using digital ads to acquire more customers has gotten more complicated thanks to the iOS14 update. All this has shifted the attention of some investors away from consumer startups once again to the more tried-and-true SaaS startups. Or, to newer industries in which they can get in on the ground floor, such as in crypto or NFT-related startups. 

As Mike Duda, general partner at Bullish put it, “people are distracted from looking at consumer right now.” 

Funding for direct-to-consumer startups is far from being in danger of drying up. Global venture capital funding hit a record $643 billion in 2021, compared to $60 billion in 2012, at the beginning of the DTC boom. So by virtue of there being more venture capital funding going around, more brands are going to be raising VC funding.

But for some investors, their criteria is stricter. Sugar said that when he is looking to invest in DTC brands, “the product line that the brand is selling has to be absolutely amazing, so much that you want to tell your friends about the product that this brand creates.”

“Then most likely this company will not have to spend a ton of money on actual performance marketing and other drug addicting things to make revenue look great,” he added. The DTC brand he most recently invested in was Feastables — the new chocolate bar brand from influencer Mr. Beast, which launched earlier this month. “That was an obvious yes,” he said.

Duda said that in addition to VC funding, he is hearing about more instances of founders using instruments like convertible notes. But he said that while there is still a ton of money to go around, any talk of it being a difficult fundraising period for DTC brands is often temporary, only a few months.

“These periods aren’t that concrete or written in stone,” Duda said. “Because the fundraising environments for funds is so huge, there’s a lot of money to deploy.” 

The rise of celebrity investors

So, who is investing more in DTC startups these days? Celebrities. Here’s a list of some of the recent funding rounds announced by DTC startups, and the celebrities who have backed them, in addition to some traditional VCs or private equity investors.

Olipop: $30 million series B, with investors including Camila Cabello, Mindy Kaling, Gwyneth Paltrow, Priyanka Chopra Jonas, and all three of the Jonas brothers. Institutional investors include Monogram Capital Partners and Rocana Venture Partners.

Blueland: $20 million Series B, with investors including Justin Timberlake, Adrian Grenier, as well as notable founders like Rent the Runway’s  Jennifer Fleiss, Sweetgreen’s Nicolas Jammet, and Thrive Market’s Nick Green. Institutional investors include Prelude Growth Partners.

Cann: $27 million Series B, with investors including Adam Devine, Nina Dobrev, and Rosario Dawson. Institutional investors include Imaginary Ventures.

Sanzo: $10 million Series A, with Simu Liu being a previous investor in the company. Institutional investors include CircleUp and Hyphen Capital.

What I’m reading

  • Marketing Brew has a case study on how olive oil brand Graza drummed up hype on social media before launch, by taking a slower, tiered approach to influencer gifting. 
  • Another day, another Peloton story: but the Financial Times has a thorough, entertaining story on what went wrong at the connected fitness company as it was hellbent on proving its Covid-induced sales bump wasn’t just a flash in the pan. 
  • Thingtesting has a deep dive into the powdered nutrition space, with Athletic Greens and others vying to come up with a more aesthetically pleasing alternative to what you can find at GNC. 

What we’ve covered 

  • Resale app Stadium Goods remodeled its Soho store to more prominently highlight apparel, as it has been quietly building out its own private label brands. 
  • Consumer startups ranging from Sagely Naturals to Kencko are increasingly betting on linear television ads to reach a wider audience. 
  • Streetwear has been all the rage with adults for years now. But now apparel brands like Fear of GodOff White and Ssence are launching lines and product drops aimed at kids.