Member Exclusive   //   March 22, 2022

DTC Briefing: How Willow Growth Partners is rethinking the venture capital calculus for consumer 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

As more venture capitalists turn their attention toward e-commerce tech startups and away from DTC brands, newer investors say they want consumer startups to rethink their valuations. 

Willow Growth Partners, founded by Deborah Benton and Amanda Schutzbank, is one such fund. Willow announced its inaugural $28 million fund last year, and has since invested in startups including Lalo, which sells baby gear like high chairs and play sets, as well as better-for-you mac and cheese brand Goodles.

Benton, the former COO of both Nasty Gal and ShoeDazzle, said she became disenchanted in recent years after seeing many startups that “had raised too much capital at too high valuations, and structurally were not well positioned to grow into the growth that investors expected of them.” Nasty Gal, for example, filed for bankruptcy in 2017 after raising $65 million in funding that valued the fashion apparel startup at $350 million at its peak. 

Benton says she is trying to take a different approach with Willow. Willow looks to lead seed rounds of $2.5 to $3 million for startups generating between $1 million and $4 million in revenue, and take a board seat. Willow’s goal is to encourage its portfolio companies to raise at valuations designed for an exit to a strategic acquirer like a CPG conglomerate, rather than a billion-dollar IPO according to Benton. She pointed to beauty brand Farmacy’s acquisition by Procter & Gamble at the end of last year as one type of outcome that brands should strive to emulate.

“That way, everybody is going to have a fantastic exit if it exits at $400, $500, $600 million dollars to a strategic or growth [private equity] fund,” Benton said. 

Below are a few highlights from a recent conversation I had with Benton, edited for clarity and length: 

What would you say are the right metrics for consumer brands to focus on?
We, in particular, are very focused on what we refer to as values-led brands. I think consumers are using their dollars to support brands where they feel they are part of the community and where they feel they are aligned with. That [values-led approach] requires a focus on the relationship with the consumer.

We are really interested in backing founders and brands that are looking to build a longer term relationship with their consumer. The key metric there [that we judge them on] really is lifetime value. So purchase frequency and [average order value] and repeat purchasing. And, within that context, being really focused on your margin profile, so that your cost of acquisition is easily, easily offset by the lifetime value at the contribution margin level. 

Given that the historical thinking has been SaaS companies exit at 20 times revenue or more, what type of valuation do you think makes sense for a consumer brand?
On the beauty side, we are seeing revenue multiples of anywhere from five to 10. It depends on acceleration of growth, it depends on margin profile, it depends on the team itself, and if they are profitable. There’s a whole bunch of factors that I can go on about; how premium is the brand? How valuable is that data? That’s essentially where the strategics are [looking].

Apparel is somewhat lower. We don’t do a lot of apparel. I have, as an angel, done a fair bit of apparel — it is a hard category to get right and there’s unique challenges to apparel. But they are trading generally at, I would say, two to four top-line revenue. 

Health and wellness and CPG is probably in the four to five range, I would say. And then food and beverage…that has high variability as well. The alcohol space — the multiples can be just extraordinary, 20 times revenue.

Food is probably in the three to four times topline revenue. [Food and beverage] are a little bit hard. There’s a lot of innovation happening in food. Some of these crazy multiples that we have seen when Beyond Meat went public, those are outliers. I’m not sure we know exactly where those multiples are going to end up.

There’s been a lot of talk for years about how tech valuations don’t make sense for consumer brands. Do you feel like you have seen progress at all… in terms of venture capitalists rethinking how they value consumer brands?
I think so. I think the greatest sign of progress for me is that more and more founders — and I talk to probably 5 to 10 founders every single day — are coming to me and saying ‘I don’t want that typical tech venture path.’

I could also give you sadly 100 examples of tech VCs overvaluing and overcapitalizing these beautiful little seed businesses that kill them. I talk to these businesses every day where I am like, ‘why did you raise that valuation? Where do you go from there…I love what you are doing but even a year later, if I were to invest in you, I would invest in you at a third less than what you closed the last round at a year ago.’

It is setting them up to fail, it is not setting them up for success. And it is frustrating for me because I think it does a real disservice to the founder. 

Gooey Snacks launches in Kroger less than a year after launch

CPG startups are striking deals with grocery stores earlier and earlier, so long as these startups can convince grocers that they’ve successfully identified a white space that will enable them to drive sales even if they’re still relatively unknown. The latest example is Gooey Snacks, a chocolate spread that, unlike Nutella, is free of palm oil, dairy and artificial flavors.

Gooey Snacks, which launched in August of last year, announced on Tuesday that it has struck a distribution partnership with Kroger. Its products will be available in nearly 2,000 Kroger-owned stores to start, with more store rollouts to come later this summer.

Gooey Snacks is the first brand from Starday Foods, an aspiring food and beverage conglomerate that launched last summer with $4 million in seed funding. Starday is positioning itself as more of a tech company — but that’s because the company has built its own in-house tech platform that helps Starday pull “first-and-third party consumer data signals about trends, ingredients categories, innovations that consumers are looking for in the food and beverage space that have not been met,” Caroline McCarthy, co-founder and vp of growth of Starday recently told me.

The thesis is that this will help Starday launch new brands more efficiently than CPG conglomerates of the past, according to McCarthy, and in the case of Gooey Snacks, Starday saw an opening for a vegan, Nutella-like brand. “We are able to derisk ourselves at launch,” she said.

That approach helped catch the attention of Kroger — Starday signed a distribution deal with Kroger just a couple of weeks after Gooey Snacks launched last year. “The whole thesis behind it was really using the data-driven approach to [help] the Kroger buyer understand what we were bringing to market with the Gooey product, why buyers in-store would want to be purchasing the product and ultimately drive additional velocity in that category,” McCarthy said.

What I’m reading

  • ThirdLove has quietly reentered physical retail after closing its lone pop-up store as the pandemic hit. The lingerie startup opened two stores last month, and plans to have between six and 10 by the end of the year. 
  • The Wall Street Journal has a deep dive into the manufacturing problems plaguing Oatly, as the oat milk company struggles to produce enough to keep up with demand
  • Rowing machine startup Hydrow recently raised a $55 million round, and its CEO spoke with CNBC about the company’s expansion plans at a time when other at-home fitness startups are struggling to match pandemic growth. 

What we’ve covered

  • Raw materials like aluminum, glass and paper have gotten more expensive or harder to find over the course of the pandemic, forcing brands to rethink their manufacturing timelines. Here’s how startups ranging from Appointed to Q Mixers have coped with the raw material shortage.
  • Greeting card startup Lovepop is opening more stores in 2022, focusing on areas with lots of tourist traffic like New York’s Grand Central station. 
  • Pet accessories startup Fable, accumulated a 5,000 person waitlist during the pandemic, thanks to supply chain delays and record adoption levels. Here’s how the company is trying to cut down on waitlists going forward.