Casper Aside, Consumer Brands are Thriving
10 Lessons from the Brand Winners and Losers of the Past Decade
In 2015, VCs and the popular press heaped praise on a new generation of “digitally native vertical brands (DNVBs)” that launched online and promised to change retail forever. Brands like Warby Parker, Boohoo, Dollar Shave Club and Glossier raised hundreds of millions in capital to transform their categories. In the cases of Boohoo and Dollar Shave, investors achieved large venture scale outcomes. However, such successes on the VC-funded path have been overshadowed by Casper, Modcloth, Nasty Gal and many other poor to mediocre outcomes. These failures have unfairly cast a pall on the VC funding environment for growing consumer businesses. The equivalence for enterprise investors would be to posit that SaaS is unattractive given the difficulties Domo has faced.
Outside of the VC community, a scrappier group of bootstrapped consumer brands has emerged that have collectively generated billions in equity returns. Look at Yeti, which started in 2006, and built an incredible brand amongst fisherman and hunters via viral videos of bears attacking their coolers. Yeti was bootstrapped until 2012, went public in 2018 and now boasts a $3 billion market cap. Another example is IT Cosmetics, whose founder Jamie Kern had a gift of deeply connecting with audiences. Jamie became known for taking off her IT Cosmetics makeup on TV, exposing her rosacea. IT sold to L’Oreal for $1.2 billion after only a single round of PE financing. Finally, Casamigos, George Clooney’s tequila brand, raised only a reported $1.8M from its three founders. They developed great products to sell online and through wholesale. Casamigos was acquired for $1B by Diageo only four years after starting.
We believe the press and investment community is telling the story about emerging consumer brands incorrectly. The difference between VC-backed DNVBs and the other group of equity value creating brands outlined above is two-fold: (1) DNVBs raised buckets of venture capital while the second group of brands were typically bootstrapped and/or funded by PE shops and (2) DNVBs all started online while the other group of brands launched in a more multi-channel fashion from the start. The whole idea of a “digitally native brand” is outdated. Rather than digitally native, our belief is that today’s customers demand that brands reach them where they are — whether it is a hunter buying a Yeti cooler at Cabela’s, an Allbirds customer shopping at an outdoor mall, a Dolls Kill customer going to Coachella, or a college student buying Kylie Cosmetics on her phone between classes. We are starting to see even VC-backed brands go multi-channel right away: Kim Kardashian’s shapewear business SKIMS entered Nordstrom less than a year after launching online.
So what are the top 10 lessons investors and entrepreneurs can draw from the consumer brands that won and lost over the past decade?
- Many of the best brands start by fostering obsessive brand love within niche, early adopter communities and then moving toward mainstream. Look at Yeti with hunters and fisherman, Lululemon with yoga enthusiasts, Nike with runners and Supreme with skateboarders.
- Brands starting in niche communities take longer than mass market brands to begin to scale and cannot authentically accelerate their early growth path with outside capital. For these brands, founders should avoid raising outside institutional capital until they get to a point where they are generating strong organic growth and viral buzz. For example, Maveron backed cult apparel brand Dolls Kill raised several years after launch, when they were already generating around $6M in annualized sales.
- Brands can no longer attain hyper-growth using digital Facebook and Google advertising. From 2010–2016, the number of ad units grew exponentially as the world shifted to online and digital platforms. At that time, brands such as Zulily, Stitchfix, Wayfair and Chewy were able to scale at an unprecedented pace largely via online performance marketing. Today, the competition for paid impressions is fierce and sustainable arbitrage opportunities don’t exist. We posit that it is virtually impossible to scale only via online channels in today’s competitive, paid acquisition environment
- Learn to thrive in a multi-channel world. Customers demand the brands they love be available online and in real life. There is a limit to the ability to scale online only — customer acquisition costs will inevitably skyrocket. And similarly, brands that start offline leave a lot on the table if they do not implement effective ecommerce strategies.
- On the capital raising front, venture capital should be the exception rather than the rule. VCs expect their winners to return 10–25x+ within a ten-year fund cycle. Only the most exceptional consumer brands can achieve this bar. However, there is a lot of wealth to be created for brands that grow to $50-$250M in equity value in a capital efficient way.
- Capital cannot accelerate growth for (most) consumer brands. The best consumer brands in Maveron’s portfolio have displayed very capital efficient growth. As brands grow they can sustain a certain growth rate; forcing higher growth unnaturally simply consumes capital unnecessarily. Consumer brands simply don’t grow as fast as consumer tech names like Facebook. That said, the best consumer brands create strong venture scale returns and grow > 50% a year in the 5–10 years after reaching $50M in revenue. Twenty two years after its founding in 1998, Lululemon is worth over $33 billion, and, with $3.3 billion in revenue, is still growing 23% a year.
- Only in rare circumstances does it make sense to raise significant institutional capital for a consumer brand early. The best examples here are if there are high R&D costs, as there were with Peloton, Impossible Foods, Nest or Fitbit. Some of the best emerging consumer brands, like Supreme or Yeti, waited for many years before taking on outside capital.
- Category determines your ceiling as a brand. Allbirds and Rothy’s have more in common with Vans and Nike than they do with emerging brands like Warby Parker. Glossier comps to beauty brands and Casper is comparable to Tempur Sealy. A brand’s category determines its ability to extend its reach over time, its valuation multiple and its logical set of acquirers. For example, Nike and Lululemon customers have given them license to launch adjacent categories. There are fewer logical adjacencies in categories such as eyewear and mattresses.
- You have no strategic value without EBITDA. Neither public market investors nor strategic buyers want to be saddled with the burden of unprofitable consumer brands. As an entrepreneur, build your business to sustainability. Understand the margin structure and frequency of purchase of the category you are in. Make sure you have a sustainable marketing and G&A costs that enable strong cash generation over time.
- Revenue multiples are for SaaS companies. Consumer brands are valued on EBITDA multiples. The best consumer companies today are valued at 20–30x EBITDA — this always vacillates over time but does point to the potential of what brands like Warby, Away and Glossier could expect with a great exit. Be careful about raising too much capital at too high a price — you could end up spending many years catching up to an inflated private market valuation and put your business at risk if you do not achieve your growth targets.