Why Brandless Failed: A Competitor’s Unsolicited Opinion

Bill Gurley at Benchmark is quoted in The New York Times as saying: “If your competitor is going to raise $150 million and you want to be conservative and only raise 20 milllion, you’re going to get run over.”

Bill has made some great investments, but in this case not only is he wrong, his opinion itself is destructive to founders and their companies.

Everyday for the past two years I’ve had to talk about Brandless with someone — investors, journalists, or customers. That’s because my company Public Goods, which has been called similar, launched around the same time (read: a bit earlier)* with way less money. In fact, we started with 50k and raised 7mm to date, Brandless started with 16mm then promptly raised 240mm. So far, by our own measures anyway, we’re successful. That is: we’ve more than doubled revenue every year, we have terrific customer retention, and we’re approaching profitability. And, now that Brandless has suddenly shut down I’ve decided to write about them publicly for the first time.

I’m writing about it for founders who find themselves perplexed by Silicon Valley and for the thoughtful investors who inevitably find themselves looking around a board room wondering how yet another seemingly backwards decision was made. Also, I’m writing this for any and all Public Goods customers: because of you, and the community you are part of, we are still here, having only raised 3% of the capital Brandless did.

My girlfriend calls me a “local contrarian” because I guess I get a kick out of identifying what everyone else seems only too happy to agree with, but to me is clearly wrong. And maybe she’s right. In this post, I’m going to outline the reason more capital does not mean more success.

Let’s admit it: there seems to be an irrational consensus that more capital means more likely success.

We’re lucky to have great investors who don’t see things this way and I’m sure there are many more. But, I’ve still been exposed to my fair share of more typical conversations that included the almost rhetorical question regarding Brandless “How can you beat them, they have so much money!?”

I might say:

• We bootstrapped giving us a chance to really understand our customer and to build a disciplined organization.
• We have 3x the retention Brandless does, and are 1/3 the size with 1/60 the cash raised.
• The market is giant. There could easily be several extremely successful companies in the space.
• We’re focused on quality without a target price point, which means different customers.

Then, a similar refrain: “Yeah but how do you win?”

Well, let’s take a look at the winners.

Airbnb won. Their copycat Wimbdu failed, even though it was better capitalized with 90mm early on. Pets.com failed with Amazon’s backing, while Chewy.com was the largest e-com exit in history going against Amazon. Typically the more capital efficient business will win. Probably because they build organizational discipline and adhere to business fundamentals. As Eric Paley points out, True Car is a better investment than Car Guru, and Wayfair better than Zappos. Both winners raised 50 to 100mm less venture capital early on.

Examples aside, let’s have a look at where, in my opinion, Brandless made mistakes. This is from my perspective only. There’s surely much I don’t know as I wasn’t on the inside, but I was watching closely.

Over Capitalization

Normally, every investor will ask themselves: what has to happen for me to get a return? And if an entrepreneur is going to take investor money, they should probably ask themselves the same thing. Let’s do a rough sketch of that math now.

• When Brandless raised 240mm it was valued at 500mm.
• VC’s say they look for companies that can return at least 10x.
• Without additional dilution, Brandless would need to sell or IPO for 5B to hit that target.

Forget that this hasn’t happened since Amazon. When Brandless received this investment apparently they were at less than 10mm annual sales. Early stage e-commerce companies today might be valued around 3x-5x revenue depending on margins and growth. This investment valued Brandless at 25x pre-money. So what would need to happen for them to catch up?

• Brandless would need to get from 10mm to 1.5B in revenue.
• Say it can get customers spending $200/year and no churn.
• It would need to get 7.5 million customers. I won’t go further into modeling this out, but it’s highly unlikely that any company can acquire customers so cheap, and keep them that long — and it’s made even harder when you’re running 100mph in the wrong direction.

I don’t like to say impossible. But the investment was a long shot, even by VC standards.

No Feedback Loop

At launch Brandless had something like 300 products, each priced at the same $3. Why 300 products? Why those products? Why $3? Your guess is as good as mine. And their guess is as good as yours.

By comparison, Public Goods launched with 10 products. They were all $6 actually, and I wondered if this was where their single price concept came from. Ultimately, as we expanded, we realized different prices made more sense for our customers and for our margins based on acquisition costs and basket size. Most importantly, when it came to product expansion we asked our customers what they wanted to see next, we didn’t have to guess. Two years later we have 250 products, AOV keeps climbing and our business is increasingly sticky, because we’re building the company to our customers specifications. This is one of the big advantages of selling directly to consumers and it’s a benefit Brandless decided to forgo. They went all in on a price point and a product group. New companies, regardless of funding, need to put themselves in a position to learn and adapt.

Confusing Brand

A brand called Brandless™, all about $3, and cutting out the “brand tax”, but then, also all about “better everything” because it’s all about being healthy and organic. A lot of ideas in that kitchen.

Aside from that, even price focused companies rarely lead with price specifically. Ikea, H&M and Zara are all affordable but don’t actually talk about price first. The simple reason for this, I think, is that anyone buying anything is about to see the price. Therefore, it’s a waste of a proverbial shot fired. The price of something at Ikea or H&M can often be the surprise and delight moment, “I want it, but how much is it … oh wow”. Not talking about price opens up the space and time brands need to show how design forward they are or whatever it is they need to convey. Talking about something everyone will see eventually is a missed opportunity.

Even if talking about price is a good move (it works Dollar General, for example). And, sticking to one price is your shtick, it’s then very hard to convince people that the products are really high quality and healthy when the olive oil happens to be the same price as the hand soap. It just doesn’t seem to make sense, even if the potential customer is patient enough to get through the messaging hierarchy.

Finally, a brand has two parts. What it says and what it does. It has to promise then deliver. It’s very hard to meet the quality standards when locked into a price point. Another uphill battle for Brandless.

A Final Word

Since fundraising is talked about so much it’s become an almost fetishized preoccupation among founders as though it’s a barometer of success. In fact, fundraising neither represents success nor predicts it. And while it feels validating, it can actually impede it. Brandless would have figured out the price mistake and the positioning, if only it didn’t have so much damn money.

*We launched in 2015 as Morgans and re-launched in 2017 as Public Goods, a few months before Brandless.