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Watches, Mattresses, and “Meh” Multiples

Founder Collective
Aug 22, 2018 · 4 min read

By Joseph Flaherty

On Friday, the Movado Group announced its acquisition of LA-based startup watch manufacturer MVMT for $100M, with an additional $100M in earnout potential.

Yesterday, Phoenix-based D2C mattress startup Tuft & Needle merged with market leader Serta-Simmons. The price paid for Tuft & Needle hasn’t been disclosed, but the company reportedly had $170M in revenue and has been profitable since its inception. Forbes estimates the sale price between $200M and $800M, though based on comps, the lower end of that range seems more likely.

So it’s been an enriching week for direct to consumer product startups, and here are some thoughts on what it might mean for the broader ecosystem.

Exit Value is a Vanity Metric

The VC playbook may have killed these deals

Is there a limit to paid digital acquisition?

Web Smith, one of the sharpest analysts looking at the DNVB space argues that Facebook and Instagram are slowing down as acquisition channels for D2C product startups. It’s striking how many of these companies are selling at the $150M-$250M revenue threshold. There are obvious exceptions to this, and a few DNVBs have made it to the public markets with billions in sales, but it does suggest there is a ceiling to what social media can deliver on its own.

Are there just two viable financing strategies for DNVBs?

As David Frankel says, in order for a startup acquisition to matter to a VC firm, it needs to be at least 1X the fund’s size. Unfortunately, there aren’t that many $100M VC funds that lead deals. The humble multiples common to DNVBs may create a misalignment between funds, who are mostly increasing in size, and the DNVB market, where a large portion of the good startups are selling for a $100M-$500M. Of course, there are outliers like Dollar Shave club that break the billion-dollar mark, but even a remarkable $600M win like RXBar’s acquisition by Kellogg’s would fail to move the needle for a billion-dollar fund.

There seem to be two viable DNVB funding strategies:

  1. Build a sustainable growth engine with a seed or small A round, or;
  2. Fully embrace the “Go big or go home” playbook and try to use capital to scale to the point where you can generate a billion or more in sales to compensate for the “meh” multiples.

Consumer products startups should carefully consider their funding strategy since the middle path seems fraught with danger. Note, Founder Collective writes lead checks from a $75M fund and invests in DNVBs, so if you have a category killer, please contact us!

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Founder Collective

Written by

Our mission is to be the most aligned VC for founders at seed. #ProudInvestor in @Uber @TheTradeDeskinc @Buzzfeed @Cruise @Diaandco @PillPack @SeatGeek & more.

HackerNoon.com

Elijah McClain, George Floyd, Eric Garner, Breonna Taylor, Ahmaud Arbery, Michael Brown, Oscar Grant, Atatiana Jefferson, Tamir Rice, Bettie Jones, Botham Jean

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