What founders and investors should know about benchmarking breakout DTC brands
By: Max Wechter, MBA Summer Associate
In the last decade, the direct-to-consumer (DTC) category has exploded. And venture capital firms have jumped at the opportunity to place their bets in the burgeoning space. The first wave of DTC breakouts were able to deliver a superior product at a substantially lower cost for consumers — changing the way we buy mattresses, razors, dog food, and more.
I spent the past few months as a Summer Associate at Lerer Hippeau building a cross-industry database of portfolio company metrics to provide founders with benchmarks to assess their performance. I chose to delve deeper into the DTC space specifically, a category Lerer Hippeau has tracked closely since writing early checks in Casper, Warby Parker, and Allbirds. Ninety percent of DTC companies Lerer Hippeau seeded have gone on to raise a Series A (vs. an industry average between 42–47%), which gave me a wealth of data for compiling benchmarks for emerging winners.
Using the firm’s data on its DTC investments, I’ve been able to map changes in the industry and establish a set of benchmarks for breakout DTC brands. I sought to answer the following questions: How has funding for DTC companies changed over time? And, how can we identify breakout DTC brands from early quantitative metrics?
Here’s my attempt to answer those questions.
A shifting funding landscape
The following trends (valuations and capital raised) are based on data from all of Lerer Hippeau’s DTC investments over the last ten years.
Valuations and Capital
Since 2010, valuations for DTC companies at the seed round have grown steadily. Pre-money seed valuations are up 11% to an average of $7.4 million, and capital raised is up 26% to $3.3 million. This upward trajectory can be pinned on several factors, particularly the influx of available capital for startups including the emergence of pre-seed funding, a strong economy, and momentum around the category.
Concurrently, we’ve seen valuations rise in Series A rounds, for similar reasons, but the jump has been substantially larger: over 50% since 2010 to $32 million. Similarly, the average capital raised over this same period has grown over 40% to about $10 million.
Barring an economic downturn, I expect this trend will continue. As the next generation of DTC startups matures and competition continues to mount, the need for additional capital will only become more pressing.
4 financial benchmarks that matter
The first two benchmarks (run rate revenue and sales and marketing spend) are pulled from a representative sample of Lerer Hippeau’s DTC investments at the 18 month mark. I chose to look at 18 months because I found this to be the point where financial metrics separate eventual home runs from the rest of the pack.
Run Rate Revenue
In the DTC category, demonstrating early revenue is important to proving initial traction and product-market fit. In fact, the data revealed that top-performers achieved run rates of $10 million+ within 18 months of launch. Looking ahead, I expect this number will increase in conjunction with companies raising larger rounds.
Sales and Marketing Spend
The top-performers I studied typically spent at least a few million dollars (annualized) on sales and marketing, all while quickly achieving and maintaining favorable unit economics. This level of spend offered the flexibility to create and grow a recognizable brand as well as acquire enough customers to scale.
The following two benchmarks (last twelve months revenue and monthly burn) are pulled from a sample of companies that have raised multiple rounds of funding, using data at the time of fundraise.
Last Twelve Months (LTM) Revenue
The average DTC company in the sample group had $1 million in LTM revenue at the time of raising a seed, $4 million at Series A (4x growth), and $20 million at Series B (5x growth). While revenue growth is a key consideration for investors, it’s not the end-all-be-all metric for raising additional capital.
Monthly Burn
Cash burn at the time of raising a Series A was about $160k per month, just over one third of the rate at Series B. Not surprisingly, this ratio is directly proportional to the round over round difference in capital raised.
The road ahead
The above analysis looks specifically at a set of high performing DTC companies in Lerer Hippeau’s portfolio. So while my findings don’t necessarily predict success for present and future DTC startups, they do offer a sense of benchmarks to note for early breakouts from a decade of investing.
Over time, early DTC breakouts have diversified product lines and extended into broader or adjacent categories to amass larger addressable markets, raise additional capital, and grow into valuations. Today’s DTC companies face new obstacles: rising CAC (especially on social), greater competition, and increasingly discerning consumers. Which means the next wave of breakout brands may look different than those studied here.
Despite changes to the DTC space, I hope my findings offer founders and investors alike a sense of what breakout DTC brands look like in the context of today’s ever-evolving fundraising landscape.
What’d I miss? Share your reflections on assessing breakout DTC brands in the comments or tweet at me.
