You Can’t Buy Brand
We’ve seen a lot of turmoil in the last year within VC-backed DTC businesses — Casper, Rockets of Awesome, and Outdoor Voices are among some of the more prominent examples — and a number of recent articles exploring some of the underlying issues. There’s one issue in particular that I believe is not discussed enough:
VC-backed DTC businesses try to short-circuit the process of brand-building when, in fact, it takes many years to build a consumer brand that is long-lasting.
When I think about the greatest consumer brands today, here are some of the names that come to mind: Nike, Supreme, Patagonia, Louis Vuitton, Lululemon, Chanel, Revlon. None of these brands raised venture capital. You might say “the world is different now”, but I think that’s only partially true. Lululemon was started in 1998, right at the peak of the dot com bubble, the same year that Pets.com launched and WebVan raised hundreds of millions of dollars in venture capital. Similarly, Supreme undoubtedly had dozens of VC firms knocking at their door for a decade or more before they finally agreed to a majority investment from Carlyle.
Seeing that today’s most iconic brands did not raise VC conveys a different insight: that deliberately taking a slower approach to brand-building is a prerequisite (though not guarantee) for building a long-lasting consumer product brand. Stated differently:
Blitzscaling is not a viable option for iconic brand-building: brand is earned, not bought.
When DTC brands are bootstrapped, they have constraints that VC-backed brands often don’t. They have to be slower in rolling out new product lines and opening physical retail stores. They must intensely focus on being a world-class brand for a specific group before they shift focus to becoming a world-class brand for the masses. Today, many VC-backed DTC brands believe these methodologies to brand-building are part of an outdated playbook and therefore don’t apply to them; more specifically, they believe they can accelerate the process of building a world-class brand by raising a lot of capital, buying many ads, expanding into more product lines, and opening additional retail stores in marquee locations. The problem is that doing all of these things within a short timeframe is actually dilutive, not accretive, to brand in most cases (Supreme has famously pulled off the exact opposite approach to this; for them, less is more).
Bootstrapping brands can only grow as quickly as their working capital cycle allows them. However, once they raise VC, they are flush with cash on the balance sheet and have increasing temptation (and pressure) to make use of it. That cash tends to be spent on immediate ROI activities such as digital acquisition (Facebook, Instagram), out of home advertising (subways, billboards), and channel expansion (brick & mortar). While the top-line (and, in limited cases, the bottom line) is growing via an increase in acquisition marketing spend, there is no guarantee that long-term loyalty is being created with the consumer. In fact:
Because these consumers are being convinced (via ad dollars) to buy the product vs. coming to that desire on their own via discovery or via a word-of-mouth recommendation, the consumer is less likely to have a long-lasting affinity to the brand.
Though there are of course exceptions, DTC e-commerce businesses should generally be wary about raising VC too early and over-spending/over-expanding in the early innings. Building a long-lasting brand takes time and founders should not be concerned about slower growth early on so long as they are executing toward a brand vision. Eventually, if you build a strong enough brand, growth will be sparked organically and your business (and ownership in that business) will be better off for it.