Our Bucket Fills With Digitally Native Vertical Brands (DNVBs)
1971 marks the year in which the first e-commerce transaction took place. It was a baggie of weed traded between computer science students at Stanford and MIT. We don’t know if it was sourced through a shady third party or grown in the backyard of the students’ dorm, leaving the level of vertical integration to speculation. What we know for a fact is, that the transaction itself is probably the starting point for what we now call direct-to-consumer (D2C) e-commerce. The sellers — students one the one end — sold their herbs directly and without any intermediary or marketplace to the buyers — students on the other end.
Today most e-commerce transactions are done via marketplaces and e-tailers. Amazon alone will soon account for 50% of the total US e-commerce transaction volume, growing faster than the overall e-commerce market and forcing brands to rethink their online strategies to compete. It is for this and other reasons that we see the accelerated rise of a new generation of D2Cs, the so-called digitally native vertical brands. Typical DNVBs distinguish themselves by being born on the internet and owning the customer experience from the first contact with the brand to the after sales communication. That’s a new development in the world of retail, where generations of consumer companies worked with stationary retail and developed delicate strategies dealing with all parties involved.
In the US this trend is not at all new with unicorns (and “soonicorns”) like Dollar Shave Club, Warby Parker, Casper, Glossier, Allbirds and many more taking market share from the big players in the industry. In fact, the US saw the advent of DNVBs over a decade ago. Bonobos was the first one to be called so — the itself term was coined by Bonobos founder Andy Dunn. However, as is so often the case, it took a bit longer for the trend to catch on in Europe.
We look at approximately 3.000 early stage deals a year with an investment team of 30 people. In any case, what we have become well aware of recently is that our dealflow fills with the above-mentioned type of companies. To put this in measurable terms, we looked at 114 e-commerce deals from Q1 to Q3 2018 whereas during the same period last year this number was only about 80 (see chart). This represents an increase of more than 40% in the comparison period. While most of these companies are active in the food industry, we also see D2Cs approaching us from industries like fashion, baby-care, eyewear & contact lenses, feminine care and others.
So, are we big believers in those digitally native vertical brands in the end? Definitely but we also believe that this category has to be treated with some restraints.
1) Choose your vertical wisely
While some brands have more chances to succeed just based on different market dynamics, it can be a tough game for others. Specific parameters like barriers to entry, purchase frequency, market saturation, and others are significantly defining a DNVB’s success in the long run. You can use this demonstrative list from Greycroft in order to evaluate your own idea — they have done so with contact lenses showing that this particular market is quite compelling. Besides other favorable factors, the product has a high frequency, meaning it’s used daily and therefore gets bought regularly; the $12B contact lenses market is big enough to build a VC case; barriers to entry are high due to regulations and complex manufacturing and the margins are economically viable.
2) Starting a brand is easy but growing it is another exercise
When analyzing the most successful D2C brands, one quickly realizes that there is much more behind it than just creating a good looking brand and stimulating the PR machine. It’s an orchestra with many interdependent parts that go along from the design, to storytelling, to the art of communication, to customer service and so on. In order to stick out of the mass you have to get every angle of brand building right while being able to pivot back and forth according to the desires and demands of your customers. This is by the way one of the reasons why most successful D2C brands started out selling only one or a handful of different products. From a marketing perspective, the ‘less is more’ approach is also clever as you can promote your product just as ‘the best’ while platforms like Amazon will never be able to do so. Claiming simplicity also goes in line with quality — just think of a canteen with a large variety of foods versus a fine restaurant with a very limited menu. And since in such a restaurant it’s not only about the quality of the ingredients but also the customer experience (eg helping you take off your coat or having a small amuse gueule before the actual meal), the principle is the same for D2C brands. What’s the overall experience when engaging with your brand, buying the actual product, having the product delivered to your door or contacting the customer service?
3) Make use of e-commerce solutions and leverage data
Let’s be honest, starting a direct-to-consumer company has never been easier than nowadays. Finding suppliers, building an e-commerce website and outsourcing the whole fulfillment is neither costly nor does it really add up to your competitive advantage. However, orchestrating all of that is a different task and also makes the difference. In making that happen you have to test and make use of all kind of e-commerce solutions out there — starting from basic search engine optimizations, to email-marketing, to pre-launch referral programs, to community building platforms, to complex back-end IT decisions. To be most effective, you have to gather all your data and know in advance how to leverage it in order to be able to make decisions based on real data points rather than gut feelings.
4) US versus Europe
As mentioned before, there are already some proven and successful US-born D2C verticals so why should it be tougher for European challenger brands? I assume it’s for the same reasons as often is the case: Internationalization is more difficult due to language barriers, cross-border logistics and deeper cultural differences influencing everything from the supply chain, to communication, to marketing, to legal questions. What is more, Europeans are usually a bit slower to adapt to new business models like subscriptions which are often utilized by vertical brands (eg Dollar Shave Club). And, ironically, as a European player, you potentially have to fear competition from US companies who entered the vertical a bit earlier and are expanding to Europe with a proven strategy and, normally, a lot more financing power (eg Casper entering Europe in 2016).
5) It’s all about execution
As with most startups — regardless of B2B, B2C, the industry or vertical — in the end, it comes down to the team being able to execute on their vision. And there is a small but very important distinction between D2C startups and most other startups. You need two strong stories to tell — the one you tell your customers (part of storytelling) and the one you tell your investors (part of fundraising). The better these stories are aligned the better you will be able to sell your product to both parties. Apart from that, it should be clear that you need a very specific set of skills spread over your team. This starts among other things with an exceptional feel for brands and branding, a deep understanding of e-commerce businesses and the operational excellence to build up an inhouse-agency and to align the whole value chain while executing relentlessly on your plan.
Having done our own bets within that category (take a look at Flaviar — the world’s largest club of spirits enthusiasts or Playbrush — subscription based smart toothbrushes for children), we at Speedinvest are big believers in this upcoming e-commerce category and we do believe that verticalized D2C brands will be the third big winner next to the e-commerce giants like Amazon and to specialized marketplaces (check out our own fund dedicated to marketplaces). While less emotional products with low added-value will be distributed by e-tailers like Amazon, there will be a place for products which are able to realize a real value proposition through the internet. The companies able to leverage the new technologies and to engage in an emotional and authentic way with this new generation of consumers will be the winners of this e-commerce category.
If you believe you are well positioned to navigate the above-mentioned restraints and you are in the process of building a DNVB brand, feel free to reach out to us via mail (startups@speedinvest.com) or contact me via Linkedin.
