Episode 2: DTC Fundraising

Last week, Jason Delray - a longtime correspondent at Recode and one of my favorite tech journalists - announced that he had joined Fortune. His announcement reminded me of an article he wrote in 2018 predicting the demise or at least deceleration of venture capital in the DTC industry. “For the founders of Native, MVMT and Tuft & Needle, they’ve shown there is a different path — one that has been lucrative for them and their teams while letting them remain as leaders of their brands,” Jason wrote more than 5 years ago.

Jason’s announcement got me thinking about how venture capital in the DTC world has changed over the past 15 years. 

The 2010’s

Over a decade ago and just three months after launching his business (Fab.com), Jason Goldberg raised $40M from Andressen Horowitz - one of the most coveted investors in the world - all without a single meeting. While fundraising, Goldberg told Andressen Horowitz partner Jeff Jordan that he didn’t have a deck and he wasn't going to fly from New York City to San Francisco for a meeting with Jordan, the former CEO of OpenTable. Instead, all he had was a data dump for the A16Z team to comb through. 

Simply put, this was one of the most audacious, Erlich Bachman balls-on-your-desk moves I’ve ever heard of, and it got him $40 million - a check I’m certain A16Z wouldn’t write today. 

VC capital invested in DTC businesses actually peaked in 2018 at over $1 billion, and has steadily declined every year since with a brief upwards blip in 2021 due to COVID-driven optimism for ecommerce and the zero-interest rate phenomenon. This peak is obvious now, but at the time industry darlings like Away, Allbirds, and Outdoor Voices had all just raised eye-popping Series Cs ($50M, $50M, and $34M respectively) and many folks were riding high on the misplaced belief that the gravy train would never end. 

I think 2018 was a banner year for VC funding in eCommerce because Unilever had acquired Dollar Shave Club in 2016, and founders and VCs believed that there was a path to reliable and repeatable 10 figure exits. “Once in a while you get an Allbirds — the growth is so fast and the love of the product so deep that you make the bet that every decade has a handful of defining brands and they might be one of them,” said one investor in the article Jason penned in 2018. “Those, I think, you can put VC money behind.”

The landscape has changed dramatically since then. Allbirds - once worth $4 billion dollars - is now worth $150 million. Andressen Horowitz has basically left ecommerce altogether, and even eCommerce funds like Forerunner have moved more towards eCommerce enablement than brands themselves. 

The 2020s

So, what happened?

First and foremost, the supply side of the money - the VCs themselves - realized that the Dollar Shave Club deals were the exception and not the norm. Specifically, the come to Jesus moment was the realization that ecommerce structurally cannot deliver the 100x returns that software can and that VCs need. 

Software products can essentially scale infinitely, driving COGS down to basically zero. Physical products in the real world will always have a cost attached to every unit. Software products are infinitely available, anywhere at any time. Physical products have supply chains that can get tripped up in an infinite number of ways, from too much inventory to too little. Selling a physical product means hand-to-hand combat everyday with marketing and advertising. Do you really think the founders of Stripe think about their Facebook CAC on a daily basis like you do? 

Can eCommerce be a nice, profitable business? Yes. I’m living proof of that. Can it deliver the same magnitude of venture returns? Rarely.

The shift in eCommerce over the past 24 months has been swift and deadly. During COVID, most eCommerce businesses experienced a major boom to sales and a major reduction in marketing costs such that they became profitable virtually instantly. Once the COVID bump started receding, two things happened. 

First, there was a major shift away from eCommerce that caused cash flow issues at many companies. If you overstocked inventory or spent too much on capital expenditures like your own fulfillment warehouse, you ended up in a cash crunch. I saw several of these in my portfolio, and some are still working off that excess inventory in 2024. 

Second, there was a shirt towards profitability. In almost every fundraising or M&A conversation in eCommerce, the conversation is about growth while remaining profitable, not minimizing burn. Ironically, the companies who have organized themselves to prioritize profitability from the very beginning are the companies who still have access to VC funding, yet they are also the companies who need it the least. This puts them in an incredible position to use any fundraising event as an opportunity to cash out some of their shares. 

Starting a Business is Cheaper Now

Since Jason’s article, the promise of easy VC funding has faded away and ecommerce businesses have become more focused on being profitable at launch (or virtually at launch), and as a result, bootstrapping. 

The good news is that bootstrapped profitability has become more accessible. 

Back in the day, Everlane had to build their own ecommerce platform because there wasn’t a good out-of-the-box solution. Today, Shopify exists. Similarly, alternative funding sources like Parker and Brex (I think Parker is far better than Brex) have made it possible to borrow money without finding an investor.

The overall rise of online shopping also shouldn’t be understated. It’s just more possible for a DTC business to reach $200M in online-only sales today as compared to a decade ago. In 2004, 2% of total U.S. retail sales happened online. By 2014, this had tripled to 6%. Going into 2024, this had nearly tripled again to 16%. That matters. 

And, even if DTC businesses can’t reach escape velocity by selling on Shopify and through Amazon, the path into wholesale has also been cleared. Target, Walmart, Walgreens, CVS, and even Nordstrom now understand how to evaluate DTC brands and are eager to put them on their shelves to stay relevant. Bonobos and Harrys paved the way for this. 

The result? We’re seeing more and more DTC exits of profitable businesses that have reached meaningful scale. 

What does this mean for you? 

I’m clearly in favor of bootstrapping brands. I was back in 2015 when everyone else was raising money, and so I certainly am now. If you have to raise money, expect it to be an uphill battle unless you are a second-time founder with some success in your past. 

Assuming you’re not a second time founder and want to raise money, how should you go about doing it? By showing traction. Here are some ways to do that: 

1. Sales! If you want to raise money, show me that you can do $100,000 in sales per month in a fairly quick period of time. Show me a revenue graph that gets there within 24 months of launching your business, and that shows revenue accelerating quickly. How can you get to $100,000 in sales while being bootstrapped? Each business is singular so I can’t answer that for you, but the destiny of those that hit this milestone is shared: meaningful fundraising conversations. 

2. If you can’t show actual sales, show some preorders! Justin Mares from Kettle & Fire has this amazing story. He started advertising his product before he even made it. He spent some of his own money advertising his shelf-stable bone broth. Once someone purchased it through Shopify, he immediately emailed them and said they hadn’t actually made any product yet. He offered a full refund right away, or a 50% discount if the customer was willing to wait 3 months until the product was made. His strategy proved two things: a founder with hustle, and product/market fit. 

3. If you can’t raise money, that doesn’t mean you can’t start your business. At Native, I found an Etsy supplier who was willing to make 100 units of deodorant for me using the formula she was already selling on Etsy. By being scrappy, I was able to avoid the minimum order quantities of larger manufacturers (normally around 5,000 to 10,000 units) which would have cost me tens of thousands of dollars. Instead, my investment was something like $550 to see if my business would work. 

Conclusion

The days of VC-funded DTC businesses are virtually over. The winners of that reality are those that are willing to work hard, remain disciplined, and be creative. The losers will be founders who don’t realize their job is to build profitable, sustainable businesses (and landlords who will no longer be able to rent office space at insane premiums to overvalued companies). 

Shoutout to Jason: To check out more of Jason’s work, read his new book here. Jason has no idea that I’m writing this + this isn’t sponsored + this isn’t an affiliate link. 

Disclosures: I’m not an investor in Parker and am actually indirectly an investor in Brex so I don’t have any reason to prefer Parker over Brex.