Original article: https://www.fastcompany.com/90828954/era-of-dtc-brands-is-over-heres-what-the-next-generation-of-startups-looks-like
For a decade, DTC startups like Warby Parker and Everlane created a playbook for how to launch a successful brand. A new generation of founders wants to chart a different path.
When fashion industry veteran Marina Larroudé decided to launch her eponymous line of heels in 2020, she made the deliberate decision not to follow in the footsteps of fast-growing direct-to-consumer shoe startups like M.Gemi, Tamara Mellon, and Rothy’s.
She wasn’t interested in copying their business model of selling exclusively through their own websites and stores; Larroudé was eager to see her shoes on the shelves of Nordstrom and Anthropologie. And she had no desire to fuel her growth with hundreds of millions of dollars in capital like her DTC counterparts. But despite this, Larroudé has sold 100,000 pairs of shoes in its first two years in business and hopes to hit $100 million in sales by 2025. “I was more interested in being small and profitable than large and burning through cash,” she says. “This business has our name on it. We’re in it for the long haul.”
Larroudé isn’t alone. A new wave of entrepreneurs is rejecting the DTC playbook that brands like Everlane, Warby Parker, Casper, and Away pioneered over the last decade. This emerging generation of businesses—including beauty brand Megababe, kids bedsheet maker Gooselings, Indian sauce startup Brooklyn Delhi, and fashion label Silver and Riley, among many others—has learned from the DTC startups that came before them and want to do things differently. They’re digitally native and tech forward, but they’re also self-funded, focused on growing sustainably, and becoming profitable.
As the first era of DTC brands winds down, these new brands are showing us what comes next. In the long run, experts believe bootstrapping and retail partnerships may lead to higher quality products and more enduring businesses.
LEARNING FROM THE PAST
The DTC model emerged in the early 2010s, as brands like Everlane and Warby Parker promised to deliver high-quality products at cheaper prices by selling through their own website. This allowed them to save on the markup that department stores and boutiques charge, which can be as steep as 50%.
Investors believed this innovative new approach had the potential to disrupt industry giants. In an era when money flowed into mushrooming technology firms, early DTC brands pitched themselves as tech startups in the e-commerce space. Between 2012 and 2021, global VC funding ballooned from $60 billion to $643 billion, of which an estimated 30% went to consumer brands. VCs poured hundreds of millions of dollars into brands like Casper, Harry’s, and Glossier. This spurred other startups to try their hand at the DTC approach, often creating competing products. For instance, more than 200 mattress brands now compete with Casper. There are now hundreds of DTC startups selling everything from razors to paint to pans.
As time passed, however, it became clear that investors expected a timely return on their investment, which put pressure on founders to grow quickly and contemplate an exit. Many DTC brands were unprepared for how expensive it would be to acquire new customers. While department stores took a steep cut, they could also market brands to their enormous audiences; without that option, online brands had to compete for consumers’ attention through Facebook and Instagram ads which became increasingly expensive. Many brands, from Allbirds to Everlane, even ended up partnering with department stores in a stark shift from their original vision. Glossier announced it is debuting in Sephora this year.
When the pandemic struck, companies of all kinds struggled with low consumer demand and supply chain problems. DTC brands were hit particularly hard because they had few savings to keep them going, due to their high “burn rate,” which refers to how quickly they go through cash before generating revenue. Away’s sales dropped by 90% when travel halted, forcing it to furlough staff; Everlane cut hundreds of employees. Casper had a disappointing IPO and was recently taken private again. Warby Parker, Allbirds, and Glossier have all experienced corporate downsizing in recent months.
In the post-pandemic world, entrepreneurs and investors have a more nuanced approach to DTCs, says Dan Frommer, veteran retail journalist and founder of the online publication The New Consumer. “It’s not a simple story,” he says. “The venture-backed, DTC model worked well for some startups, but not others.” He points to brands like Warby Parker and Allbirds that are steadily growing in the eyewear and sneaker sectors, respectively. Even though they’re reducing headcount, he believes they are poised to weather inflation and even a possible recession. And there is still capital floating around, Frommer adds.
But it’s clear that today’s founders are charting a different path. “Everyone is trying to figure out the new formula,” says Elana Dagnbol, who founded bedding brand Gooselings in 2018. “There were some aspects of the DTC model that worked well, and others that didn’t.” DTC were good at gathering customer data and communicating with customers, she says, even if they often to turn a profit. “We’re all trying to find the right mix,” Dagnbol says.
BACK INTO RETAIL
Entrepreneur Katie Sturino observed the hyper-growth of many DTC beauty brands thanks to enormous infusions of capital. Glossier, for instance, has landed $266 million since it launched in 2014. But when Sturino decided to launch her own beauty brand, Megababe, she made the decision not to take any investment. Her goal was to create products that would tackle taboo issues, like chafing thighs and sweat under breasts, and VCs didn’t seem to understand her mission. “The suits didn’t get it,” she says. “I didn’t want to be in a position where we had great products and an investor forced us to pivot to become a totally different company.”
Sturino and her co-founders self-funded the business, partnering with a lab to create the line and hiring a firm to design the packaging. When the brand launched in 2017, it did so by selling directly from its website and pushing the products on social media, but Sturino and her team ultimately believed the best way to market it was through large box stores. After garnering a grassroots cult following, Megababe attracted the buying teams at both Ulta and Target reached out, saying they believed Megababe had discovered a rare gap in the oversaturated beauty space. Within two years, the brand was picked up by both retailers across their entire fleet of stores; Anthropologies, Goop, and Nordstrom quickly followed. Today, Sturino has a large following on Instagram and TikTok, but she’s still convinced that retailers are key to making it as a beauty brand. “I didn’t want to be an influencer brand, because I wanted the product to stand up on its own,” says Sturino. “Big retailers have the reach we could never achieve ourselves.”
Over the past five years, Megababe has grown at a rate of 70% year over year, and it has been profitable from the start. It’s a very different trajectory from VC-fueled DTC brands that were expected to grow at a faster rate. Glossier, for instance, had upwards of triple digit growth for its first four years and was valued at $1.8 billion in 2021. (The company has declined to comment on whether it is profitable.) However, Glossier’s US sales shrunk by 26% in 2021 and last year it laid off a third of its workforce. It poured its recent $80 million Series E funding into opening dozens of brick-and-mortar stores. But some experts say that part of the brand’s struggles comes from choosing not to partner with retailers, especially since consumers like to shop for beauty products in person. Launching at Sephora may be a way to turn the tide.
At times, Sturino has been envious of well-funded brands, but she believes her slower approach may lead to steadier growth. And ultimately, she hopes Megababe will be acquired by a larger company. “It’s been hard as a founder to see the kind of marketing dollars well-funded brands are able to spend,” she says. “But I’ve seen enough brands take over the side of a building, only to crash and burn a few months later.”
WORD OF MOUTH
Venture capital didn’t just pay for brands’ billboards. A lot of it also went into targeted Facebook, Instagram, and TikTok ads, which was startups’ main strategy for acquiring customers.
In the early days of the DTC movement, this approach worked well for brands, but as more companies popped up and competed for ads, marketing on social media became more expensive. For instance, when Casper went public in 2020, its financial documents revealed that it was losing $157 on every mattress it sold, thanks to the steep cost of social media advertising, which was their main approach to acquiring customers. And costs are only increasing: In 2022, social media advertising costs rose 41% from the year before.
Degnbol, of Gooselings, had seen this play out as a retail executive who spent a decade leading sales at Michael Kors. When she launched Gooselings in 2018, she decided not to rely on social media to drive sales. Instead, she sells through retailers like Bloomingdale’s, Saks, and Maisonette, and uses press to create awareness about the brand. “When you throw dollars into Facebook ads you’re playing against the casino,” she says. “And for smaller self-funded businesses, you’re not playing big enough to compete with the bigger brands.”
Degnbol—along with Sturino and Larroudé—believes that word of mouth is the key to growth, but becoming a brand that people recommend to their friends is a slow, laborious process. For one thing, it requires creating a high quality product that doesn’t already exist on the market. One critique of DTC brands is that many didn’t create distinct products: That’s why it was so easy to replicate Casper’s mattress-in-a-box or Away’s suitcases. “Many of these startups were founded by marketers,” says Frommer of The New Consumer. “Over time, it was clear that their expertise was marketing, not creating products.”
When launching Gooselings, Degnbol tried to avoid falling into this trap by focusing on developing a unique product that isn’t available in the U.S. She found top suppliers in Portugal and Denmark known for the quality of their duvets and sheets. So far, she’s sold out of her first two runs of products, and in 2023, she plans to pour her profits into expanding her product line.
Even though this new generation of businesses is moving away from the DTC formula, founders want to hold on to the aspects of those businesses worked. “The one thing they got right was their obsession with the end consumer,” says Ricardo Larroudé, who co-founded the shoe business with his wife.
Before the DTC movement, many brands didn’t have a direct relationship with their customer; they relied on retailers to sell the product and follow up with them. But DTC brands wanted to own that relationship. They were very good at gathering data about their customers, understanding how they felt about product, and providing good customer service. At Larroudé, Ricardo and Marina believe customer service is crucial to building a strong business, but they believe that there are clever new ways to do this, even when you partner with retailers. For instance, they have QR codes on their shoe boxes so customers can register their shoes, even when they buy them from Revolve or Nordstrom.
With a high quality product and a strong relationship with the customer, the couple believes they can scale their business without an infusion of cash—and the strings that come along with it. In the first two years in business, the brand has generated tens of millions in revenue and is on track to continue growing steadily in the years to come. “There’s no such thing as free money,” says Ricardo. “But I don’t think we could have grown any faster if we had gotten funding. We’re showing that with good business fundamentals, you can scale without relying on outside capital.”