With the valuation collapse of Casper, the shuttering of Brandless, the down-round for Outdoor Voices, the lack of clarity around the future of Harry’s and the continued challenges facing brands like The Honest Company, former consumer product darlings of the venture capital community were facing a reckoning before COVID-19. In the year and a half since, start-ups have been some of the hardest-hit businesses. Those that are still in business often don’t have a clear path to profitability, since they having never invested the time to really figure out the unit economics where they could sustain themselves without regular outside capital injections.
Why did this happen? Part of it is due to the cash influx of cash into the venture ecosystem, forcing investors to go further afield in an effort to find places to deploy their capital. This resulted in industry investments in industries that even a decade ago would have been outside traditional venture investing’s the purview of traditional venture investing. Not only did this mean venture dollars went were going into very un-venture-like businesses, it also meant valuation multiples for those businesses skyrocketed. There is good reason many of the old guard venture firms did not invest in these huge consumer products businesses.
Some have watched the ongoing travails in consumer products and looked to it as vindication that the category as a whole is simply not where you want to be. That, for reasons that will soon become clear, is not the case. Rather, the venture money, deployed at times almost haphazardly, served as a drug that allowed fledgling businesses to ignore good sense and embrace bad habits. Often with their financiers the implicit encouragement of their financiers. Everything was done in the pursuit of scale-;, profitability (or logic) be damned!
The good news
Fortunately, for any aspiring entrepreneur there is a lot to be said for building a consumer products business. For one, while true tech businesses tend to have a fairly binary set of outcomes, due to existing oftentimes in winner-take-all markets, consumer businesses are almost never winner-take-all. There are more than over a hundred mattress companies in the U.S., m. Many of which are successful and profitable, m. Much to Casper’s detriment. Look no further than Purple for one such example.
The chance for a consumer products company’s chance of being the next billion-dollar business is might be considerably smaller than with pure tech. B, but the chance of building a fifty-million-dollar business is considerably higher. Depending on a founder’s aspirations in life, that might be a trade they are happy to take.
With the curtain has having dropped on reckless funding and scale-at-all-costs thinking. H, here are the first four pieces of behaviors that will need to change amongst consumer products businesses.
- Develop realistic unit economics or do not pass go.
Pitch deck after pitch deck presumes aggressively low customer acquisition costs, unrealistically high retention rates, and ambitiously low margins that provide little room for error. And, time and again, these businesses receive funding. The underlying business idea, taken at face value, may be compelling. But if the numbers don’t work, then the business will not succeed. In the irrationality of the past several years, people seemed to forget this, investing it seemed people forgot this and invested on little more than an idea and a prayer. Every aspiring consumer founder should would do well to remind themselves of three things. Customers will be more fickle fickler than you believe; a. Acquiring those customers will grow more expensive over time, not less. Your margins are going to be tighter than you budget for due to unexpected costs. Get realistic about what your unit economics are going to be, and challenge yourself with truly defensible assumptions.
2. Be realistic about your potential market opportunity.
There are almost undoubtedly good businesses that have found themselves in difficult positions because they expanded too fast and too far beyond where they should have. They simply were never going to get past a certain share of their addressable market. The further they expanded outside their core group of evangelists, the higher customer acquisition costs went and the lower the new customers’ lifetime value of those new customer cohorts. Blue Apron had this experienced this. So too, does it seem, did Casper.
What does this mean when you’re building your next business? There will be a point beyond which you’re “forcing it.” T - that might be at revenue of $twenty-five million, $fifty million, or a one hundred million and above. You’ll almost undoubtedly know it when you see it in the metrics though. Customers will be getting considerably harder to acquire. Those same customers will buy fewer of your products. The perverse incentive created by an overabundance of capital over the past several years was to simply push through what should have been an otherwise obvious signal to slow down and focus on profitability. Instead, these businesses decided that turning a dollar into ninety cents at scale was a good idea. Don’t do that.
3. Omnichannel from day zero.
Founders often forget that the world we live in is one where e-Commerce is still only just above 10ten percent of total commerce in the United States and Amazon takes up over more than half that pie. Thus, if your only path to a consumer is through direct sales on your website, you will be in trouble. The market share you need to win to succeed in that case might be enormous. Instead, out of the gate, you should know what your owned retail, wholesale, and other online sales strategies are going to look like. You don’t need to do every one of them initially out the gate, but few brands will succeed by relying solely on owned channels. The best brands will figure out how to have an Amazon strategy to minimize the dilution it creates for their direct channel and doesn’t conflict with their wholesale business. Unquestionably, it’s a lot to deal with early in a business’s lifecycle. However, all these channels, done right, will work in concert with one another and build brand awareness and momentum. The old way of being channel-specific no simply will not cut it any longer cuts it. Don’t think a pretty Shopify site and a decent Facebook ad strategy is going to deliver you to the promised land.
4. Pursue profitability far, far sooner.
I built Well Path to the point where I was cash flow positive shortly after we hit $5five million of revenue. I did that for two reasons. Number one, I did not want the sword of Damocles hanging over my head, something that is undoubtedly bad for your sleep. Further, I wanted to know that we would never be dependent on the beneficence of an outside investor to survive. Number two, and more importantly, it opens up a wonderful world of alternative financing sources of financing. Venture capital as an industry has done a magnificent job of lionizing the act of raising very expensive equity capital, turning it into a badge of honor for any aspiring entrepreneur. However, there are many, many others financing sources of financing that are far less expensive but are open to consumer brands who can handle the interest payments. Receivables financing, inventory financing, working capital lines, and factoring, just to name a few. Peter Rahal grew RX Bar with only ten thousand dollars of equity capital raised from friends and family. He sold it for more than over six hundred million dollars. He did not face any meaningful dilution outside of his employees and partners. Think about that. Build a profitable business, and you will control your own destiny.
So, what to do now?
There are going to be some amazing consumer businesses built over the next decade. Some will be the right sort of businesses that can and should take venture funding. There will also be many businesses that make great products, employ dozens of people, and leave their founders financially well- off. These will be businesses that really understand their unit economics from day one. These businesses will not scale too fast quickly or beyond their core target market. These businesses will be adept at utilizing multiple channels, knowing the compounding effect of different customer touchpoints. These businesses will not raise massive venture rounds but instead find creative financing sources, successfully avoiding selling progressively larger pieces of equity. These businesses will be fantastic companies because they were forced to have a degree of discipline that has been missing from consumer business building the past handful of years. Ultimately, we’ll all be the better for it.