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This is Why Investors Are Spending on Digitally Native Brands

Just as consumers are increasingly directing their attention to upstart digitally native brands, investors are directing their dollars in much the same manner.

But what is it that’s bringing on the interest in backing these new businesses?

Well, for starters, these companies are building themselves from the ground up around the customer and solving for that customer’s specific need—which, in many cases, is more than can be said for traditional brands.

And that’s one thing Ben Lerer, managing partner of Lerer Hippeau, a seed stage venture capital fund that has backed Allbirds, Casper, Everlane, Glossier and Cotopaxi, to name a few, looks for when agreeing to fork over funding.

“There’s a lot of clever ideas for businesses, but there are not that many people that genuinely will put the customer first—always—and are that obsessed with the quality of the product,” Lerer said earlier this month at The Lead Innovation Summit 2019 in Brooklyn. And while, at times, Lerer Hippeau invests in a business before seeing any of that promised quality product, it’s clear from the point of ideation whether a brand idea has real legs.

“It’s the way that [digital native brand entrepreneurs] talk about the person that they’re serving or the ‘what’ that they’re solving. And I think in almost all of these cases, there’s a very personal connection with the founder, in that they’re solving a problem they had as an individual.”

[Join us at Sourcing Summit New York on Oct. 17 to learn more about what DTCs are doing right.]

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While many longer-standing players in the industry may be stuck for how they’ll disrupt a space crawling with new companies trying to do the same, in an industry where seemingly not terribly much could change, Lerer says disruption isn’t always the answer.

When Casper came to Lerer Hippeau’s table, that was about disruption, but when Allbirds showed up, it wasn’t.

“The way we traditionally bought mattresses by going into a Sleepy’s and having some creepy person stand over us while we lie down…the idea that that was not a good consumer experience is now obvious,” Lerer said. “But at the time, there was this belief that you have to try a mattress in order to purchase it.”

That was once the case for apparel, too, but with the advent of online shopping came a consumer who’s OK seeing a product for the first time when it lands on their doorstep. So, traditional brick-and-mortar retailers can’t continue banking on what they believe to be their physical prowess without putting real steam behind a corresponding digital experience.

For Lerer, the case for Casper became clear once he’d had his own dissatisfying shopping experience—something today’s consumer is loath to put up with.

“I had recently gone out and gone mattress shipping and came back feeling gross and said, ‘that’s ridiculous and why has mattress shipping not changed with the invention of the internet?,’” Lerer said of an experience he’d had not long before investing in the now 5-year-old digitally-native mattress company Casper. “So that was a category bet.”

But the venture capital fund’s investment in Allbirds wasn’t about a belief that the footwear category was “ripe for disruption,” as Lerer put it.

“Some of the best companies in the entire universe dominate the footwear category, like Nike,” Lerer said. “In that instance that was 100 percent about the guys and the taste level that I thought they had and the vision that they had.”

Digital versus traditional

Though the apparel industry can feel like an “us versus them” battle between traditional and digitally native brands for consumer mindshare, and that the days of mega brands are numbered now that micro brands have moved in, Lerer says he doesn’t think that’s quite the case.

“Maybe you’re not going to have 70 [percent market] share brands in some categories, but I don’t agree that we’re moving into a world where there are that many different sort of niche communities and personas and that we’re entering some hyper-targeted world where everyone needs personalization,” he said. “The knock right now on this idea of digital native unicorns is actually just a huge amount of impatience that the world has.”

Digitally native brands are garnering the fast appeal they have because each has created a level of convenience around one experience or another, which most traditional brands haven’t come close to rivaling.

“When you look at a category like retail, something that grows 30 percent year over year for a long time and may take 20 years to reach $1 billion of revenue, that’s OK. That’s how the world usually works, and most categories don’t have the opportunity for that insane exponential growth,” Lerer said.

Comparing traditional brands to their digitally native counterparts is like pitting the pre-internet world against its post-internet counterpart. “There was 150 years pre-internet to go build really big brands, and you can’t expect 15 years post internet we’re going to go and build the next Coca Cola or the next Nike. These companies have had 100 years to establish themselves.”

Digital natives for the long haul?

While three to five years ago may have marked prime time for digitally native brands, it’s becoming harder to enter the space. And many of these new brands have built “effective acquisition funnels,” without building a product that was really “all that special,” and then hit a wall, Lerer said.

“What ends up inevitably happening is they hit a wall, they freak out, they have to rebuild their entire leadership team, and then they have to figure out what omnichannel looks like…what’s our retail strategy? What’s our wholesale strategy? God forbid, what’s our Amazon strategy?,” Lerer said.

“Three years ago a company may have been able to go from one to 10 by buying that growth, and now we have to be more patient, we have to find Series A investors who are willing to be more patient,” he continued. “I think we get to the same place—and actually at the end of the day it ends up being a better business because these companies can raise less capital.”

Brands, upstart or otherwise, can’t just decide they want to build, or at the very least embrace, a direct to consumer strategy. It’s more than that that has these brands always at the tip of the industry’s tongue.

“You have to figure out what your brand is, what it’s going to stand for, obsess about the quality of that product and then obsess about building a multifaceted distribution engine for that product,” Lerer said, adding that Casper is a good example of the new way to do direct to consumer (DTC). “We were all DTC and now Casper is selling in Costco, Casper’s selling in Target, Casper has 30 or 40 retail stores, Casper is on Amazon. We’re figuring out new ways to distribute and where you’re not cannibalizing. It’s harder. Starting a DTC brand today is way harder.”

For traditional brands less interested in starting a DTC or digitally native brand but still keen to know which lessons they can repurpose and make their own, Lerer says there’s one thing they shouldn’t be expending their energy on: innovation.

“I think launching stuff for big companies is generally a futile effort,” Lerer said. “If you look at the best companies in Silicon Valley, if you look at the best companies in the world, for the most part, they buy their innovation. Look at Facebook, look at Google. These companies buy, buy, buy and they are the best buyers in the world and it’s why those companies have the innovation that they do. I think big traditional companies that try to do everything themselves are sort of kidding themselves.”