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Do Startup Brands Really Need VC Money?

Four years ago, Allbirds announced its entrance into the world. Today, the San Francisco-based environmentally friendly digital shoe brand is valued at $1.4 billion.

That doesn’t mean Allbirds is actually worth that much, but it also doesn’t mean it’s not worth that sum, said Assembled Brands CEO Adam Pritzker at Decoded Future in New York City on Nov. 2. The company funnels working capital to young brands finding market success.

In a market awash with venture capital (VC) and dreams of blockbuster exits dancing through entrepreneurs’ heads, raising round after inflated round of financing has become the norm for fledgling brands hoping to convert their seed of an idea into the next big thing. But Pritzker said this focus might be a bit misguided and shouldn’t form the sole recipe for success as a new company today.

Pritzker described the prestige around securing venture funding to a “Harvard-like luxury” many startups see as the ultimate stamp of approval. And they probably think this way because that’s simply how the market is set up. Walk into a VC pitch, Pritzker said, and the potential investors will ask how your idea can be the next billion-dollar brand. And with shows like “Shark Tank” popularizing the stories of the “little guys,” venture capital funding is, to some degree, mainstream.

But bigger doesn’t always mean better, Pritzker theorized. That’s because, he believes, people inherently enjoy the “tribal” thrill of discovering new things—like indie bands, for example. There’s a particular joy that comes from knowing about a new act before anyone else, linking up with like-minded enthusiasts to help propel that talent into the limelight. A Bon Iver, for example, will probably never blow up to Beyoncé’s level—but that doesn’t make their fans any less passionate and engaged.

That is to say, there’s plenty of space in the market for mid-level brands providing value for a niche audience, according to Pritzker, though it’s tempting to assume size is everything.

Thanks to the smartphone, it’s possible for brands today to scale in a way previously not possible. The explosion of mobility, connectivity and social networks means consumers across the globe can discover and drive demand for a tiny brand, which might not even be gaining much traction in its own home country. Such organic growth is more sustainable and manageable than throwing oneself at the mercy of investors. Stitch Fix raised tens of millions of dollars in VC funding, launched a successful IPO, but since then it has delivered quarterly earnings that at times fail to meet market expectations.

“Scale is possible but it’s not necessary to build a great business,” Pritzker said.

Entrepreneurs might be waking up to the reality of what’s practical, possible and realistic when it comes to building their brands, he added. Facebook and its founder Mark Zuckerberg could be the ultimate cautionary tale, like it or not.

In light of the data scandal, congressional hearings and fines levied by the European Union, it’s been a rough many months for the social network. And, Pritzker noted, people are starting to realize Facebook’s “move fast and break things” mindset might not be the one they should emulate.

Custom apparel and design startup TeePublic might be a better example. The company generated $2 million in revenue annually, Pritzker said. However, it sold for $41 million in an all-cash deal to Red Bubble last month, instantly enriching founders Adam Schwartz and Josh Abramson, who never raised any venture funding, per AlleyWatch.

“Our vision was to build a profitable business independently, which meant we had to find a way to hire, scale and acquire customers profitably against constraints as a philosophy, in a market landscape that’s placed a premium on venture capital,” Schwartz told AlleyWatch.

Men’s wear startup TAYLRD has also been intentional about shunning venture capital, founder and CEO Thomas Dwyer said at a future of retail and technology panel discussion hosted by HEC Paris business school in October.

“Digitally native brands have done so many things so well except be profitable,” he explained, adding, “The chickens are coming home to roost,” with regard to the over-reliance on venture funding.

“There’s a serious gap in the market between what a lot of these [heavily funded] brands can be worth, what the valuations were four or five years ago and what the reality is, especially in a world where a company like mine can come up and take market share,” Dwyer said.

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