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Why Billion-Dollar Status Is the Wrong Goal for DTC Startups

Blame digital for the death of the billion-dollar brand.

Digital technology is the reason why pop stars today don’t command the market share that Michael Jackson and Madonna hoarded in the ‘80s, or why Hollywood churns out fewer stars with the singularly supreme wattage that a Harrison Ford, Demi Moore or Julia Roberts commanded decades ago.

An always-on world that’s shifted from analog to online has “fragmented almost everything,” Greats founder Ryan Babenzien said on a direct-to-consumer panel at the Sourcing Summit New York last week. “And brands are now seeing that.”

The era of a few mega-brands—like the market-crushing athletic trinity of Nike, Adidas and Under Armour—dominating a sector is over, said Babenzien, whose five-year-old direct-to-consumer brand of sneakers Made in Italy was acquired by Steve Madden two months ago. To hear the footwear founder tell it, it may simply be unrealistic to believe the market can support 10 more $20-billion brands, but there’s room for, say, dozens of smaller ones performing at a high level.

And while a few billion-dollar unicorns might break through the noise of a DTC landscape that’s seeing anyone with a laptop, internet access and a dream stand up a store on Shopify and slap together a slick Instagram account, setting sights sky-high shouldn’t be a startup’s sole goal or seal of success, Babenzien said.

Instead, he explained, new entrepreneurs will want to figure out how to wring the highest profits out of their operations wherever they land, even if it’s at the seemingly lowly $100-million mark.

The art of raising capital to juice young brands continues to change by the day—or the decade.

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“Most people today forget that consumer venture didn’t exist for a good 10 years [and] there’s a reason for that,” said Anthony Choe, who has been investing in consumer companies since 1996 and founded his growth-investment firm Provenance to nurture promising direct-to-consumer and omnichannel brands, like California-based Marine Layer.

“A lot of people said, ‘why would I want to take startup risk and then layer brand risk on top of that?’ So most people forget that in between the dot-com boom and around 2009, there was not any consumer venture happening, period,” Choe said. “Then things started to look easy because this e-commerce thing was here to stay and it looked like there were some quick wins—things like Groupon and Gilt and other things…got people really excited and sucked venture back in.”

That tide is expected to reverse, however, Choe said. A number of finance industry veterans are beginning to grasp that maybe “venture” and “brand” go together like oil and water, he added.

Securing capital can mimic Goldilocks’ quixotic quest to discover which of the three bears’ beds was “just right.”

“We think there’s an optimal amount of capital that nobody gets perfectly right,” Choe said. “You shouldn’t raise too little, you shouldn’t raise too much. It’s really hard to get that right zone and I think the stakes are even higher today because…our view is that brands are just going to be smaller than they used to be.”

Babenzien readily admitted the struggle of striking that balance of how much to raise—and how quickly. If he had to redo the fundraising experience all over again, “I would raise more sooner, just once,” he said. Stringing together a series of small seed rounds meant Babenzien “never had enough capital to…grow out of the box.”

New Fundamentals of apparel sourcing and supply chain successKyle McClure, who co-founded men’s performance and commuter apparel label Rhone and serves as chief product officer, wouldn’t do things differently if faced with doing them again.

“I think we needed all the capital that we raised in order to learn all the things that we’ve learned,” he shared, noting that if anything had to change, he would have gotten “smarter faster.”

And if Taylor Shupe had a venture-capital mulligan, the co-founder and chief product officer of quirky sock brand Stance who founded China’s FutureStitch factory a year ago, said “I would have been a little bit more methodical in my approach to fundraising—who I was getting the funding from.”

Stance “raised probably too much,” Shupe said, mostly because the brand didn’t truly need it to nourish the tender shoots of its budding art-for-feet empire.

“But we continued to raise because the sun was shining and it felt warm and delicious,” he said, describing those heady, venture-flush days as “some fun years.”

With the benefit of hindsight, Shupe now sees that alternatives to venture capital might have been a smarter bet for Stance. Though the sock brand that counts Rihanna among its ambassadors raised more than $100 million from traditional venture groups, Shupe admitted he didn’t believe those funds gave him “a lot of return outside of what I was able to do with that capital.” Strategic investors, he said, would have likely made for better bedfellows.

Falling into the venture trap of taking staggering sums can be particularly dangerous for emerging brands if VC is truly at an inflection point.

“There’s a lot more brands, every category is way more fragmented,” Choe explained. And while that “doesn’t mean the category is going to grow that much more, that means the pie is getting chopped up a little bit more finely,” he added, which means high stakes for both investors and founders.

There are times when it’s great to follow your gut—but cajoling investors into giving you their business-building capital isn’t one of them, according to Choe.

“You have to be somewhat precise about what’s the right amount [and] when to raise it,” he said. “It’s hard to do that, if you’re using a rule of thumb like ‘this feels right.’ It’s got to be custom tailored for what’s going on…for that brand in that category.”