WHY THERE HAVEN’T BEEN MORE BILLION-DOLLAR ACQUISITIONS FOR DIRECT-TO-CONSUMER COMMERCE STARTUPS

Three years after Dollar Shave Club’s big deal, it’s been an anomaly so far.

The boom in consumer startups over the past decade has created a new generation of household-name brands: Warby Parker, Everlane, Glossier, Away, etc. Investors have poured money into the field, and many of the best companies are valued at $1 billion or more.

But so far, those valuations are mostly theoretical — agreements between investors and executive teams. Few have been supported by the public markets or even an acquisition. Since Dollar Shave Club’s $1 billion purchase by Unilever three years ago, it is hard to name a similar deal.

That’s because there simply haven’t been many — or any, depending on how you define the category we’re talking about. Adjacent e-commerce brands Stitch Fix and Blue Apron have gone public, but Warby Parker, Casper, Peloton, Allbirds, and others have not yet. And there hasn’t been any sort of billion-dollar-startup buying spree by incumbent consumer giants.

Why not?

One big reason is that the strongest new consumer companies haven’t needed to sell themselves or go public yet. The private markets, including venture capital and growth equity, have continued to place bets on the big companies at increasing valuations, expecting that growth will continue. See, for example, beauty brand Glossier’s recent $100 million round, led by technology venture capital firm Sequoia, which valued the company at $1.2 billion.

This has allowed founders to continue to invest in growing their businesses without having to find a buyer or deal with the pressures of the public markets — activist shareholders, quarterly disclosures, stock fluctuations, etc.

In many cases, it has also allowed founders and early investors to cash out some of their shares, taking money off the table through what’s called secondary sales. The argument goes: With a few million in the bank, founders can buy the house they want, take the vacation they want, and reduce their personal financial risk, without having to sell the whole company just yet.

It’s possible the markets will pull back at some point, but for now, it just hasn’t been too tricky for the best brands.

What many of the bigger new consumer brands have had to do is substantially change or broaden their strategies to continue growing — and to try to grow intotheir valuations — as the industry matures, customer acquisition gets harder and more expensive, and predictable, long-term profitability becomes a bigger part of the equation.

For example:

Warby Parker, which started selling glasses over the internet, has fully embraced offline retail as a necessary part of its strategy on its way to eventually going public. It now has 95 stores listed on its site, including three in Canada. Retail generally means lower margins, but can be an important part of the customer experience, especially on tactile products that people want to try in person.
Casper, which famously launched with one simple mattress delivered in an improbably small box, now runs 20 retail stores on its way to 200, and offers five mattresses, with starting prices from $450 to $1,545. It also sells mattresses on Amazon.
Away has long described itself as a “travel” company, not just a luggage company. It is hiring to grow in apparel, lifestyle accessories, and consumer packaged goods and wellness. Co-founder Jen Rubio has even teased a long-term vision of Away hotels — a vastly different business than suitcases.
Harry’s is basically trying to build itself into the new Procter & Gamble of the 21st Century. After starting as a subscription-based men’s grooming brand and later embracing big retailers, it recently launched a women’s brand, Flamingo, on its path to regularly spinning up new brands — exploring “everything from cosmetics to cleaning supplies to pet care” — via a group called Harry’s Labs. The bet there is that a platform of brands with the Harry’s DNA — across product, manufacturing, marketing, and distribution — will be a bigger and more interesting business.

Until these models prove out — or don’t — there’s basically no reason to sell or go public if the companies don’t want to. Unless there’s an offer they can’t refuse. But that hasn’t happened yet.

The tension on the horizon — especially for the companies that can’t go public — is that the few consumer acquirers that can do a billion-dollar deal have vastly different ideas about how to value a company than tech investors, which are used to winner-take-all markets. And that’s where many heavily funded companies will run into trouble.

The big consumer packaged goods companies are “DESPERATE for growth,” says Ryan Caldbeck, founder and CEO of CircleUp, which invests in early-stage consumer brands.

“But they look at most of the direct-to-consumer companies and they think: ‘Why would I pay 15X revenue for this brand that has rising customer acquisition costs, is losing a ton of money, and likely has exhausted how big it can get before it goes into a different channel — likely offline — where it hasn’t proven anything?’”

In reality, Caldbeck says, consumer goods companies, “when working, shouldn’t need much capital. The best consumer companies often raise $5 million to $10 million to get to breakeven, not $50 million to $75 million, as is common in tech.”

Yet here we are, where many consumer companies have raised tens or hundreds of millions from tech VCs at big valuations.

“Everyone feels good,” Caldbeck says, “and then an acquirer — or the public market — looks at the company and says, ‘actually, that thing is worth 4X revenue, not 15X revenue’. The exit becomes much harder. Unilever looked at Honest Co. — they decided to buy Seventh Generation instead.”

The next year will be very instructive: Can Warby Parker and Casper go public? Will dusty consumer conglomerates go on a spending spree to boost their relevance? If so, at what multiples?

It’s worth considering why the big, old consumer companies need to buy newer companies, to help get to some of the answers.

One problem they have is that their big, old brands are losing relevance, aren’t modern in any way, and don’t serve today’s increasingly niche needs. Those deals will probably continue to look like P&G’s purchase of Native, the natural deodorant brand, for $100 million. That was a great deal for its founder, Moiz Ali, who owned more than 90% of the company. But it wasn’t expensive — around 4X its reported revenue.

But if they’re buying real growth, that will cost more. Few of the new consumer startups are large enough — and growing fast enough — to command multi-billion-dollar valuations. But some will.