Direct-to-consumer (d2c) disruptors are winning market share across consumer categories; over the last 5 years, startup disruptors have experienced an estimated average CAGR of 200% while traditional CPG market leaders less than 1%. Using the food-and-beverage industry as an example, 97% of growth came from a longtail of smaller players.
While the shift away from incumbents to d2c brands is unambiguous, there’s a fair amount of scepticism from the investor community–and rightly so. For every Dollar Shave Club ($1B acquisition) there’s a plethora of brands built on unsustainably high CAC resulting in blah multiples and unexciting exits.
That is, however, not to say that the d2c revolution isn’t investible. On the contrary, while many brands aren’t venture backable in themselves, the startups providing the infrastructure paving the way for the next generation of micro-brands certainly are.
This article hones in on two of many “micro-brand infrastructure” startup opportunities: startups digitizing contract manufacturing and startups providing physical retail space for DNVBs.
Manufacturing: a missing piece of the d2c playbook
As Ankur Nagpal’s tweet suggests, the barriers to entry to start a d2c brand are limited thanks to a plethora of companies catering to different aspects of company- and product creation. For branding, there’s agencies like Gin Lane and Red Antler (the former has helped launch over 50 startups including Hims and Harry’s, and the latter’s clients include Casper, Brandless, and Allbirds). To solve digitally native brands’ packing and shipping, there’s companies like Lumi (raised a series A in the beginning of last year with investor including Forerunner and Spark). For distribution, a neat instant solution is provided by Shopify (IPO’d for $1.3B in 2015 – way too early. Ouch! – and now makes around $1.050 billion in annual revenue). For payment processing Stripe, for returnsReturnly – and the list goes on.
That said, a critical missing piece–the piece that still keeps d2c entrepreneurs up at night–has, up until now, been manufacturing.
Producing physical goods is still a painful and thorny process. Using the personal care industry as an example, R&D can cost between $15-100k/sku and it typically takes 9-18 months before the entrepreneur has a product in their hands. In addition, the whole process (including timeline and pricing) is opaque and non-digital. The smaller the brand the thornier the issue, as the best contract manufacturers require minimum order values in the tens of thousands.
A “Shopify of contract manufacturing” is still to be built; a manufacturing platform for d2c brands that removes the massive manufacturing barriers to entry and uses the platform’s economies of scale to allow the next generation of savvy digital entrepreneurs–that currently don’t have the resources to meet R&D costs and minimum order values–to bring their concepts to life.
Wildist, founded by a team of ex-P&G and ex-Etsy seniors, is trying do this for the personal care segment. With a vertically integrated approach and a “self-serve” platform they think they will be able to serve everyone from micro-brands that otherwise never would materialize, to venture backed DNVBs, to incumbents who wants to experiment with small test runs that their massive facilities aren’t built to handle.
There’s an array of startups with a less vertically integrated approach, either digitizing sourcing, automating interactions between brands and manufacturers, or just providing a supply chain specific software layer to try to make the process a little bit less opaque and painful. Companies worth watching here include Anvyl, Sourcify, and Maker’s Row.
Honing in on the apparel category, Zingo Asia Mall is a one-stop sourcing solution for anyone to set up a fashion label. Younger and edgier, New York based Cala matches emerging fashion startups with manufacturers, layering everything from warehousing to financing on top. Cala counts rapper A$AP Ferg and the model Jazzelle Zanaughtti as early clients.
Along the theme of turning influencers into entrepreneurs, there’s a range of companies building influencer-backed beauty and fashion brands from the ground up, with a model that’s more like an incubator than self-serve. Some of the more successful include Seed Beauty (the behind-the-scene creator of Kylie Cosmetics), Maesa ($175m annual revenue), Digital Brand Products, Kendo Brands, and Hatch Beauty.
As a market, contract manufacturing is fragmented with hundred of legacy players who are unsusceptible to the needs of today’s conscious consumers and the brands serving them. There’s a lot cooking in the startup world but we’re still to see a winning platform that truly simplifies and “democratizes” manufacturing the way Instagram democratized d2c marketing and levelled the playing field for a generation of brands and entrepreneurs with a very different DNA to the previous. Since manufacturing is the first thing that an emerging d2c startup has to nail, the company that manages to digitize the manufacturing process will also be well positioned to eat in to other components of the d2c value chain.
Physical retail space for DNVBs
Walk down the streets of any chic New York or London avenue, and it’s inevitable to notice that long-term tenants have been replaced with the Allbirds, The Ordinary, and the Everlanes of this world; trendy d2c brands are taking over the high street.
Although an interesting topic in and of itself (brands such as Indochino have found that online sales grow twice as fastin geographies with a physical location, thanks to a flywheel effect) what this article will focus on are the opportunities that comes with this new breed of tenants. Just like Knotel and WeWork are making a dent in the real estate industry by understanding the office needs of a changing work demographic, I believe similarly impactful companies will be built providing retail space tailored to the changing needs of modern brands.
Appear Here, the marketplace for short-term retail space, is now a veteran in the space. However, Appear Here was built in 2013 when the d2c landscape was still young and hence not entirely intuned with d2c brands’ operations and needs.
Younger Uppercase–backed by Lerer Hippeau–caters to the brand that wants a permanent store, digitizing the whole process from making a data-driven decision regarding the right location, to build-outs, staffing, and everything in-between. Competitor Leap is all about simplifying physical retail operations into a single line item on the company’s P&L, paid on a percent of sales basis.
For the longtail of brands that doesn’t have the resources to secure their own space innovative solutions are provided by the likes of Re:store and Bulletin. Re:Store is providing an all-in-one solution including both retail and co-working space for DNVB founders. The company raised a pre-seed from Sequoia Capital in 2018 and believes that “the future of retail is more than just a storefront but a sharable experience between makers and customers.” Similarly a few other startups–including Bulletin that focuses only on female founded companies–provides shared retail space for emerging brands.
B8ta is also bundling digital brands offline, but partnering with incumbent malls and department stores (they’re even backed by Macy’s), putting young brands on display with tablets and one representative product each.
As everyone regularly visiting d2c brand’s high-street outposts will know, modern brands are known to serve up experiences such as live fitness classes, live talks, and DJs–an observation that has informed the layout of Texas-based Neighborhood Goods and New York-based Showfields. Showfield’s first location is a four story building on Bond Street, where every brand serves up a unique (instagrammable) experience and the common areas resembles a gallery. Neighborhood Goods (NG) is focusing on less metropolitan areas re-inventing the experience of the American mall. Founded in 2017, NG has already raised close to $14million and opened their first location outside of Dallas in 2018.
Summing up, the more d2c brands that are founded, the harder it becomes to discover them online, the more pressing the need for offline. It’s still day zero for the retail-as-a-service industry, and the European market is still almost completely untapped. If you find a way to combine the data-centric approach of Uppercase, the ease of Leap, the scalability of b8ta, and the brand-centric/experiential nature of Showfields, chances are you will have an endless list of brand clients. Contributing to my bullishness on the category is the belief that whoever manages to aggregate d2c brands offline is a good contestant to aggregate them online (a topic I’m intrigued by and explore here).
D2C founders will grow in number, the companies serving them will grow in size
The “Shopify of manufacturing” and the “Wework of retail space” are just two of many exciting investment opportunities in today’s evolving retail landscape. As the barriers to entry to start a d2c brand demise, we pave the way for a new generation of micro entrepreneurs who–albeit niche and tiny when considered in isolation–will make up an increasingly large share of our wallet. As these entrepreneurs grow in number, the companies serving them will grow in value. I certainly believe that extraordinary founders can build d2c unicorns, but I believe the conditions are more favorable to build unicorns catering to those d2c brands. I’ll keep mining for gold (the next d2c category winners) but am planning on investing in some powerful shovels along the way.