After Marketplace and SaaS, I am back with D2C when it comes to fundraising.
Unlike Marketplace and SaaS, the D2C-fundraising subject becomes quickly complex. Even the wizards of pitching (if you’re not, here for you) are currently struggling with getting VC-funded.
We all tend to forget essentials.
VC are hunting fast-growing companies with defensible moats.
Not just fast-growing companies.
Moat, popularized by Warren Buffet means the durable ability for a business to increasingly dominate a market without losing profits to competition.
Currently, investing in D2C companies presents one of the biggest opportunities in Consumer Tech to date.
As a result of internalizing producer margins and disintermediating wholesales and merchants, these businesses can be very attractive from a unit economics perspective.
However, favorable economics without the ability to protect them at scale (with defensible moats) and you will have a hard time reaching a VC-style return.
Despite outstanding unit economics, D2C companies are selling commodities. Unlike Marketplace or SaaS businesses, there are no moats coming from the product.
Think of Medium, the network effect the Marketplace has been able to build is capturing 80% of my reading time. HubSpot is another example. The time I’ve invested to get used to this SaaS embedded a high switching cost.
In fact, too many DTC entrepreneurs believe their brand itself creates a wide enough moat to protect against competition.
It is true.
However, trying to short-circuit the process of brand-building with VC funding is, in my opinion, not a viable option.
Brand is earned, not bought.
Because consumers are being convinced (via ad dollars) to buy the product vs coming to that desire on their own discovery or via a word-of-mouth recommendation, they will less likely have a long-lasting affinity to the brand.
The long process of brand-building does not currently match the short VCs’ timeframe.
Rather than hacking the brand-building playbook, use VC money to become antifragile by the time your brand becomes iconic.
Antifragile, coined by Nassim Taleb, is the buzzword of our day. An antifragile asset tends to thrive under chaos.
Antifragility is beyond resilience or robustness.
It’s fundamentally different from the concepts of resiliency (the ability to recover from failure) and robustness (the ability to resist failure).
When your competitors disappear because their economics don’t work under iOS14.5, you feel good. When a new wave of copycats led to a race to the bottom on biddable media, you are sleeping well.
Maybe you are antifragile even without even knowing it.
Here are 7 metrics to help you figure it out :
Let’s dive slightly into these 7 metrics.
Distribution Channel > 2
COVID has emphasized the importance of multiple distribution channels.
Omni-channel isn’t a buzzword. It’s how people shop. You decrease risk when you diversify demand and distribution across your business.
A fragile D2C company is digital-only. An antifragile one is digital-first.
Organic-vs-Paid Traffic > 50%
If over 50% of your business comes from Facebook ads, then you took a massive hit at the release of iOS 14.5.
iOS is only a symptom: The more your business depends on any single channel, the higher your risk and fragility become.
Getting traffic is like rice. You can buy it or you can grow it.
Production Lead Times On-demand
Production lead time is the average length between ordering inventory and receiving stock.
The longer that period, the better you’re forced to be at something that’s fundamentally impossible: forecasting.
As you predict further into the future, risk intensifies. Likewise, your ability to capitalize on new opportunities declines.
Supplier Payment Net on Delivery
If you can negotiate payment as net 30 “on delivery” — meaning, you receive the invoice once you’ve received the product — you have an opportunity to achieve the dream of every retailer: a negative cash conversion cycle.
Cash conversion cycle (CCC) is a measure of how many days it takes for a business to turn invested cash (usually purchased inventory in D2C) back into cash in its bank account.
CCC = Days Inventory + Days Accounts Receivables - Days Accounts Payables
60-Day Customer Lifetime Value > 30%
Customer lifetime value refers to the additional revenue your business makes from customers over the 60 days after their first purchase.
60-Day LTV % = Average 60-Day Additional Customer Revenue ÷ Average First Order Value
Gross Profit > 75%
The higher your gross profit, the more money you make every time you acquire a customer. This number should inform your target customer acquisition costs.
Gross Profit = (Sales Revenue — Cost of Delivery ) / Sales Revenue
When calculating revenue, use both first-purchase AOV and 60-day CLV. Conversely, cost of delivery (CoD) refers to your all-in costs of getting a product from nonexistent into the hands of a customer.
OpEx Percentage of Revenue < 15%
Unlike variable costs — which increase in direct proportion to order volume — Operational Expenses (OpEx) is a fixed cost that only increases at major milestones.
You are evaluating expenses like payroll, rent, utilities, equipment, and your technology stack (tools, licenses, etc.).
You build your investment thesis around the notion of Antifragility and you will easily connect with VCs.
And why’s that, Thomas?
Because you will focus on them and on their goal which is investing in fast-growing defensible companies.
For a deep dive into these 7 metrics, here’s the brilliant piece made by Taylor Holiday!
Cheers!
Thomas