INSUBCONTINENT EXCLUSIVE:
Micah Rosenbloom
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Micah Rosenbloom is a venture partner at Founder Collective.
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Startups need to respect the laws of retail physics
Is VC The Right Money For Fintech
These days
my Instagram feed feels more like QVC than a social network.
And many of these companies are enjoying tremendous success pitching natural
deodorants, unique underwear, creative candles, glam glasses, stunning shoes — all manner of well-craftedmicrobrands
We&re witnessing a Cambrian explosion of new consumer startups.
For the last couple of years, building a successful startup has seemed as
simple as picking an out of favor category like ketchup and turning the most mundane of condiments into a$100M+ exit! Why try to build a
robot or AI company when you can just modify and repackage a topping
But how should founders evaluate the markets for mattresses and men
health What heuristics should an investor use to weigh Hims and Hubble, or to compare AllBirds and Away And what is the right kind of
founder for this sort of startup Do you look for the designer with an unimpeachable aesthetic sense Or an MBA who run the numbers on every
facet of the fashion industry
It far from clear at this point, but I think there are a few emerging ground rules:
It more Science than
Art
What strikes me as most unusual and unpredictable is that most of these companies were founded by entrepreneurs with analytical,
They&re strong on finance, marketing, and customer acquisition
It not what you would have expected in categories noted more for an ineffable &cool& factor than feature lists.Creative designhelps a brand
stand out, but accounting acumen is what keeps it alive and on its way to becoming a unicorn.
It turns out that much of the same playbook
for building and scaling a software company applies to a modern CPG startup
In many ways, Casper isn''t so different from Slack, and they are certainly closer in spirit than a direct competitor like
MattressFirm.
This is why you see a migration of founders and VCs like me playing in categories previously out of bounds for tech investors
Whether its finding the latest targeting tools or closely monitoring customer NPS, this is the DNA needed to be successful
For this reason, VCs are able to pattern match, somewhat, based on what they&ve seen working in other aspects of their investing.
Market
structure is more important than marketing
Bootstrapped mattress maker Tuft Needle merged with market leader Serta-Sealy for somewhere
between$200 million and $800million.Purple, whoonly raised $2 millionvia crowdfunding, wasacquired for $1.1 billionby a private equity
Casper is reported to have broken through the$600 million in revenuemilestone earlier this year and is on the trajectory towards becoming a
These mattress companies, along with other emerging D2C players have captured20% of the market in the space of five years.
Perhaps it a
coincidence that three amazing founding teams bet on beds, but I&d wager the state of the mattress market is partially responsible for their
The mattress business is essentially aduopolyrun byprivate equity firmswho have made major investments in real-estate and an in-store sales
As a result, we see less experimentation and artificially high prices.
Compare the mattress industry to the meal kit delivery business which
had to contend with a wide variety of substitute food products, from Domino to DoorDash and supermarkets to Soylent — not to mention
spoilage, high levels of customer churn, etc
As a result, companies in this space have had a harder time dominating their respective categories
Sadly, there is no amount of clever branding or subway advertising that will eliminate those realities.
Image: Soifer/iStock
What the
million-dollar insight
The first Casper mattress was the50,001st mattress sold by Philip Krim
Prior to manufacturing his own beds, Krim built a drop ship business serving other manufacturers and learned which levers to pull in order
to attract customers and generate demand
It was this seemingly mundane insight & that you could box and ship a mattress via a carrier instead of onboard a large truck that allowed
him to scale much faster than Sleepys andgenerate $100M+ in sales just a couple of years after founding.
Similarly,ButcherBoxandDaily
Harvesteach ignited a boom in direct-to-consumer food delivery
These companies recognized that fresh and immediately frozen products limit spoilage and allows for much easier transport
While competitors had to worry about organic kale rotting in a fulfillment center, these companies could focus more attention on customer
This insight coupled with smart marketing, virality, and high NPS has helped them bothgarner millions of dollars of weekly sales.
It not
nearly enough to say, &The competitors don''t get it.& or this is for &Gen Z.& Instead, like with all start-ups, the founders need to
identify that non-obvious, often contrarian, insight
This is usually less of a product &A-Ha!& and is more likely an arbitrage opportunity in a dysfunctional market.
Spend Carefully, Your
Potential Buyer Will
Digital vertical native brands can be compelling investments, but they are unlikely to have deal dimensions, in terms
of multiples or absolute exits, that we see with traditional tech investments.
Just look at a few recent sales of DNVBs
The absolute dollar amounts are reasonable, but the multiples are small relative to tech, ranging from 1.6X to a potential 8X (no doubt
subject to earn outs), with the average being in the 2-3X range
On the bright side, these acquisitions do tend to consummate quickly, often within a few years of their founding.
If you finance a DNVB like
a deep tech company with heavy reliance on tens of millions of venture capital, founders and investors are likely to see little in return
AsJason Del Rayrecently wrote at ReCode, many of these brands are skipping VC all together.
Sir Kensington wasacquired for $143M
Native
Deodorant wasacquired for $100M
MVMT wasacquired for $100M
Tuft and Needle had$170M in revenueand was acquired for 1-5X
Krave Jerky
sold for $200-$300M with $35M in revenue
RX Bar was acquired for $600M, but had $130M in sales
Dave Killer Bread wasacquired for $275M
on $160M in sales
Anova was acquired for$115M (with $135M in earn out potential) on $40M in sales.
Blue Apron has built the biggest
brand in meal kit delivery, got public, and currently has amarket cap that is just 50% higher the aggregate amount of capital it has
raised.
StitchFix is one of the clearest success stories and stilltrades at 1-3X revenues.
Dollar Shave Club sold for$1B on $200M in
revenue, though it wasn''t yet profitable.
It important to remember that these sales are predicated on impressive revenues
Cruise Automation can get acquired for $1B because its technology could be the basis for a new kind of car, but don''t expect Kellogg to
acquire a pre-launch cereal company for a similar sum.
DNVB investing is here to stay as there is a fundamental shift going on in retail and
Unless you&re Kylie Jenner with a hit reality show, investors would be wise not to dismiss that nerdy MBA or former consultant pitching the
