Table of Contents
** Minutes
Becoming a $1 million brand vs. $100 million brand
Out-of-the-box growth strategies
This is part three in our interview series to demystify the secret to ecommerce and DNVB success. Read part one and part two.
With the emergence of ecommerce came the opportunity to discover and invest in new digital-first brands. Yet, identifying the potential of direct-to-consumer (DTC) brands and betting on which will be successful, scalable, and profitable is not an exact science.
Not only do you need to find the right opportunity in the right market but also focus on lifetime value (LTV) — not just big, one-time purchase where the acquisition cost is hard to recoup.
We sat down with Kate McAndrew, Principal at VC firm Bolt to hear how she and her team find these genuine and well-thought out brand builders.
We discussed, among other things:
- How ecommerce venture capitalists (VCs) evaluate DTC brands that are building something enduring
- How to measure success for this relatively new wave of companies
- Where to find the next big idea
How the landscape has changed
Today’s VCs are evaluating companies in ways that are different than ever before. Thematically, Bolt is really interested in the ways in which the Internet continues to reshape our lives — the intersect of software in a physical world.
“We’ve seen a shift away from mass culture,” Kate said. “There wasn’t an acquisition or retention mechanism before, but now there’s this new ability to build a presence, find your tribe, acquire that tribe, and to retain that tribe in tech-enabled ways.”
For example, products like Peloton or Bobbie (an infant formula company) are really becoming technology companies in the way that they connect with, acquire, and retain consumers.
The shift away from traditional retail has been an enabler of that, as was Facebook’s ad platform. It opened up the floodgates for people to efficiently start new niche brands, because the barriers to entry are much lower.
Becoming a $1 million brand vs. $100 million brand
The first exercise for a DTC brand is to get to $1 million dollars in revenue. Then, it’s a completely different exercise to get to $100 million dollars, and then to $1 billion dollars.
It’s become very easy to start a niche brand today — but to actually scale something to become a big company is very different. Of course, there are DNVBs coexisting with the Walmarts of the world. These brands continue to change their strategy to reach the next scaling point.
“There are a lot of people participating in the new wave of mom-and-pop shops, which have always been the largest number of employers in America,” Kate explained. In today’s standards, these are the folks who are setting up a Shopify site, making a cool product, and selling it.
She added, “These people are very different than the kind of companies that we look at investing in, which really have that aspiration to do $100 million in annual revenue or become a billion-dollar-revenue business.”
Researching market demand
Like any VC, Kate and team look into a bottom-up analysis of market size or market opportunity and then a top-down market analysis — whether it’s an emerging or mature category.
For example, Kate was recently looking at a sustainable packaging company. She saw there were over 10 companies in China that do more than $1 billion dollars in annual revenue, and the sustainable packaging sector was already making hundreds of billions of dollars in revenue and growing 7% each year. There’s no question that’s a big market.
On the other side, Bolt recently made an investment in a men’s makeup company focused on young Millennials and Gen-Z consumers. This is not a big market today, but they believe there’s an opportunity that it could really grow. This company would be an early market entrant.
Somewhere in the middle is the baby market, where only four million babies are born in the US every year. “If you’re trying to sell something that every parent in the US could buy, your total addressable market in the US is four million parents,” Kate explained. “Then you start to reduce that down based on their income level and so on.”
Bolt looks at both early market entrants and late market entrants, but market size is always key — not just from where it is today, but where the market might move. “Just because it’s small today doesn’t mean it won’t become big. We’d bring awareness to that and have a thesis around why we think this is a good market to be an early market entrant in, versus a late market entrant,” Kate added.
Finding untapped categories
There’s a surprising number of consumer needs where there are no dominant brands or an experience that’s not currently consumer-centric. For big industries where there’s no top-of-mind brand, it might be because of the industry — it’s too fragmented or there are some dynamics that make it very difficult. But there are many where this isn’t the case.
“I’m watching one company that’s looking to build a brand in the end-of-life space, digitizing all the paperwork around cremation and into end-of-life celebrations,” Kate said. There’s an interesting opportunity there, because death and taxes is a big market.
Think about it: A consumer gets hit with this issue — sometimes unexpectedly — and all of a sudden they have to solve a problem because a loved one has died and there’s no one they know of to turn to. You might remember the name of the funeral parlor that you used to drive by on the way to your elementary school, but there really are no dominant brands in this space.
On the flip side, Kate pointed out how you don’t see one ad for organic deodorant on Instagram today — you see 10. “That’s a category I’m not super excited about investing in because it’s a low AOV, there’s tons of competition, and in some ways you’re fighting for the scraps,” she said.
Kate’s most interested in sleepy categories that are multibillion-dollar industries and have been largely ignored, or where there’s truly a new perspective on something. One example of this is in the fertility space.
Co-Founder & CEO of Modern Fertility, Afton Vechery, is bringing empowering information to a generation of women that wants to take control of their healthcare journey, often outside of what the American medical system tells them they should be doing with their bodies. It’s a brand that’s really about the consumerization of health.
This involves thinking outside of the box. Kate would argue the most funded DTC company out there is Tesla: “They made the electric car cool,” she said. “Say what you will about Elon Musk, but that was a sea change moment.”
“I think we need to loosen the reins on how we think about DTC and recognize the revolutionary companies and opportunities outside of things like apparel and personal care. While there are interesting companies in those spaces, I’m most excited about investing in massive multibillion dollar industries that have the opportunity to really move our culture forward.”
Kate McAndrew, Principal at Bolt
Identifying passion
Building any company to scale is such an incredibly difficult thing to do. Unless you have a genuine passion for the problem you’re trying to solve, you’re likely not going to take it for the long haul.
Bolt uses a very founder-led strategy to work with those they believe have curious and surprising insights into consumer trends or industry problems and are uniquely positioned to solve those problems.
“You don’t have to be the consumer in order to want to build something for that consumer. We’re not just investing in people who are building things for themselves. We’re looking for people who are on a mission to solve something.”
Kate McAndrew, Principal at Bolt
In Kate’s first meetings with founders she’s invested in, something that always comes through is that they are fired up about the journey. These people are genuinely excited about this endeavor, whether or not they’re the target customer, and have a sense of buy-in and rigor.
Kate explained: “On paper, they might look the same as someone approaching something as an academic exercise, but you can identify them in the way that they are or are not talking to customers, diving deeply into the technology, and talking with the ten other people who tried to do this thing that failed along the way.”
Out-of-the-box growth strategies
To date, the major inflection points for DTC brands have been the ability to grow on paid media channels, such as Facebook. However, you don’t want to rely exclusively on channels where terms of service can change or become more expensive tomorrow.
“The easier, more efficient digital acquisition days are over, and if you haven’t already reached scale, it’s very difficult to do so as a startup,” Kate said. “If people are going to heavily lean on digital acquisition, they really have to be world class.”
More so, Kate’s team is looking at whether the founding team is well positioned and has a plan to build an enduring brand. It’s more of an investment in the brand versus transactional nature of paid media.
“We’re looking for companies that transcend individual marketing channels. That’s not just paid media on Facebook and Instagram,” Kate said. “The best founders will continue to look at where people are spending their time, learn how to reach them, make a genuine connection, and deliver value to them. And they’ll continue to follow that equation.”
Bolt is an investor in WONE, a luxury athletic apparel company. Rather than blanketing Instagram feeds with ads to buy their $300 leggings, they give very few access codes for limited edition drops. As a result, they’ve built a cult following of celebrities and high-net-worth individuals that are clamoring to get their clothes.
“In terms of WONE’s growth strategy, I think what’s interesting to me is the way in which this is all stemming from a very genuine and philosophical brand that the Founder, Kristin Hildebrand, is building. And she’s really building it for the long term,” Kate added.
“We’re not investing blindly in DTC companies that we think will inexpensively buy eyeballs on Facebook and get high conversion rates. We’re looking for creative brand builders that are thinking about how to build something enduring, meet their audience in surprising ways, and build up real equity and trust with those people, such that they earn the right to get a share of their wallet.”
Kate McAndrew, Principal at Bolt
DNVBs are still new
Kate realizes that as an investor, she must be willing to give brands more time to mature. It’s not as simple as saying, “Away grew this way, so this is the way that you’re going to grow.” Away started at a very different time — and this industry moves quickly.
“While it feels like brands such as Away, Casper, and Dollar Shave Club have been around forever, this is actually all very new. This has not been the playbook for 20 years; It’s more like a blip on the radar screen.”
Kate McAndrew, Principal at Bolt
While these tactics have allowed a certain wave of brands to reach scale, brands should diversify channels, figure out what works, measure that, and double down on what’s working. It’s not rocket science, but oftentimes people (and especially investors) get obsessed with the thing that worked for their other portfolio companies.
What VC-backed DTC founders do different
According to Kate, there is no absolute heuristic for making good early stage investments, except for an amazing founder: “Lots of people can dream big, but we’re really looking for brands that are thinking strategically about how they get people to repurchase or engage them within a universe of products, as opposed to just a single product,” she mentioned.
“Great founders have a vision for how to get their first million dollars and also how they will get to $100 million dollars. Not only that, but they can think about near-term execution — and that’s very rare. There’s a certain magic in being able to do both, and that’s where visionary meets operator.”
Kate McAndrew, Principal at Bolt
Kate believes that DTC companies that scale are the ones that focus on LTV. “We tend to look for brands that we think can be category brands, not just product companies. Those that have the potential to get maybe $1,000 from that customer within the first year,” she said. “They aren’t one-time high-value sales, but are rather becoming a new aspect of your daily life. High repeat rate and high LTV.”
It’s why Casper is no longer positioning themselves as a mattress company but a sleep brand. Or why Away opened up their SKU count beyond their signature luggage to be a travel brand. Good founders are thinking about that from the beginning.
Conclusion
There are always new opportunities as consumer demand shifts and technology develops. Most VCs today are thinking about the trends that are going to drive people to want new and different goods and services, which is always changing throughout time.
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