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Published September 14, 2020
Published September 14, 2020

“It’s never been easier to start a company. It’s never been harder to build one.” – Naval Ravikant

Unicorn Skepticism and New Rules of the Game

Well before COVID-19 alarmed the markets, Silicon Valley’s obsession with manifesting unicorns is finally receiving some healthy scrutiny from private markets as well as the media. With unreasonable IPO pricing expectations of Casper, the shutdown of Brandless, and instability of Away and Outdoor Voices, the challenges of “blitzscaling” DTC brands were irrevocably exposed. The prior playbook was to achieve explosive growth at all costs, but now there are a plethora of examples that show that is not the right thing to do.

It’s now becoming clear that relying on VC-subsidized products and celebrating outrageous valuations can be problematic for DTC brands. With a few wonderful and rare exceptions such as Rothy’s (which raised $42MM but was profitable from the beginning and generated $140MM in revenue within 2 years of launching), unicorns in DTC are addicted to the cycle of venture funding to feed growth in order to maintain a high valuation multiple. These companies come to rely on digital customer acquisition that keeps them addicted to chasing FB, IG, or whatever channels of the day give them the drug-like high of internet-enabled growth hacks. This works for a while; however, when the path to profitability appears murky and exit options either don’t appear or only appear from non-tech companies with very conservative multiples, the walls start crumbling.

The Buck Stops at Exits

Nothing matters more than exits. For investors, valuation increases are short-term wins, but the only metric that counts is cash returned, invariably from a sale or IPO. When the market appears less interested in purchasing unicorn companies and the bar for attractive exits keeps rising, as it has been in the last year, most shareholders will not find the outcome they were hoping for. Thus, the unicorn exit becomes a mirage.

In a recent WWD article, Odile Roujol, the former CEO of Lancôme who recently launched venture fund FAB Ventures, said, “Generally speaking, the era of $1 billion valuations for beauty companies is over. The people that struggle have been the companies that spend so much money in just a few years.” She went on to say, “The big corporations now … are not ready to spend $1.2 billion, $1.5 billion on such a brand like Glossier.”

This change in sentiment from acquirers is further fueled by recent research on the challenges of turning hyper-growth companies profitable. In his Harvard Business School Case Study Direct to Consumer Brands, Professor Sunil Gupta stated that, “Acquiring DTC brands is easy for incumbent conglomerates, but making them profitable is challenging. More than three years after Unilever acquired Dollar Shave Club, it was still unprofitable.” Unilever executives learned that the average cost of acquiring a new customer online was about the same as in stores. David Taylor, CEO of P&G, said his company was still figuring out how to turn recently acquired DTC brands into profitable businesses. Taylor summarized this dilemma, saying, “There are many, many launches that grow fast … a business model that makes money is a higher challenge.” Since making these realizations, incumbent conglomerates will be more cautious when considering the acquisition of hyped DTC brands that raised lots of venture capital.

Big Funding Rounds Don’t Necessarily Yield Success

While large early funding rounds from VCs may work for tech companies, they are largely unnecessary for DTC brands. When a DTC founder raises too much money, as in hundreds of millions, one might assume that they could focus on several issues simultaneously. However, in reality, the CEO still only has 24 hours a day, and now there is increased pressure for explosive growth. Creating great products or sustainable growth naturally falls to second or third place.

No Venture Capital, No Problem—Retro Founders Build Camels

The terms unicorn and more recently “camel” have now evolved into a mindset. While unicorns are chasing headline-grabbing capital raises and valuations, camel founders are laser-focused on profitability while bootstrapping. People in the industry may not be aware of how well “camel” companies are doing since they may not have high-profile investors, their ads don’t pop up every time you open Instagram or Facebook, and the founders aren’t gracing the cover of Forbes, Entrepreneur, or Time magazines. However, many of them have had massively successful exits, such as the founders of Olaplex and Drunk Elephant. The old has become new again as these retro founders’ traditional way of doing business has become the recycled blueprint for ambitious DTC founders. They create differentiated products, sell them for more than it costs to make and market them, and then reinvest the profits in their business to grow faster. Three founders who followed this blueprint for success are Moiz Ali of Native, Jennifer Yen of Yensa, and Namrata Kamdar of Plenaire.

Moiz Ali, Founder of Native: In 2015 when Moiz Ali’s sister was pregnant, he wanted her to use a natural deodorant, but he couldn’t find any. So he set out to launch Native, one of the very first DTC natural deodorant brands. Native’s edge is that it offers safe, effective, and non-toxic personal care products for adults. Moreover, it didn’t enter a mature market dominated by established companies since natural deodorant was a new concept in 2015. Interestingly, at one point, a VC told Ali that the investment opportunity was small since the natural deodorant industry was only $30MM. By then, Native was already doing $30MM in sales.

For the first year, Ali was the only employee, and he started with only $50K. Later, he raised $250K after Native was doing about $100K in sales per month. In Native’s second year, he raised an additional $200K when it was doing millions in revenue per month. The limited funds made him very prudent with his marketing spend, and he never had a staff size that ever rose above 10. Early on, he followed up with every disappointed customer because he knew product market fit was critical. He always focused on achieving a profit with every sale.

“I wish Silicon Valley didn’t glorify those massive fundraising rounds as much as they do,” Ali said in an interview with Recode. “People don’t respect how much one person can do.” Just two and a half years after its launch, P&G acquired Native for $100MM in cash. Ali made a fortune since he owned more than 90% of his company.

Jennifer Yen, Founder of Yensa: Serial entrepreneur Jennifer Yen founded Yensa, a superfood cosmetic beauty brand based on Asian rituals, with $250K of her savings. After launching in October 2018, Yensa became profitable 9 months later. Since then, Yen has grown the business over 400%.

Yensa’s strengths are its story and its innovative product development. After experiencing breakouts, a lackluster complexion, and dry skin after the birth of her daughter coupled with the new curveball of being a single mother, Yen became determined to heal herself and her complexion. Following in the path of her mother and generations of women in her family before her, Yen embraced the rich superfood diet in the Chinese tradition of zuo yue zi, or “sitting the month.” Traced back to as early as the year 960, it is a ritual that is meant to nourish women back to inner and outer health and vitality via superfoods. The success of the superfood lifestyle she embraced as a new mother sparked the conception of Yensa.

All Yensa products are clean (they meet the Clean at Sephora standard), have high-tech formulas with 8 powerful superfoods (8 being the luckiest number in Chinese culture), and most products are also multifunctional. For example, Yensa’s best-selling product is its BC Foundation, which is a BB cream, CC cream, full-coverage foundation plus SPF40 with 8 black superfoods in 1 multitasking product.

Instead of spending exorbitant amounts of money on marketing and PR for Yensa, Yen instead opted for partnerships with QVC, Ipsy, and BoxyCharm. It was a smart move since it simultaneously led to greater brand awareness and immediate conversions. For its debut launch, Yensa partnered with QVC for its International Women’s Day Show. It sold through its product inventory in record time and was the second best-selling brand during the launch show. Since she is a former actress, Yen shines on camera. It’s a strength that she leverages well when on QVC, which has been a great platform to share her personal story while demonstrating the effectiveness of the products. In tandem with its QVC debut on International Women’s Day, YENSA launched a social impact initiative with Good Girls actress Mae Whitman to support the Dress For Success Foundation, an organization that promotes economic independence for women. 100% of the profits of the Yensa Lip Oils were donated to Dress For Success.

Although $250K is a lean budget to launch a beauty brand, Yen knew what she was doing since she had experience launching her skincare brand Purlisse previously. Initially, the Yensa team consisted of 5 people, and now it has 10. What really prepared Yen the most for being an entrepreneur was growing up watching her immigrant mother build a successful Chinese restaurant business in Alabama. Like her mother, Yen learned to be prudent and save along the way in order to reinvest her money and grow her business.

Namrata Kamdar, Founder of Plenaire: After recovering from corporate burnout, endocrine disorder, and post-natal depression after her second pregnancy, Namrata Kamdar started thinking about the impact of beauty and its connection to mental health, which led to a desire to lead a more balanced life. It was her impetus to create Plenaire, a clean, vegan skincare brand, which she started with a £350K investment from her family. Although she was a first-time entrepreneur, she previously had a 20-year career in the industry as a marketing, innovations, product development, and digital content expert for Pepsi, Unilever Dove, Hindustan Unilever’s Lakmé, and Lumene.

Refinery29 profiled Plenaire one month before its launch in October 2019 and said, “Plenaire is set to rival the innovative brands we all know and love, such as Glossier, Lixir Skin and The Ordinary. Shelfie-worthy and sustainable, products are housed in fully recyclable bottles, jars and biodegradable cartons, which are PECF and FSC and accredited. Plenaire is also in talks with TerraCycle to explore a closed loop recycling partnership.”

Plenaire’s point of difference is that the brand offers skincare that celebrates the skin’s chemistry with gentle and effective essentials for everyone. “Our products are mood and need-based and work well on all types of skin, particularly if you have delicate or sensitive skin. They send the message of kindness to self, opposite to the messaging that’s typically prominent in adolescent skincare. Each formulation has a pleasurable sensory experience—every detail from the fragrance to the softness of the mono-material tube has been thought through to reflect a gentle, loving message. For something to become a daily ritual, it should spark joy and make you feel better,” said Kamdar.

Plenaire’s bestselling product Rose Jelly utilizes a technology that gently dissolves makeup on contact with a few drops of water, even stubborn eye makeup, so that you can treat your skin with gentle kindness. In addition to a gentle, tonifying effect, the rosewater in the formula provides aromatherapeutic feelings of positivity.

Arguably, it’s easier for Kamdar to be frugal and operate Plenaire very leanly given her history of building global brands and products including running a skincare brand owned by a PE fund. The bulk of Kamdar’s working capital was spent on warehousing, fulfillment, packaging, training, and inventory. Plenaire has done no paid digital advertising, though it did advertise on London buses and the London tube at a discounted rate after the holiday season alongside its partnership with the British Fashion Council’s sustainable fashion exhibition at London Fashion Week last year. Kamdar is the sole employee, who hires consultants on an as-needed basis. She works from her dining table and home office.

Plenaire’s turnover has been largely organic, with gifted influencer partnerships, word of mouth, and editorial features by Byrdie Beauty, Popsugar beauty, Hunger Magazine, Elle UK, Vogue UK, Grazia, Wallpaper Magazine, Hypebae, and Marie Claire. Plenaire was first profiled in a story on clean beauty in London’s Financial Times, which piqued the interest of a buyer from Liberty London. Since then, Plenaire ended up doing an exclusive launch with Liberty London; now Liberty London is its flagship location. This year, Plenaire extended its distribution with Cult Beauty, and it will be announcing another premier global retailer partnership too. Although she reinvested £150K of the £350K investment from her family, Kamdar is already on the cusp of breaking even.

Hold the Praise Until Profitability Happens

Despite recent fallouts of hyped VC-backed DTC brands, DTC sales are continuing to grow. According to eMarketer’s forecasts, DTC sales may account for nearly $18B in 2020, a 24% jump from the previous year. Smart DTC brands usually have a moat to forge ahead:

  • They are focused on building differentiated products, not commodity products. They have a strong point of difference, and a brand story attracts customers and builds community.
  • They are focused on vertical integration and operational efficiency (while not contracting out the manufacturing and branding of their products).
  • They rely on strategic partnerships to increase brand awareness and reach. (Instead of owning stores, they build partnerships with retailers and sampling companies.)
  • They stay laser focused on achieving profitability.

Let’s canonize the founders who should be celebrated for creating profitable companies and successful exits. In order to do that, we need to refocus on important metrics such as a customer’s lifetime value instead of getting seduced by fluffy hype. To put things in perspective, we must think about what revenue numbers mean with respect to the amount of money raised by a company. Operating efficiency matters. Is it smart to be impressed with companies that grow at a loss while only hoping their lifetime value of customers eventually offsets customer acquisition costs? Let’s give credit to the camels that can weather droughts and recessions—not the unicorn mirages.


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