Warby Parker's 'clones' are imploding: why?
You may have no idea who Ty Haney is, but if you've ever used Instagram, you can't help but know his company. Outdoor Voices, with its millennial brand and apparel athleisure pastel colors, it is a real hit on social media. Searching for the company's hashtag, #DoingThings, images immediately appear of girls, including Haney, nonchalantly wearing skimpy tops while walking the dog, hiking, or yoga, paired with flamboyant leggings and skort strictly signed Outdoor Voices.
Haney, co-founder of the company in 2012 at the age of just 24, found herself in charge of what appeared to be a rocket ship. Within four years, he raised $ 64 million in equity funds for his startup "Direct-To-Consumer" (DTC), a type of e-commerce created in the image of Warby Parker, with the aim of designing a better version of a commonly used product, selling it directly to consumers at a lower price, thus maintaining tight control over marketing, customer service and data feedback, with the aim of usurping the market share of traditional competitors. In Haney's case, those competitors would be industry giants like Nike is Lululemon. The 24-year-old managed to grace a retail legend like J.Crew Mickey Drexler and have him as Chairman of the Board of Directors, and when she moved the headquarters of Outdoor Voices from New York to Austin in 2017, she immediately became the undisputed icon of the city's up-and-coming startups, finding herself on the cover of Inc. magazine with a 10,000-word article about the “New York girl”. It all seemed perfect.
Until a few weeks ago, when a very different picture of Outdoor Voices. The Business of Fashion He reported that in the face of the startup's apparent growth and fame - including 11 stores in cities like Los Angeles and Nashville - the company "continues to lose money on customer acquisition." According to BoF indeed, Outdoor Voices suffered a loss of $ 2 million a month last year on annual revenues of approximately $ 40 million. It even appears that executives are fleeing the crisis-ridden society. The new president from the Nike that Haney managed to get hold of last year only lasted a few months, and Drexler left the Council. The startup was able to get a fresh infusion of money from the company's investors, but at a lower valuation than in the past. On February 25, CEO Haney sent a subdued message to his hundreds of employees: "With sorrow, I have resigned," he said. BuzzFeed News.
The news could be interpreted as an unfortunate isolated incident, the story of an inexperienced businesswoman who mismanaged her fortune due to overspending. But for anyone familiar with the harsh reality of the DTC model, it's the affirmation of something far more fundamental: not all that glitters is gold. In fact, once you take away the generous capital raisings, the elegant lettering, the stores in the trendy locations, the podcast ads, it turns out that making ends meet is rather complicated.
Since the king of DTCs, Warby Parker, appeared on the startup scene in 2010, the businesses of Venture Capital they've funded hundreds of startups trying to mimic that model - from manufacturers of hearing aids and strollers to erectile dysfunction drugs. Second eMarketer there are currently more than 400 DTC brands. Since 2012, consumer brands have raised more than $ 3 billion, he reported Digiday last year, with about half of the capital realized in 2018 alone. Venture Capital like Kirsten Green of Forerunner Ventures made a name for themselves by betting on DTC's early success stories, including Dollar Shave Club, Glossier and the original, Warby. Other investors like too Nikki Quinn of Lightspeed Venture Partners and Caitlin Strandberg of Lerer Hippeau have made their way into the DTC fray, channeling money that would generally have gone to a software company in the "Warby" on duty, startups such as Allbirds, Everlane is Rothy.
We have just begun to see how utopian this boom has been from the very beginning. Even before the revelation Outdoor Voices, the last few months have shown deep cracks in the DTC business model, so much so that several high-profile and Venture-funded DTC startups have struggled to stay afloat and others have completely closed their doors. The investors who finance these companies are finding that they all have one thing in common - most of their money is used for ever-increasing customer acquisition costs (CACs) via Google, Facebook, and Instagram.
"There is a generation of consumers who don't want their parents' governments and systems, they don't want to be part of their industry, and they don't want their brands," any of the founders of DTCs might retort, but in this case, it was Tina Sharkey, the co-founder and CEO of Brandless, a DTC homeware brand that hit the scene in 2017. The San Francisco startup that aimed to outsmart Target set up its own store in Minneapolis, home of the mega-retailer, as well as stealing a couple of merchandising executives - with the audacious goal of selling private-label groceries and other household goods for a fixed price of $ 3 each. Brandless's rationale was that if they invested a lot of money in marketing to attract customers, those customers would have every reason to keep coming back, thanks to the hundreds of other affordable products to buy. In addition to raising $ 52 million from investors like Google Ventures and Cowboy Ventures, the startup raised another $ 240 million from SoftBank in 2018.
Unsurprisingly, things didn't go well for the company. Brandless has found itself faced with the problems that so many DTCs encounter in this phase of growth, namely the realization that creating a customer-based product from scratch is actually quite difficult - and incredibly expensive.
There's a reason DTC companies market on Facebook: Facebook ads are cheap to set up and allow you to target the audience to target. The problem, however, is that channels like Facebook have now become saturated and more expensive than in the past. Last fall, Rittenhouse said Brandless would try to break into major retailers by abandoning its strictly "online" business model. Instead of hindering Target, the company suddenly wanted to be distributed in the giant's stores, a common trend among many DTC companies that first started out as digital only. But even this goal never materialized; in January, Brandless announced that it would lower the shutters.
While the economic logic of Brandless it never appeared sustainable, the only sensible part of its strategy, at least in theory, was to build customer loyalty. The reality is that most high-profile DTCs have built their brands on one product - be it Warby with glasses, Casper with mattresses or Away with suitcases. A month before Brandless closed, luggage startup Away had found itself embroiled in a PR crisis. Months after achieving unicorn company status by getting $ 100 million in funding at a $ 1.4 billion valuation, The Verge accusations against the super startup by #Instagrammy claiming that its CEO Steph Korey had generated a culture of exploitation within the company. Korey apologized, and after a series of back-and-forth audiences, she held the position of CEO of the company, flanked by the company's new co-CEO, Stuart Haselden, executive of Lululemon.
While the press raged on a founder who had become deleterious under pressure, that was hardly the company's most dramatic problem. With a total of $ 181 million in funding and just one product to market, how would it meet investors' earnings expectations? The reality is that most people only need to buy a suitcase once every five or ten years. Despite the many color variations of its aluminum suitcases and bags, the product itself - like many in the DTC world - is nothing but slightly better than a Samsonite or a Travelpro.
So Away tries to reinvent itself as something much bigger than it really is. Korey and co-founder Jen Rubio define Away as a "travel company". In an attempt to reclaim the wealthiest clients, Away currently has several projects funded by Venture - lines of supplements and beauty creams, travel clothing in more functional and comfortable fabrics.
With this Rubio showed the further ambitious expansion plans of the startup, which intends to open 50 new stores in the coming years. Which translated means: customer acquisition is so challenging that it requires an incredible amount of money to get them to approach the product - and then even more money to retain them.
When Casper filed his S-1 in January, analysts, investors and corporate nerds pounced on the document like vultures. Not only was it an uncertain time to go public with a startup, but also the first time someone could actually access the real numbers of a DTC. “The balance sheet squares Casper sent you a free, $ 300 padded mattress, ”teased the marketing professor from NYU Stern Scott Galloway. "Apparently that's Casper's business," tweeted Derek Thompson ofAtlantic. “Buy a mattress for $ 400. Resell it for 1,000. Refund 20%. Keep $ 400, more or less. Then he spent 290 on advertising / marketing and 270 on administration (finance, HR, IT). You lose $ 160. And it starts again. "
Like suitcases, mattresses are also produced with incredibly long life cycles; you are no more likely to buy a new mattress more frequently than you would with a new suitcase. Like Away, Casper, with his mission to become the Nike of sleep, now sells dog beds and lamps. (What's worse, Casper has about 175 other online mattress competitors.) From Casper's S-1, we learned that in the first nine months of 2019 the startup suffered a net loss of $ 67.4 million, after losing $ 93.2 million in 2018 and $ 73.1 million. in 2017. A warning to investors? The company may never make a profit.
When Casper was finally made public on February 5th, reality collapsed. Despite the unicorn's private valuation of $ 1.1 billion, its market cap today is less than $ 350 million, indicating that a less gullible public market doesn't think its mattresses are worth that much.
This large gap between how a DTC can be hypothetically and optimistically valued on private markets and the harsh reality of what public markets are worth, is haunting many DTC CEOs right now. The only startup that has nearly managed to avoid this fate is Harry's razor company. In May 2019, it secured a $ 1.37 billion deal to be acquired by Edgewell, the conglomerate it owns Schick - a respectable exit for a company whose private market valuation was approaching $ 1 billion, and whose main competitor, Dollar Shave Club, was bought by Unilever for $ 1 billion three years ago, in one of the biggest business model success stories. The deal seemed like an ideal marriage but, as you can easily guess, things didn't work out.
Venture's highly funded DTCs have two paths to longevity and success. They can sell to a giant already on the market, just like Bonobos is Jet.com they sold to Walmart, or they can try their luck and make themselves public. The giants of the market are willing to overlook DTC's less than perfect balance sheets because what they are buying is not a business model, far from it, it is a data-driven decision. So when a startup like Harry's that plans to quit the market by selling itself to another company suddenly can't, what options do you have left?
When the co-founders of Warby Parker initially raised their first $ 2,500 while receiving their MBAs in Wharton, they could not have imagined that a decade later their company, which sells stylish eyewear online at reasonable prices, would be valued at $ 1.75 billion, or that the the entire startup economy would be founded in their image.
For years, rumors of an initial public offering (IPO) have revolved around Warby Parker. When you are the example that hundreds of companies have tried to emulate, with nearly $ 300 million in funding, people start wanting to know how you will get out of business, if you ever do. A little over a year ago, co-founder and co-CEO Neil Blumenthal revealed to Business of Fashion that in terms of exit, “the most likely outcome is an IPO in the next two years”.
Last week, Blumenthal brushed off the idea that Warby needed to be made public now. “We have always seen an IPO as a financing opportunity. In an initial public offering, you raise capital, ”he told me. “And at the moment there is no urgent need for capital; we were able to raise capital in private markets. " When Warby needs cash, he explained, he'll get it as effectively as possible. “If it means doing an IPO, we'll do an IPO,” he said. "If we were to do this through a private channel, we will stay in private markets." Blumenthal didn't go into specifics about Warby's finances, but he did assure that Warby Parker has been generating profits since 2018 and is still growing. “Growth increased in 2018-2019 compared to 2017-2018, which was already at a very good point,” he said.
But like all mono product DTCs, too Warby it needs a next step. As he reported Bloomberg Businessweek in November, the company covered everything from selling watches to selling its own software. More recently, however, it has come to a logical extension of the market - the $ 11 billion contact lens business.
Blumenthal he is not only a startup founder, he is also an investor. It has never been easier and cheaper than ever to start a business, but it has never been harder than that to grow one.
Source: Global Retail Alliance