Every week, there seems to be a new statistic on how difficult the fundraising environment is – especially for consumer startups.
Carta Inc., formerly Twitter, shared some stats about “the Series B traffic jam.” Only 10% of the 2,188 startups that raised Series A funding in the first half 2022 have raised a series B. Direct-to consumer startups have seen one of the steepest drops in funding. Crunchbase declared late last year that ” VCs no longer fund DTC“. These businesses saw a 97% decline in funding between 2021-2023.
Venture capitalists and founders agree that the funding environment for consumer startups will remain challenging in 2024. In 2021, venture capital funding reached an record high. Startups were told to focus at all costs on growth. Over the past three-year period, as venture capital funding has slowed, startups are increasingly being told to focus their efforts on growing profitably.
Startups are still adapting to this new mentality, which is resulting in smaller funding rounds. Founders have become accustomed to bootstrapping and making a preseed round last for longer. When they meet with VCs they spend more time discussing how they reach customers organically.
There are still more rounds to raise. The biggest rounds are being raised by repeat founders who are also hyping the hottest tech trend, AI. Daydream, which aims to create an AI-powered search tool for ecommerce queries, announced on Thursday that it had raised $50 million in a seed round led by Forerunner Ventures. Daydream’s CEO, Julie Bornstein is a veteran from companies such as Sephora, Stitch Fix and Pinterest.
News of fundraising like Daydream is rare. Many founders have been prepared to work hard when they went out to fundraise in the past year. Lisa Guerrera is the co-founder and CEO of the skin care brand Experiment. She said that when she went to raise her seed round in July last year, “I was prepared for the worst.”
Guerrera was able to raise money. Experiment announced in April that its seed round, which totaled $3 million and was led Greycroft, had closed.
Rethinking success metrics
A part of the problem is that over the last five years, there has been a recalibration in how to value consumer startups. Venture capitalists were encouraged by early exits such as Dollar Shave Club being acquired by Unilever in 2016 for $1 billion cash.
The venture-backed companies who hit a $1billion valuation on the private markets have not been able to live up to that, as they have struggled with turning a profit and maintaining sales growth. Allbirds for example, which was valued at $1 billion when it was privately owned, now has a value of just under $87m after going public in the year 2022.
Inflation and the continued economic challenges of the past two decades have also made some potential strategic buyers wary about buying startups at this time. Investment bankers are sceptical that many beauty brands trying to sell will find a buyer this year, reported.
This has led to a retreat of venture capitalists from consumer. Ben Lerer said in an The information interview that more talent is leaving the consumer space because they feel like they need to “stick the landing harder and even tighter”. It’s harder. “There are more places that it can go wrong.”
But not all venture capitalists have given up on consumer-oriented startups. It can be difficult for consumer startups to understand what venture capitalists are looking for right now. Mike Duda is the co-founder and CEO of venture capital firm Bullish. He said, “I think venture investor are sending very mixed messages about what we want.” “We want to be able to see strong growth and profitability, without a lot of burning.”
How each investor defines “something within the realm of profitability” is different. Duda, who invests in pre-seed, Seed and Series A rounds, said he’s OK with companies not being profitable, but he doesn’t like to see a high burn rate.
There are still other sources of funding available, even though the venture landscape is frustrating. Duda stated that “family offices” are a good example. In this new funding climate, he said that overall, more companies “raise less money and in various tranches.”
The new consumer startup security guard
This shifting landscape has also inspired a new talent who wants to build consumer businesses in the way they believe that they were meant to. Chip Longenecker, a serial ecommerce entrepreneur, founded RompHim – a line of male underwear – and the men’s jewellery brand Podium. He has founded a fund named Tonic Ventures and invested in consumer startups such as the refillable capsule startup Cadence, and the nonalcoholic wine startup Oddbird.
Longenecker said that he was motivated to invest more in startups, because “there was so much negative activity surrounding investing in consumer.” He felt that there was still room for the type of investor that he would have liked to partner with when he built his two companies. It is “someone who knew how to build scalable, sustainable businesses.”
Longenecker said that while larger venture capital funds are pulling back from consumer-facing funds, he is seeing an increase in interest for “more smaller, Founder-Operator Funds.”
Longenecker says that during the DTC boom in the 2010s it felt like too much attention was focused on how startups could become billion-dollar brands. “There were only two outcomes: either we became a billion-dollar company or we imploded,” he said.
Longenecker thinks there are still plenty of opportunities for, say, $100 or $200 million exits. To make it a success for both founders, and investors, the rounds will need to recalibrated – from a preseed round to a Series B or A.
Some startups who have taken great care to keep their burn rates low find that the environment they are in is not as bad as they were warned.
Guerrera, as an example, stated that she planned to spend a minimum of six months raising the seed round for Experiment. Within a month, Guerrera received three term papers.
Experiment was launched in 2019 and raised $1 million in a pre-seed round back in 2021. Guerrera, who was out to raise money this time, focused her pitch on how Experiment has grown the brand organically and through word-of mouth. The brand has only recently started to spend on paid marketing, around a month-and-a-half ago.
Guerrera is a chemist who has a TikTok account with over 60,000 followers. She uses a scientific approach to explain common skin care problems. Many of Experiment’s early customers discovered the brand via her. She has kept a personal touch even as Experiment has grown. She still responds to comments on Reddit, and posts personal videos of herself on the brand’s Instagram page. One of these shows her dad opening a box of Experiment skin care.
She said that at this point “[we] have grown so large, there are many people who love Experiment, but have nothing to do me on TikTok.” Other influencers like Mikayla Ngueira have posted organically.
She says that a few key characteristics have been crucial to Experiment’s growth. Guerrera says that Experiment has a unique brand voice and is not afraid to joke with its audience. “I think this really helps us create shareable content,” Guerrera said.
The brand also sells products that are in line with current skin care trends. She said that recent exits like K18’s sales to Unilever show there is a demand for clinically-backed products in the beauty industry. Experiment’s website and social media content are largely devoted to promoting the clinical benefits of its ingredients. She said, “That’s an excellent marketing story.”
Experiment also had other data to show investors. The waitlist for Experiment’s serum, Super Saturated was more than 10,000 at the beginning of 2023. Guerrera was able prove that the brand has a strong, engaged community through email engagement numbers.
“It’s these kinds of critical moments that allowed us to show to seed investors that we might be small in terms of seed brands right now, but that there is so much room for growth here that it would have been silly not to invest,” Guerrera stated.
She said that she learned from her experience that great businesses can still receive funding. “Will you get the same valuation as you could get three year ago?” she asked. “No, most likely not. Will you be able get money for a product with a great deal and a great partner? Yes.”
Longenecker believes that, “the people who are really, truly passionate consumers will survive.”
“There are still amazing companies being built [and] everyone is doing their best with the resources we have,” he said.
