Angels Flocking to DTC Brands: Mistake or Opportunity?

Angel investors are flocking to Direct to Consumer (DTC) brands, even as venture firms have pulled back. From a report out this morning in Business Insider:

A growing class of angel investors is now swooping in to write the early checks fledgling DTC-brand founders need to bring their products to market. While individual angel investors may not offer the large sums of cash or the pedigree and connections a blue-chip Silicon Valley VC can provide, they offer other advantages, DTC founders told Insider. Perhaps most importantly, they are willing to open their checkbooks to untested new brands as VCs analyze them more critically.

“If you think about the early floodgates of VC money going into DTC, it was because they were using a specific playbook,” Eunice Shin, a partner at Prophet, a DTC consultancy, said. “That playbook is broken.”

DTC brands like Peloton, Casper and Blue Apron used to be some of the best known names in tech. Now those companies are struggling and VC’s are wary.

So founders go where they can: to angels. Angels usually ask fewer questions and may be unaware of the headwinds DTC is facing.

Advertising, manufacturing and shipping costs have skyrocketed. Supply chains are a mess.

Things started to go very wrong for DTC last spring. Apple released an iOS update that let users stop ad tracking, and almost all did.

This meant apps like Facebook and Instagram had no idea who saw an ad.

The update was a gut punch for DTC brands. A woman’s underwear startup that only ships in the US could waste its precious ad dollars advertising to men in Germany.

Many startups saw their Customer Acquisition Cost (CAC) triple. What had been a solid business model no longer worked.

And it’s going to get even worse. Google also plans to limit ad tracking next year.

What happens when your advertising, manufacturing, and shipping costs skyrocket? You start bleeding red ink.

VC’s are usually familiar with these problems facing DTC. Unfortunately, many angels are not.

As scary as things may be in DTC land, a few companies have bucked the trend.

Eight Sleep, which produces a heating and cooling cover for mattresses, is one great example. The cooler surface can greatly improve your sleep.

Eight Sleep produces a highly differentiated and expensive product. Its mattress covers start at $1,845, and its mattresses are even more.

This is the kind of consumer product that can still be a great business.

It’s expensive enough to absorb a higher CAC. And it doesn’t have to fight it out with a dozen competitors.

Still, I prefer SaaS. You’re not dependent on online ads, customers tend to stick around, and your product is infinitely scalable without any messy “stuff.”

DTC brands are sexy.

A yummy steak from Blue Apron is a lot more exciting than a SaaS revenue retention product. And it’s a service you could use yourself, unlike most SaaS products.

But if we want to make returns, we have to focus on what’s financially viable, not just what’s exciting.

What do you think about the DTC industry today? Leave a comment at the bottom and let me know!

And now, I’m off to invest in some more boring SaaS companies. 🙂

P.S. There will be no blog tomorrow. I have an appointment. See you Thursday!

More on tech:

Will Adam Neumann Change Housing Forever?

Seed Valuations Are…Up?

$500 Billion in Venture Capital is Sitting on the Sidelines

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