We're continuing our big push in direct-to-consumer (DTC), digitally-native vertically-integrated brands (DNVB) at the moment with trips to New York, Copenhagen, and Stockholm this week. On the back of a few trends (easier to access supply chains, ecommerce logistics, variable marketing channels), there's a Cambrian explosion of these types of companies.
I'll write a post soon about what we look for in a DTC investment, but in the meantime I'd like to draw your attention to the meta layer of the secular trend of DTC: i.e. "selling pickaxes during the goldrush."
As you may know, this is an allusion to the California Gold Rush and entrepreneurs such as Levi Strauss selling supplies to miners, which turned out to be the better business.
Of course these are very different markets: there are orders of magnitude fewer people buying pickaxes and than people buying gold. But while gold is a commodity (and a non-zero-sum market), if your pickaxe is a lot better at helping people mine gold, then you're going to corner the pickaxe market pretty rapidly. And if your pickaxe business has network effects, e.g. you get better at helping people find gold the more people are using your pickaxes, then your position can become unassailable.
So what's the meta or "pickaxe" layer in DTC investing?
The big play here has been Shopify. The stock has been doing very well and we think it will continue to outperform relative to market. Incidentally, it makes me sad that we still don't run a hedge fund on the back of the insights we derive from private market investing.
I would not be surprised if the Shopify toolchain, like plugins and associated businesses like Printful, yield a few good DTC infrastructure investments. As with any "tools" business, there's a question whether it can meet venture investment criteria.
Logistics: while these are typically the same fulfillment providers as in retail ecommerce, we have seen a few businesses that lend themselves to DTC brands, e.g. by allowing businesses to start selling internationally at low volumes. Seven Senders in Berlin is an example, but we think there will be other ones. As Amazon increases customer expectations to same-day or overnight, we will see multiple attempts at building out competing infrastructure.
Packaging: we have seen a few businesses that innovate around packaging, making high quality, custom packaging accessible at smaller lot sizes. A good example is Packhelp in Poland.
Wholesale/Retail Aggregation: this has been a horizontal function that has seen relatively little innovation. Indigo Fair aggregates DTC brands and offers stock to relevant retailers. We love the concept and would like to see it in Europe. Let us know if you're working on something similar.
Marketplace/Shop Aggregation: next to operating your own shop, a lot of DTC brands are doing experiments on Amazon. For a whole bunch of reasons this might not be a great idea. We think there is space in the market for several non-Amazon marketplaces for innovative DTC brands, a little concept stores with distinct demographics. Think Farfetch for DTC. For example, I think an Outdoor Voices, a Cotopaxi and a Mafia Bags could very well sell alongside each other while increasing conversion and boosting AOV for everyone.
Marketing/Branding: of course these are mainly services and some design agencies have done much to help the DTC phenomenon (in Europe: Otherway, Proxy). But arguably the largest driver is variable online marketing costs (FB/Insta, Google). We've seen scaled influencer campaigns that are working and while we have not seen an influencer marketplace that we've liked, we think e.g. what Harper from Berlin is doing is very interesting.
Sourcing: it's not a secret that many DTC brands are using the same factory infrastructure as e.g. private label or even luxury brands. Making this a more transparent, even more accessible market could be an interesting business. Right now the approaches here mostly consist of classifieds type listings databases.
Have we forgotten something? Do you have an interesting company to suggest we look at? Leave a comment or send me an email to firstname.lastname@example.org.