Privatizing DTC Companies

TLDR:

Wedding plan battles
Taking DTC Companies Private
Tool: I have a request!!

Planning a wedding is hard

This week the major challenge I’ve been facing is our wedding photographer cancelling on us. We locked her in back in December for a July wedding. We think we’ve found a solution but it was a great reminder from the customer side that you build a business in the hard moments.

Our particular vendor here was great in communicating an incredibly frustrating update for us, but she did the right thing. She offered to find us a replacement at no cost or refund us the money.

We’ve gotten close to a solution after a lot of back and forth, additional research, existential questioning into why have a wedding, and remembering that we’ll want the most special day of our lives to be captured the way we want.

While I’m not ecstatic about the whole experience I do have to give credit to our photographer who worked hard to find a solution we’re happy enough with to retain our business and turn livid potential ex-customers into existing customers.

Shoutout to the 943 of your still riding with me. I think today’s will be a shareable one so if you think of one person who’d want to read it fire it over to them.

Privatizing DTC Companies

Walmart sold Bonobos for $75m last week. (vs $310m Acquisition price in ‘17).

Casper went private for $308m (vs. $1.1B IPO cap in ‘19).

Warby Parker’s cap is $1.2B (vs. $6bn IPO cap in 2021).

This doesn’t look great for eCom and DTC companies, but we should swing too far to the other side of the pendulum. Too many people are complaining DTC is dead. It obviously isn’t, but the last decade investment expectations around it are.

More on that here.

The shifting landscape has bigger implications for how the money around DTC is going to work and what that means for brand building. But in chaos there’s always opportunity.

This market reversal means 1 thing. A LOT of public DTC brands are going to go private or out of business. Let’s look into who’s at risk and what this means for everyone in DTC/eCom.

Public DTC Companies likely be taken private in the next 18 mos.

It’s not guaranteed, but there’s a real chance you’ll see a Take over headline with one of these brands pop up in your feed.

Running a public company is hard, and expensive. There are plenty of benefits to running a public company, but there’s a certain size (market cap) where it make financial sense to remain a public company. Below that you have to ask the tough question…

Can they survive in the public markets and is it the right call for their businesses?

The public scrutiny and disclosure requirements can prevent brands from executing the long term strategy needed to get them back to their previous billion dollar plus valuations.

Taking a company private is always looked at as a bad thing and a failure. While that’s true to some extent, the company wan’t sustainable enough to remain a public company, plenty of hugely successful brands went private and re-listed (Dell, Burger King, Hilton).

No Tool this week. I have a request for you!

Instead of plugging a helpful tool I’m putting my goals out there into the world. I’m looking to buy a business!!!

I’m looking for a strong Ecom or Content business with returning customers that’s doing $1 - $10m in EDITDA/yr. The company doesn’t interact with an alphabet soup agency (ATF, DEA, etc) and doesn’t have more than 50% of company Revenue coming from Amazon.

Other than that. Send me the info at [email protected] and I’m actively looking.

I’ve been wanting to get back into the eCom game for a while now and want to scale something up vs. building from scratch. If you have a business that you’re looking to exit or know someone who does send them my way!!!

Why Go Private?

If you’re the public company you may not have a choice. Since anyone can go and buy your stock a public company is always at risk of a hostile takeover (Investor buys enough shares to force their direction on the company).

For the companies that do have a choice there are 3 primary reasons to go private:

1. They’ll need the patience of the private market to execute a multi-year un-profitable strategy to get them to their growth targets vs. meeting quarterly profit demands.

2. The Accounting and Legal expenses of a public company add considerable operating expenses to a business category that already has low operating margins. If the volume of dollars isn’t big enough all of the profits could go just to keeping the lights on.

3. The pockets of an investor who can take a public company private might be deeper than the funding options of a small cap public company. If they need to make considerable unprofitable investments to fuel the long term vision private options could better suit their size.

It all comes down to the growth strategy and how the brand wants to execute against it, but going private doesn’t mean it’s a death sentence of the end of the brand.

So what does this mean for the eCom/DTC community?

We are looking at 3 primary market shifts that everyone else needs to prepare for:

1) Without the billion dollar exits, VCs leave the space opening PE and Debt to return as the primary capital players.

• Early stage capital is harder to come by

• Growth will be slower as more brands need to bootstrap to $10m-$20m

• PE will return as the main growth capital.

  • Founders are going to trade more equity for the same/fewer dollars.

• Smaller exits will happen more frequently as valuations come back down to reality.

With VCs retreating the main sources of capital are going to return to the classics, PE and Debt. Founders are going to need to make tougher choices about how fast they want to grow into their future.

2) It’s easier to build a $10m business and much harder to build a $1B dollar business.

• There will be less competitors in every category

• Fewer ad dollars spent = less competitive Ad channels.

• More businesses will exit at lower valuations.

• Building $1B physical goods businesses will return to a multi-decade game.

Less capital means fewer clones (aka competitors), or early companies overspending marketing budgets and driving up ad costs. It also means fewer brands rocketing to $20-$50m in sales.

3) We’ll go back to building real, enduring brands.

• The main strategy will return to Slower but more sustainably growth.

• Retail will matter more as a viable revenue driving marketing channel.

• Ad dollars will retrench from FB and Google and mix into a variety of channels.

• Business fundamentals like margins, cash flow, profit per order, and CAC payback will matter again.

The stories everyone gravitates to won’t be the brands who became a mythical creature in 5-10 years, but the enduring brands who were built over decades and made real lasting impacts on people’s lives.

🧠 The Takeaway

Small market cap public DTC brands will be taken private which will be the end of the Unicorn era and the return of the brand building era.

1. More DTC companies will go private as their valuations fall to SMB/Mid-Market PE valuations.

2. Traditional PE and Debt will return as larger capital players in the space.

3. Brand building will slow down from a race to exit to enduring generational brands.

👷 What can you do about this?

Be more thoughtful about your growth plan. The race to build a massive business isn’t en vogue anymore. Building a business that accomplishes your goals has always mattered. Now there’s less noise drowning that out.

1. PE means giving more equity for the same dollars. Debt means higher immediate costs. Think harder about how fast you want to grow.

2. Financials and the news around DTC is going to get better before it gets worse.

3. Do you really want to build a billion dollar business?

As always. Stay confident, connect with your customers, and keep crushing it.

Jeremy Horowitz

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