Is Debt Financing The Future Of DTC Fundraising?

September 23, 2022
2 min read

Here's how 3 ecommerce experts predict DTC brands will raise external capital now that venture capital's died up.

In the immortal words of Kenny Powers, "dolla', dolla' bills, y'all." That's what Everlane is saying this week after raising $90m in debt financing (which apparently isn't the same as VC funding). 

In the good ol' days, headlines were riddled with DTC brands securing venture capital (Glossier raised $266.4m total and Warby Parker, $535.5m this way). But you don't see too many of these headlines anymore. 

So, what happened? 

According to Ridge CEO Sean Frank in a recent Twitter thread, "the VC model cant work in consumer," and we should expect its availability to "wind down to zero."

Why? Because margins typically slim as retail brands grow. This is partly due to the increasing costs of acquiring new customers at scale. 

Our CEO Adii Pienaar estimates that less than 1% of DTC brands become unicorns. Even less than that become profitable unicorns

And as Sean points out in his thread, the billion-dollar brands that remain profitable took generations to do it. 

  • Hermes (valued at $130B) has been in business for 185 years
  • Lululemon (valued at $40B), 40 years in business 

Simply put, VC investors can't wait that long. Typically, they expect a 10x return in 5 years. This caliber outcome just isn't feasible for consumer brands. After all, neither Glossier nor Warby Parker are profitable despite earning unicorn status in a good market.

Now, throw in today's topsy-turvy market (earlier this year, YCombinator, the accelerator program dubbed "a Silicon Valley kingmaker," urged its portfolio to "plan for the worst"). And VC fundraising has all but dried up.

The irony is that external capital might be what many brands need to weather a looming recession. So, is debt financing (like Everlane did) how DTC will secure money moving forward? 

Short answer: Yes. 

"As less institutional money flows into DTC, brands will likely turn to angel investors and non-dilutive methods (like debt financing and friends-and-family funding)," Adii explains. 

Why? For one, these methods are easier to secure, especially in this economy. 

But they're also lower risk to repay, considering you only need to pay back what's borrowed plus a little interest (not 10x). 

Brands will also likely start exploring alternative flexible funding methods (like Clearco and Wayflyer) and adopting cashflow management tools (like Settle). The latter will address the root of why most brands seek out external cash in the first place. 

"[Companies have] a huge cash flow gap between buying inventory and turning that into revenue," Alex Koenig, Settle founder and CEO, said on The Checkout

And with many brands overstocked after years of supply chain issues, this cashflow gap is only widening. When left unaddressed, it's a massive threat to businesses (after all, lack of capital was the #1 reason brands went out of business in 2021). 

Securing non-dilutive financing has always been one way to fill that gap with dolla' bills. But with VC out of the question for most consumer brands, it's likely to become even more common. 

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