The last year has been tough for founders seeking funding. Pre-pandemic, venture capital funding was plentiful, and startup and DTC brands were able to achieve massive growth based on that funding without reaching profitability. At Shoptalk 2023 in Las Vegas this week, brands and investors alike reckoned with the reality that it’s the end of that era. Just as consumer spending is falling, investors are now much more focused on profitability and immediate returns.
Imran Khan, CEO of Verishop, told Glossy that he could see the change coming as early as last year.
“Right after I raised money last July [in a $40 million series B round], I could see that world was going to change,” Khan said. “And I think the worst is yet to come. It will be really, really bad. Every company will have to actually start making money. Every company is going to make hard choices, and they need a very clear path to profitability if they don’t have it yet. We’re going into a decade of a low-growth [retail] environment.”
You can see the shift happening in big companies like The RealReal, which has made a number of drastic changes to cut costs and reach profitability. The same is happening with investors. The Peter Thiel-owned Founders’ Fund cut its eighth VC fund nearly in half, from $1.8 billion to $900 million in early March.
But it’s not all doom and gloom. For one thing, Scott Friend, partner at Bain Capital, said recessions and tough economic environments often breed innovation and some of the most resilient companies.
“There’s good precedent for crisis creating good startups,” Friend said. “Think about the iconic companies that came out right after the dot-com bubble, or in 2008 and 2009. Uber, Airbnb, Rent the Runway — they all came up just as a lot of tech funding was drying up.”
Friend said startups that are overfunded often fix their problems with more money, rather than building sustainable business models that can weather problems over time. Companies coming up in a tougher environment are more resilient out of necessity.
And it’s not like there’s no funding to be had. Emily Gittins, co-founder and CEO of the resale startup Archive, said her company raised $15 million in December, which she attributed to the buzziness of resale and its ability to help brands make money off existing products. That kind of resourcefulness and extra revenue is appealing in lean economic times when customers are less likely to spend on full-price items.
“Investors are certainly more cautious and wanting to see true traction before making big investments,” Gittins said. “But we did our Series A last year, in one of the worst fundraising markets in years, and there’s still a lot of capital to be deployed out there. Businesses are still growing.”
For both investors and brands, it’s important to recognize the core values of a business — the product — and not the flashy distractions, according to Friend.
“VC shouldn’t fund DTC brands just because they’re DTC,” he said. “A DTC brand might have a great product, and that’s great. But don’t get hooked on the heroin of DTC. The product matters, not the channel.”
And for brands, raising a pile of money doesn’t mean that the business is going to do well. Khan showed Glossy an email he received from a company asking to meet with him. The only information this company shared was that it had recently raised a lot of money and would like to buy him lunch.
“It was nothing about the value proposition or the business model, just that they’ve got capital,” Khan said. “That might work in a bull market, but not in a tough environment like the one we’re in now. In this kind of market, I can buy my own lunch.”