Almost ZERO public D2C brands are profitable

It’s not uncommon for Investors and founders to butt heads over the way a business is managed, let alone the survival of the business in the long term. Unfortunately the politics of operating a venture backed company comes with a lot of pressure to grow and meet certain targets. But here are a few issues when this happens:

• Investors almost always have no intimate experience in your field or niche.
• “Growth targets” are made up. They’re often too aggressive and these targets are very hard to predict as you scale.
• Investors' version of success and a founder's version of success could hold very different motives.

The deadly e-commerce collapse in public markets

Now in 2020/2021, we saw an immense period of growth in technology and e-commerce sales, with the pandemic bringing to light a whole new era of software, SaaS platforms, social media engines and, with stimulus checks, also a lot of shoppers! As a result, we saw a huge surge in growth for a lot (but not all) D2C businesses. Interest rates were low, investor sentiment was high, so the cash came piling in.

However, what a lot of investors failed to realize, or compute, was that D2C businesses scale very differently to software. While in software your variable costs are a lot smaller as you scale, the variable costs of a D2C business increase significantly as a business grows. This includes staff costs, warehousing space and a heavy hitter called advertising.

As you grow and acquire more market share in your category, the cost of acquiring that user also rises (CAC: customer acquisition cost). So not only are you dealing with rising fees of all your operations, you’re now paying a premium to acquire a customer from a cold audience (AKA a new customer).

Now, growing a business organically without buying users takes a lot of time. Innovation in developing better products - takes time. Investors are often impatient, and VC’s are after home runs, which often includes an initial public offering (IPO) or selling their shares to another investor for a profit.

Now, let’s take a look at the performance from some of the D2C brands that IPO’d and how they’ve performed since:

• Allbirds (Footwear): Down 96% since IPO
• Smile Direct Club (Teeth aligners): Down 99.99% since IPO, declared bankruptcy
• Warby Parker (Eyewear): Down 69% since IPO (up 17% YTD actually)
• Stitchfix (Clothing): Down 73% Last 5 Years
• FIGS (Fashionable scrubs): Down 77.10% since IPO
• Honest Co. (Eco-friendly products): Down 82% since IPO (+140% last 12 months, and turning it around)
• Wayfair (Furniture): Down 64% Last 5 Years. Peaked at $340 p/share, now trading at $51 p/share
• Bark (Pet food): Down 88.19% Since IPO

What about the venture backed business that didn’t go public? A lot of them encountered very similar trajectories and fell victim to similar narratives. Granted, some businesses that have survived have had to do so by making major operational changes. But there’s currently a LOT of founders working for a business they once founded, with a fairly cloudy outlook, shares they can’t sell, and investors they can’t please. Years of being forced to over hire, and paying a premium for new users will do that.

Where does AI fit into this, and can we expect a similar sentiment in this next investment wave?

In the words of Eugene O'Neill - “There is no present or future - only the past, happening over and over again - now.”

Amongst a sea of AI businesses fundraising for the New New Thing, how many of these AI driven services or providers are actually making a net profit? It’s hard to tell. Just to put it into perspective, we should probably talk about who’s doing it best.

Needless to say, OpenAI (owned by Microsoft), also the mothership behind ChatGPT, is a pioneer in democratizing AI. OpenAI is set to generate $3.5B+ in revenue this year. But…OpenAI is still not profitable. While currently listed as a “non-profit” (lol), we’re already seeing the investor-founder politics at HQ heat up between Microsoft's board and OpenAI CEO Sam Altman.

Microsoft’s attempted ousting of the Silicon Valley star didn’t go quite to plan when all of OpenAI’s employees threatened to leave following the news. In a Leonidas-esque return, Altman now leads the company once more into battle, with loyalty that appears comparable to that of peak Stratton Oakmont. Just with fewer drugs (we think).

The only business in the AI realm, that’s selling picks and shovels instead of selling just software and subscriptions, is NVIDIA. Kind of a big deal, for those who, like myself, had no idea what NVIDIA produces (until recently), they net over 80% profit margins building GPU’s and hardware that powers data centers (plus some other stuff). NVIDIA is now a $3.33 trillion dollar company. Coincidentally this is something every company in the World needs to store their information. So one AI company is profitable, to be exact.

However, when you break it down, your SaaS products, like Monday, AirBnB, Deliveroo, and Robinhood, that accompanied the IPO frenzy, were also service providers, brokers or operational tools, built to fill the gaps of a remote working world. Few are profitable businesses today. Across the field, and in marketing, including at our agency, AI has thus far been applied to increase the efficiency of businesses with an existing tech or operational stack.

Whether or not investors can find an AI driven product that supports top line growth, enough to go public, as well as remain profitable, is proving extremely unlikely. The question is when these companies do go public and are losing money each quarter, will founders and investors reign triumphant, or will they fall like dominoes just like the D2C folks?

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• Kamala Harris raised $81mm in her first 24 hours and $100 + million in her first week as the leading Democratic candidate. Does this make her a non-profitable venture backed startup? Read more.
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