It seems like every week new statistics are released that show just how tough the fundraising environment is, especially for consumer startups.
Carta Inc. shared statistics on X, formerly known as Twitter, about what the company calls the “Series A logjam.” Of 2,188 startups that raised a Series A in the first half of 2022, only 10% have raised a Series B so far. D2C startups have experienced the steepest drop in funding, with Crunchbase declaring late last year that “VCs aren’t doing D2C anymore.” These businesses saw a 97% drop in funding between 2021 and 2023.
Founders and venture capitalists say the funding environment will remain tough for consumer startups in 2024. In 2021, when venture capital funding hit an all-time high, startups were told to focus on growth at all costs. But as venture capital funding levels have slowed over the past three years, startups are increasingly being asked to focus on profitable growth.
Startups are still adjusting to this new mindset, and funding rounds are becoming fewer and smaller: Founders are becoming accustomed to longer bootstrapped or pre-seed rounds, and when meeting with VCs, they spend more time talking about how they approach customers organically in their fundraising pitches.
To be sure, there are still funding rounds to come. But the biggest round right now comes from a returning founder touting some of the hottest tech trends, including AI. On Thursday, Daydream, a startup that aims to build an AI-powered search engine designed for e-commerce queries, announced it had raised a massive $50 million seed round co-led by Forerunner Ventures and Index Ventures. Daydream founder Julie Bornstein, a veteran of companies like Sephora and Stitch Fix, sold her most recent startup to Pinterest.
Daydream-like fundraising news is rare. So many founders who have raised capital over the past year were prepared for hard times. Lisa Guerrera, co-founder of skincare brand Experiment, said she was “prepared for the worst” when she raised her seed round last July. She continued: “The advice and notes we received over and over were: [were] Be prepared for a really long process… I had some friends who struggled to raise money. Some of them were successful and some of them were unsuccessful.”
But Guerrera was successful in raising the money: Experiment announced the closing of a seed round in April, totaling $3.3 million, led by Greycroft.
Rethinking success metrics
Part of the problem is that the past five years have seen a recalibration of how to properly value consumer startups: Early exits, such as Dollar Shave Club’s 2016 acquisition by Unilever for $1 billion in cash, have encouraged venture capitalists to think more DTC brands could become unicorns.
But by and large, venture-backed companies that achieved $1 billion valuations in the private markets have fallen short of that goal, struggling to turn a profit while maintaining sales growth. For example, Allbirds, which reportedly achieved a $1 billion valuation when it went private, now has a market capitalization of just under $87 million after going public in 2022.
Additionally, inflation over the past two years and the ongoing economic crisis have made some potential strategic acquirers wary of acquiring startups at this time. Even in popular sectors like beauty, investment bankers are skeptical that many of the beauty brands trying to sell this year will find buyers, The Information reports.
As a result, more venture capitalists are moving away from consumer. As Ben Lerer, co-founder of venture capital firm Lerer Hippeau, said in an interview with The Information, more talent is moving away from the space because “it feels like you have to hit the ground running and be firmer. And it’s getting harder. There are more places you can fail.”
That doesn’t mean all venture capitalists have given up on consumer startups, however. For consumer startups, however, it can be tough to figure out what venture capitalists are currently looking for. “I think venture capitalists are sending very conflicting signals about what we want,” said Mike Duda, co-founder of venture capital firm Bullish. “We want something that has solid growth, is profitable, and doesn’t burn out too much.”
And different investors will have different definitions of “profitable.” Duda, who invests in pre-seed, seed and Series A rounds, said he doesn’t mind companies not being profitable, but he doesn’t want to see insane burn rates.
While the venture landscape remains frustrating, there are other sources of funding: “Family offices are on the rise,” for example, Duda said. Overall, in this new funding environment, more companies are “raising smaller amounts of money in different tranches,” he said.
New Consumer Startup Guard
This changing environment is also inspiring a new generation of talent who want to build and fund consumer businesses the way they should be. Chip Longenecker is a serial e-commerce entrepreneur who previously founded men’s rompers line RompHim and men’s jewelry brand Podium. He is now founder of Tonic Ventures, a fund that has invested in consumer startups such as refillable capsule startup Cadence and non-alcoholic wine startup Oddbird.
Longenecker said he wanted to invest more in startups because “there was a lot of negativity around investing in consumer companies” and he felt there was room for more of the type of investor he wanted as a partner while launching his two companies: “someone who understands how to build a sustainable, scalable business.”
While large venture capital funds have pulled back from consumer investments, Longenecker said he is seeing increased interest in “smaller founder-management funds.”
Longenecker said he felt like there was too much focus during the DTC boom of the 2010s on how startups could become billion-dollar brands: “You either become a billion-dollar company or you completely implode,” he said.
Longenecker believes there’s still plenty of opportunity for, say, a $100 million or $200 million exit, but rounds will likely need to be rescaled from pre-seed to Series A or B to be successful for both founders and investors.
Some startups that have been careful to keep their burn rates low are finding that the environment is not as bleak as they had warned.
For example, Guerrera said she expected to spend at least six months raising Experiment’s seed round of funding, but within a month, she had received three term sheets.
Experiment was founded in 2019 and previously raised $1 million in a pre-seed round in 2021. During the fundraising round, Guerrera said he focused his pitch on the fact that Experiment had thoroughly grown its brand through organic marketing efforts and word of mouth. The brand had only begun investing in paid marketing about a month and a half ago.
Guerrera, a chemist, has more than 60,000 followers on her personal TikTok account, where she explains scientific approaches to solutions to common skin-care challenges. Many of Experiment’s early customers discovered the brand through Guerrera, and she has tried to maintain a personal touch as Experiment has expanded. She still responds to Reddit comments and posts personal videos to the brand’s Instagram account, including one of her father opening an Experiment skin-care box.
But at this point she said:[we have] “Because the brand has gotten so big, there are so many people on TikTok who love Experiment, even if they have no connection to me.” Other influencers, like Micaila Nogueira, also organically post about the brand.
She says a few key attributes have been essential to Experiment’s growth: “We have a really unique brand voice. [and] “We’re not afraid to joke around with our audience,” Guerrera said, “and I think that really helps us create content that’s easy to share.” It also helps that Experiment’s flagship products, like a bright blue gooey face serum and bright green reusable wipes, are visually striking, making them easy for people to share on social media.
And, perhaps most importantly, the brand sells products that tap into current skin care trends. She said recent exits like K18’s sale to Unilever show there’s beauty industry demand for clinically backed products. Much of Experiment’s social media copy and website content focuses on touting the clinical benefits of its skin care ingredients. “It’s a great marketing story,” she said.
Experimento had other data points to show investors: At the start of 2023, the company had more than 10,000 people on its waitlist for its Supersaturated serum. Guerrera said showing email engagement numbers was further proof the brand has a strong, engaged community.
“It was such an important moment for the brand that we approached our seed investors. [that] “While it may be a small seed-stage brand right now, there is so much room for growth that it would be foolish not to invest in it,” Guerrera said.
She added that the lesson she learned after raising her seed round was that good companies can still raise money. “Will we get exactly the same valuation we got three years ago?” she said. “No, probably not. But can we get a good deal with a good partner and raise money at a good price? Yes.”
Meanwhile, Longenecker believes that “the people who are truly passionate about the consumer will survive.”
“Great companies are still being created. [and] “Everybody is doing the best they can,” he said.
