Follow The Debrief wherever you listen to podcasts.

Background:

Over the past few years, investors have been bullish on fast-growing digital brands — rewarding their rapid sales growth with sky-high valuations. More recently, physical retail has rebounded and e-commerce sales have shrunk. As a result, a number of digital-first brands are burning through cash as inflation and the cost of goods rises. VCs are increasingly wary of investing in companies without clear paths to profitability, so a number of those money-losing labels are finding it difficult to raise funds. Many, with few options to weather the imminent recession, are looking for an exit.

“A great deal of these digital brands were growing at all costs… people did not anticipate a large slowdown and then a possible recession — so they weren’t managing their money well,” said Malique Morris, BoF direct-to-consumer correspondent.

Key Insights:

• To catch the eye of a potential investor, brands must focus on profitability. But they also need to set themselves apart with new ideas and business models.
• A number of retailers struggling to adapt to shifting consumer tastes — like Victoria’s Secret, which acquired lingerie start-up Adore Me in November — are in need of a boost.
• To set the stage for an attractive exit, Ministry of Supply, which sells wrinkle-free dress shirts, has focused on getting old customers to make additional purchases, rather than acquire new ones.
• Seeing lower valuations, profitable brands that are attractive acquisition targets don’t have much incentive to sell at the moment.

Additional Resources:

• The Next Wave of DTC Acquisitions: As the economy weakens and funding dries up, more digital upstarts will face pressure to sell. They’ll have no trouble finding buyers — if they can prove they’re more than just another money-losing start-up.
• Why Venture Capital Is a Bad Fit for (Most) Fashion Businesses: For every Reformation, there are a dozen Outdoor Voices. Most apparel companies will have better luck looking beyond Silicon Valley for funding.
• A New Model for Funding Fashion Start-Ups: Clearco, which just secured $215 million in funding from Softbank, is at the forefront of a new investing model where brands get speedy financing in exchange for a share of future revenues.