Direct to consumer companies are among the first to feel the pinch with business models that manage cost, exercise restraint, and assure profitability.

Are you a fast growing, D2C company? Being profitable now matters more than ever as VC funding slows.

For fast-growing companies banking on investors to fuel growth, slowdowns in major metros are worth paying attention to. For example, the amount of venture capital raised by Chicago companies slowed in the first quarter to its lowest rate in two years. There, funding totaled $275 million across 39 deals, according to the Money Tree Report by PwC and CB Insights. It’s the lowest total funding since first-quarter 2017 and below the quarterly average of $398 million over the past four years.

Direct-to-consumer startups are first to feel the pinch.

Nationally, first-quarter venture funding fell 36% on 4% fewer deals from a near-record pace in the fourth quarter. While funding levels remain near historical highs, the glossy sheen of economic certainty from the last few years has dulled.

In a recent DigiDay article, one D2C industry insider shared:

We’re seeing it already: Unless you’re a serial founder, you’re having a much harder time raising money. There was a moment where everyone could get funded and it got a little crazy. Now, every category and every channel is more competitive [...] ”

Another leader, Andrew Dudum, the CEO of telemedicine D2C startup Hims said:

Now the main concern is how we can get to profitable growth, [...] Investors we’re talking to, they’re asking different questions now with different expectations.

It’s time to consider that the gravy train of seemingly-endless financing is slowing.

One simple reason?

D2C businesses often embrace models that are not retention, or subscription based. If companies sell a product that customers don’t frequently replenish or buy more of (like, mattresses and furniture, or estate planning documents, for example) than these businesses still have to invest heavily in customer acquisition and ongoing customer engagement and loyalty, without the recurring, offsetting revenue. And they have to push out this cash while still building a business well-liked by investors.

When unprofitable, D2C businesses run into the challenge of trying to satisfy VC demands for rapid growth.

Even D2C businesses that do have recurring, subscription models (like, shampoo and pet food, for example) have to aggressively promote their brand to compete with upstarts that can quickly go-to-market with digital ads and plug-and-play ecommerce tools. When unprofitable, these companies run into the challenge of trying to satisfy VC demands for rapid growth and exits, while balancing cash flow and maintaining customer experiences to fuel growth; two dynamics that don’t always mesh.

A company’s growth ambition is expensive enough.

Leaders must be careful not to introduce needless cash burn into the operating equation. Cleanshelf is working with a number of leading D2C companies around this very issue. SaaS adoption has come fast and furious for most growing D2Cs. So, as early SaaS adopters, these companies in particular have watched SaaS app acquisition accelerate. This has been due to marketing, customer acquisition, metric and performance tracking demands. Cleanshelf’s solution specifically can help manage spending and allocate dollars back to the bottom line.

Actually making money provides the necessary proof of concept and market validation needed for a company to confirm that they can navigate the learning curve around consumer businesses.

Forbes recently debated the growth versus profitability issue for fast growing companies, concluding, “[...] for a business to be sustainable it must ultimately make a profit at the operating level, otherwise it’s just a house of cards.” Actually making money – not just spending investor cash – provides the necessary proof of concept and market validation needed for a company to confirm that they can navigate the learning curve around consumer businesses. If not, they can be lulled by a false sense of viability.

After banner years for fundraising, VC dollars are slowing. Investors are exercising more caution; looking closely and assessing companies’ viability before writing big checks. While big unicorns may always make headlines with eye-popping mega-deals, small and mid-market companies may have to fight harder. They’ll have to show growth with business models that manage cost, exercise restraint and make more than they spend – proving that they can be successful with or without outside investment.

Reach out to us if you're interested in learning how Cleanshelf specializes in helping companies get there.

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