why vc funding is falling out of favor with top d2c brands

In 2020, venture capital firms significantly altered their approach to direct-to-consumer (D2C) brands and product-based companies.

Numerous investors observed their portfolio companies implementing substantial layoffs and seeking to extend their financial runway, leading to increased scrutiny of their underlying business models.

Certain firms simply noted the underwhelming initial public offering of Casper, or reviewed reports of Brandless and similar companies facing difficulties, and subsequently began to reduce engagement with D2C brands—declining to review proposals or follow up on initial conversations.

Throughout the previous year, investors generally adopted a cautious stance toward all new investments, hoping that existing portfolio companies could sufficiently reduce expenses, maintain relevance, and navigate the challenging economic climate.

Businesses centered around physical products experienced a decline in investor interest, with venture capitalists primarily directing funds toward artificial intelligence startups, and companies specializing in data collaboration, data privacy, and healthcare—often founded by male entrepreneurs.

From an outside perspective, it appeared that D2C founders were left without resources and urgently seeking funding, negatively impacted by rejections and dependent on the preferences of Silicon Valley investors.

However, as Hal Koss articulated in his analysis of the D2C landscape, this was not a unilateral decision; the shift in focus was mutually agreed upon. Many product-based brands, it turned out, were no longer prioritizing the pursuit of venture capital, the “growth-at-all-costs” strategy, and the relinquishing of control to investors, despite the pandemic and the uncertain conditions faced by many founders.

Through my experience with Bulletin, I have monitored thousands of product-based businesses, ranging from independent beauty brands offering natural skincare to companies in the sexual wellness sector creating products for couples. I have followed their progress on social media, in industry publications, and across various platforms, and in many instances, I have communicated directly with their founders.

Over the last two years, I conducted interviews with leaders of over 30 women-owned businesses for my forthcoming book, “How to Build a Goddamn Empire,” and engaged in extensive conversations with numerous independent brands and makers as Bulletin assessed the pandemic’s impact on consumer behavior. I observed a notable change in founders’ priorities in 2021 compared to previous years.

Previously, I frequently received unsolicited inquiries regarding successful venture capital fundraising and the unwritten rules of the process. Business owners were often contemplating or preparing for funding rounds, and entrepreneurs aimed to emulate the success of companies like Glossier or Away. Many newer founders lacked a comprehensive understanding of venture capital but viewed it as a form of validation or the sole path to significant growth.

Currently, brands are more inclined to manage with existing resources rather than accept funding on unfavorable terms; examples include the founders of Gorjana and Scott Sternberg. Several brands that experienced substantial growth in 2020, such as Rosen, Golde, Entireworld, and others that contributed to the expansion of Etsy and Shopify, are entirely self-funded and take pride in that fact.

Some founders with whom I have spoken have even declined investment offers. A growing number of D2C brands are exploring alternative financing options, including bank loans, credit lines, and crowdfunding, and are researching platforms like iFundWomen and Kickstarter, inspired by the success of fully crowdfunded brands like Dame and Pepper.

From my perspective, venture capital has diminished in appeal for many product-based brands. They are not in a desperate search for funding; instead, they are skeptical of the idea and confident in their ability to achieve success, scale their operations, and maintain long-term profitability without exchanging equity for capital. They are influenced by reports in the media or have successfully navigated or even prospered during COVID as self-funded companies, reinforcing their belief in a “slow growth” strategy.

They are reading the same reports about layoffs and unsustainable financial models at large D2C companies and agreeing with Sam Kaplan that the traditional approach—expensive customer acquisition, rapid expansion, and continuous fundraising—is outdated. It is 2021, and amidst the ongoing pandemic, these brands prioritize profitability.

Beyond the challenges of the business model, many consumer-focused founders do not desire the lifestyle associated with leading a rapidly growing D2C brand. They seek a reasonable work-life balance, weekends, and a team assembled based on the company’s specific needs, not its funding level. They want to avoid the pressures of balancing investor expectations with the best interests of the business and scaling at the expense of company culture or community.

Community, in particular, has emerged as a cost-effective and organic method for attracting and retaining customers—and is vital to a brand’s success. Anything that jeopardizes an authentic sense of community, or the genuineness of the products or brand, threatens the foundation of the business.

Consequently, there is increasing interest in “anti-VC” firms like Indie VC and Earnest Capital, which prioritize profitability over aggressive scaling, a strategy that often undermines community or compromises product quality. According to The New York Times, Indie VC “offers startups the option to buy back the firm’s shares as a portion of their total sales,” potentially resulting in Indie VC receiving only a 3x return on its investment—an uncommon scenario in traditional venture capital, where portfolio companies typically aim for a 10x return or higher. Like Earnest Capital, Indie VC focuses on assisting founders in building enduring, sustainable businesses.

While this financing approach is relatively new, several brands within my network have already adopted it. Curie, a brand specializing in natural deodorant and hand sanitizer sold on Bulletin’s marketplace, is backed by Indie VC. In an interview on the Indie VC website, Curie founder Sarah Moret explained that she “didn’t really want that life,” referring to the lifestyle associated with venture-backed entrepreneurship.

Moret, having previously worked at a venture firm, stated that she has “seen and met those [venture-backed] entrepreneurs and I know the pressure they’re under, and that’s just not the life I want to live.”

What kind of life does she aspire to? “I want to live a good life. I want to be able to enjoy my life. And be proud of it. And not succumb to the pressure that comes with those big venture rounds and incentives.” I have heard similar sentiments from countless other founders who once considered venture financing the ultimate goal.

Beyond lifestyle preferences, many D2C founders have experienced systemic discrimination based on their race or gender, and they are understandably reluctant to relinquish control of their ventures to the venture capital system. They are concerned by the lack of diversity within VC firms, uncomfortable when investors seek validation from their spouses regarding product-market fit, and disheartened by the homogeneity of partners they encounter during pitch meetings.

They do not believe they will receive fair treatment or genuine support from investors who lack understanding of their customer base or a demonstrated commitment to supporting Black, Latinx, and/or female founders, or who lack diversity within their own organizations. Silicon Valley has often been perceived as an exclusive group with limited access to opportunities, and this perception is now hindering VCs and fostering mistrust among successful founders.

Of course, there are still founders who are actively pursuing venture capital for their product-based businesses, either to build upon their bootstrapped successes or to launch with initial funding, as many D2C companies did in the past. I do not intend to pass judgment on either strategy—I have great respect for product-based entrepreneurs, particularly given my lack of experience in supply chain management, manufacturing, fulfillment, or consumer customer acquisition at scale.

While we operate within the same industry, I am not one of them, and, unlike commentators on social media, I will refrain from offering opinions on what is right or wrong, good or bad, true or false, without sufficient knowledge or experience.

However, there are numerous alternative ways to finance a product-based business, and I believe we should celebrate those who have secured bank loans, bootstrapped their operations, or utilized crowdfunding, elevating these methods to the same level of prestige as venture capital. We should feature them on magazine covers, invite them to appear on podcasts like “How I Built This” with Guy Raz, and showcase them as prominent speakers at industry events.

We need to recognize individuals like Jaime Schmidt, who bootstrapped her way to an acquisition by Unilever, and MVMT, the watch company that crowdfunded through Indiegogo and was subsequently sold for $200 million. Tuft & Needle secured a $500,000 loan before its reported $400-$500 million merger with Serta Simmons.

While the 2010s positioned venture capital as the preferred financing method for innovative brands and their ambitious founders, the “D2C Reckoning” is underway, prompting both brands and investors to reassess the outcomes of venture-backed, product-based businesses. In 2021, we will see platforms like IFundWomen and Fundable become the primary resources for product-based businesses seeking to launch and scale, and founders will be more transparent—and proud—about utilizing traditional financing options like loans and credit lines to achieve their goals.

If we are fortunate, these founders will receive the same recognition and acclaim as the well-known D2C founders, inspiring aspiring and existing entrepreneurs to explore their options and make informed decisions about how to grow their businesses—and who to include in their journey.