Member Exclusive   //   August 1, 2023

DTC Briefing: What’s driving the recent sales of young startups to strategic acquirers

This is the latest installment of the DTC Briefing, a weekly Modern Retail+ column about the biggest challenges and trends facing the volatile direct-to-consumer startup world. More from the series →

Some DTC startups are selling earlier to strategic acquirers than they may have in years past. 

In July, Cuup – a five-year-old direct-to-consumer lingerie startup – announced that it had sold to Full Beauty Brands for an undisclosed amount. Full Beauty Brands, a holding company that owns 10 other brands in the intimates space, also recently purchased Eloquii from Walmart. 

What was most interesting about the Cuup news was that it came on the heels of some other, similar acquisitions in the DTC space. In June, cookware brand Great Jones was bought by Meyer, a manufacturer and distributor in the kitchen supplies space, for an undisclosed amount. That same month, candle startup Otherland was acquired by Curio Brands, which also owns a couple other brands in the candle and fragrance space, Thymes and Capri Blue. 

There are a few similarities that stood between these announcements: All of these startups were roughly five to six years old and had raised, at most, a Series A — and hadn’t made a big funding announcement for a couple of years. They did most of their sales through their DTC websites, save for maybe a few wholesale partnerships. And, all sold to larger conglomerates in the space who already have experience operating brands in the space these DTC startups are playing in. 

When I asked some founders and investors in the space what seems to be driving these acquisitions, they pointed to the usual culprits: venture capital funding drying up, credit getting harder to access and the increased difficulties of operating a consumer brand. While many founders are still trying to hold off on selling their businesses this year, these acquisitions point to a potential new reality for early- to mid-stage DTC brands: rather than raising more venture capital money to reach say, $50 million or $100 million in sales, some founders are instead looking to an established holding company to help them scale. 

“​​For some of the largest strategics, putting a $10 million budget into a brand each year probably isn’t that big of a deal,” Fan Bi, CEO of The Hedgehog Company said. “But it’s really hard for consumer brands these days to be able to raise $10 million a year.”

Sierra Tishgart, founder and CEO of Great Jones, told me that many founders, especially female founders, have inquired about how and why she decided to sell since announcing her company’s acquisition two months ago. She said that the overwhelming sentiment from these conversations have been: “these founders and leaders care deeply about their companies, have made all sorts of sacrifices over the years and are sort of putting their hands up like, ‘I need help’.” 

Tishgart acknowledged that the tough venture capital market – funding overall has been down this year – was a “major factor” in her decision to sell the business now. Great Jones had raised about $8 million over the last five years, with the last round being conducted as a Simple Agreement for Future Equity, or a SAFE. She will remain the CEO of Great Jones, and will also become the executive creative director at Meyer. 

Meyer actually became a minority investor in Great Jones back in 2020. Tishgart said she had been having a “diverse range of conversations” over the past couple of years about how to keep capitalizing the business. What ultimately cemented her decision to sell, she said, was knowing that being bought by an established company like Meyer would mean “having stability and having resources to really unlock our product roadmap.”

Due to a variety of factors — venture capitalists becoming less interested in backing consumer startups, pandemic-induced supply chain disruptions and the rising costs of raw materials — Tishgart said it had been difficult to invest in hiring and new product development. “We have been operating extremely lean and with a ton of ambiguity, not knowing what our resources are going to be at any given point,” Tishgart said.

“One of the things I am proud of is we are not just one viral pan,” Tishgart said. She wants Great Jones to eventually go into other parts of the kitchen like appliances, and “we are really able to achieve that with [Meyer].”  Meyer now has 16 different brands under its umbrella, and produces over 125 product collections distributed in over 30 countries. 

Bi of The Hedgehog Company said he’s seeing a few different dynamics at play right now impacting the M&A market for DTC brands. Bi’s company buys VC-backed consumer brands that have signs of early brand equity but are in need of a turnaround. They usually do around $10 million to $25 million in revenue.

He said that big conglomerates are actually going upmarket, and are actually getting more strict about what types of consumer startups they may have acquired in the past. 

He cited P&G’s acquisition of Native as one such example – P&G acquired Native for $100 million in 2017, at a time when the deodorant brand was reportedly doing around $25 million to $30 million in sales. “They would have dabbled in [this] and said… hey as a conglomerate, we have distribution, and we will plug you in and help you grow,” he said. “I think that was like a really good case study of bull market behavior.”

Nowadays, he said, it is rare for a conglomerate of that size to consider acquiring a DTC brand doing less than $100 million in sales. 

On the other hand, Bi said that the other type of acquisition he is seeing right now is “a brand that is going to strategics saying, ‘look we’re price insensitive. But, you know, we can bring you a modern audience and some digital perspective.”

Bi said that he’s only seen a “very slight uptick” in the number of brands approaching The Hedgehog Company this year looking to sell, though he does expect things to accelerate in the second half of the year. “These things just take a while,” Bi said. “Founders are resilient, they can usually figure it out for 6, 12, 18 months extended runway.” 

That was a sentiment echoed a few weeks ago in a conversation I had with Andrew Silard, head of consumer growth at Shopify holding company OpenStore. Silard said that among the entrepreneurs OpenStore has surveyed, while 74% are thinking about their exit strategies, only about 7% are looking to sell in the near term. 

“In practice, it’s a pretty emotional decision to sell something that you put your blood, sweat and tears into,” Silard said.

Thus, while these early-than-usual exits are expected to increase, it may still take a while as founders weigh whether they are truly ready to sell just yet. But, should the fundraising environment for consumer startups remain constrained, it is likely that more founders will want to get off the hamster wheel of continuously having to fundraise. Or, in more dire situations, they may find their hands forced.

“As a leader, you really start to think: how do I just not make sure that the company survives to the next fundraising round… but, how do we make sure that what we built in — what we really believe in — lasts,” Tishgart said. 

Correction: This story has been updated to clarify that Meyer is a manufacturer and distributor in the kitchen supplies space, not a holding company.

What I’m reading

  • Parent company Deckers disclosed that Hoka hit another quarterly sales record during its first-quarter earnings and that it is being selective about what wholesale partnerships to pursue for Hoka as DTC demand remains high. 
  • Seven-year-old startup Hairstory has significantly revamped its C-suite over the past nine months, having named a new CEO, as well as a first-ever chief marketing officer and vice president of sales.  
  • Sweetgreen’s losses are narrowing as a publicly-traded company, but its revenue growth is also slowing. Net sales were up 22% year-over-year during its second quarter earnings, compared to 45% growth reported during 2022 second quarter earnings. 

What we’ve covered 

  • A look at how the mattress industry has started to stabilize, as new startups like Silk & Snow and Earthfoam say they are trying to learn from the missteps made by Casper and other players that were heavily VC-backed. 
  • How canned water brand Open Water is entering unorthodox sales channels, from zoos to aquariums. 
  • Startups like OurX, Apothékary and Bite are trying to get more people onboard with refillable solutions in the beauty and personal care categories.