New Economic Realities   //   March 14, 2024

Startups are getting more realistic about exit roadmaps

Startup brands are rethinking their exit roadmaps, which, more and more, come down to being acquired by a larger company.

M&A remains frequent, thanks to fire sales of struggling companies in the past year. But gone are the days when a strategic acquirer like Unilever would shell out $1 billion on a startup simply because it’s a direct-to-consumer brand. And, lackluster IPO debuts from previous DTC darlings like Casper and Allbirds within the past four years have also soured the prospects of going public for DTC brands.

In turn, young DTC brands are being more pragmatic about their exit strategies — specifically, by not taking on venture capital funding too early on. Taking on more venture capital funding means brands need to secure a higher valuation when it’s time to exit in order to give investors a significant enough return — a prospect that’s become more difficult as the public markets have soured on DTC brands. Founders that are launching their brands today are opting to not take on venture capital funding until it’s needed for specific expansion, and are increasingly hoping to sell within three to 10 years as opposed to going public.

According to industry watchers and investors, founders have to be level-headed about exiting at any given point, especially at a time when further funding is no longer guaranteed. 

In 2021, a record number of retail startups went public via an SPAC or IPO after years of raising millions from venture capital firms. These companies, some of which had valuations of upward of $1 billion, needed a way to return their investors’ cash — and an IPO provided one avenue to do so. But now, many of these brands have faltered on the public markets, especially for those brands that have yet to turn a profit.Allbirds, for example, was valued at $1.7 billion at the time of its 2021 IPO.Now, its market cap has fallen to just $115 million.

Ben Cogan, co-founder of the aggregator Agora Brands, which focuses on businesses generating $1 million to $15 million in revenue, said both investors and founders are increasingly becoming more realistic about the future of the brand. “It’s a pretty tough time for DTC and consumer brands right now, both the venture-backed and bootstrapped companies,” Cogan said. The self-funded companies, however, are in better shape due to their ability to scale back without pressure from growing their topline during low demand. 

Currently, the venture-backed brands are trying to get acquired by conglomerates or PE firms, Cogan said. And while the IPOs from 2020 and 2021 haven’t gone well, some of the past M&A deals haven’t necessarily been foolproof either. For example, last October Dollar Shave Club was sold by Unilever after the conglomerate paid $1 billion for the startup in 2016. 

“I still think there are potential exits and opportunities for brands that are large and profitable enough to move the needle for a parent company or financial institution like a PE firm,” Cogan said. But struggling aggregators like Thrasio are showing that rolling up small brands hasn’t necessarily turned out well for these players.

Being realistic about the future of the company 

Indian spices brand Droosh launched in June 2023, at time when inflation has made it more challenging to run a food brand. As co-founder Serena Rathi told Modern Retail, “I’d be lying if I didn’t say it can be a struggle to navigate the evolving CPG landscape, especially with reduced funding and increased challenges due to higher COGS, shipping rates, vendor fees, among other costs.”

Droosh is currently 100% self funded with no outside investors, but Rathi said she’s looking into fundraising to support future retail launches. “I’ve gotten so many opinions on fundraising, so it’s top of mind for this year as we try to get on shelves — which can get really expensive,” she said.

Right now, the company has healthy enough cash flow to support upcoming product launches and much of the focus is on figuring out where to cut costs to extend the brand’s runway as much as possible. The Droosh team is currently working with a new manufacturer to help cut down costs and bring the product price down from $14 per container to get into grocery chains.

“So many successful CPGs have been able to launch without tons of institutional backing,” Rathi said, citing Haven’s Kitchen as one such example.

While the plan is to continue growing the company incrementally, Rathi said she’s realistic that the company will soon need to look at funding options — whether it’s from venture capital or debt financing. “The roadmap for the future can be scary as there is so much unknown and uncertainty at this early stage,” Rathi said.

“There aren’t that many Indian-specific spice brands, and we want to leverage that to appeal to big spice and seasonings players,” she said. Currently, Droosh is trying to build brand awareness through selling at specialty shops, doing pop-up collaborations with retailers like Nordstrom and building a social media and email following through storytelling.“

As founders, we often feel we have to have the best marketing, ads, imagery and influencers to partner with,” Rathi said. However, that all costs a lot of money. “I’m using the skills I have gained throughout my career in PR to help grow Droosh, rather than constantly paying an outside vendor to do what I can probably do myself.” This includes doing social media management, photography, recipe videos and media outreach.

Other founders are also sticking with keeping fixed costs low for the sake of growing sustainably.

Libie Motchan, co-founder of DTC insoles brand Fulton, said leading up to its launch in 2021 there were decisions made with profitability in mind. “It impacted the way we went about launching, including not taking on venture capital,” she said. Fulton, which has been profitable since the start of 2023, plans to “grow sustainably” for the foreseeable future, Motchan said.

Having seen the pressure outside funding creates, Motchan said that instead she and co-founder Daniel Nelson decided to self-fund the product launch.

When research and development began in 2019, Motchan said, “Everyone at the time in business school was raising money, but I realized it wasn’t as glamorous as it seemed.” The self-funding path also influenced the founders’ ideas for a product that can lead to profitability, and wanting it to have good margins and is light and easy to ship. “We wanted it to be something people come back and re-purchase,” she said — unlike big-ticket items such as mattresses.

With plans to get into wholesale in the coming year, Motchan said the startup expects customer acquisition to become easier. Eventually, the goal is to sell the company sometime in the next 10 years, or less if the right offer comes along. “There are exit routes for us, ideally an acquisition by a footwear conglomerate or another brand in the category.”  

Motchan said there were other seemingly small early decisions that helped the company reach profitability quicker, such as foregoing the DTC bells and whistles of an elaborate unboxing experience and sticking with simple packaging. “Another big thing for us is not hiring people and outsourcing projects to contractors on a one-off basis,” she said. Much of the marketing has come from organic UGC and partnerships with physical therapists and chiropractors. 

Planning for a strategic M&A deal

From an investor’s point of view, the reality of their return on investment is also setting in. 

Rachel Hirsch, founder and general partner at Wellness Growth Ventures, said a path to an IPO has evolved, “and for many brands, it’s no longer the preferred strategy.”

These days, there are very few brands going public, and they have to be large enough to warrant it — such as Harry’s, which reportedly confidentially filed to go public. “Consumer brands typically take longer to reach the scale required for an IPO compared to other sectors, which may not align with the goals of many consumer funds,” Hirsch said.   

“Particularly in the consumer packaged goods industry, both the idealistic and realistic exit often involve acquisition by a strategic player, such as Nestlé, Unilever, L’Oreal or Diageo,” Hirsch said. These acquirers often bring expertise in a similar space and can facilitate the brand’s expansion. Alternatively, Hirsch said companies may aim for private equity deals — which have become popular — from respected firms like L Catterton, KKR and TPG, or explore potential deals with large family offices. 

There are numerous strategies for growing a business, but once institutional capital is involved, Hirsch said the decision of when to sell becomes crucial. This is why many founders of newer brands have opted to try to bootstrap their businesses for as long as possible. “A founder’s emotional attachment can fuel motivation and resilience, but there comes a point where the value of an exit must be weighed against the value of continued growth,” Hirsch said.

Hirsch said, right now, her firm is starting these conversations about exit strategies early on with founders. Many founders have the drive to map out an ideal future for their brand. While this creative energy can help fuel innovation during the early stage, “I often find myself assuming the role of the realist in these discussions,” Hirsch said.

“Investors are becoming more realistic after those large funding rounds, and a lot of the brands that have survived have shrunk their topline revenue,” Cogan said. The only thing to do now is focus on profitability and efficiency in hopes of weathering the storm and eventually finding a buyer. “Brands have to assume they don’t have more funding coming in and live off the land, that’s the reality we’re in now.”

That’s the plan for some of the brand founders who spoke to Modern Retail about their companies’ future plans. “We definitely see ourselves continuing to grow, but realistically it won’t be at the same rate as it was the past couple of years,” Fulton’s Motchan said.