Commerce Flows vs. Capital Flows
The Rise and Fall of the eComm Empire
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As we highlighted in our Death to DTC? post, the DTC-only strategy is no longer a viable path for the vast majority of brands. In 2016, Andy Dunn, CEO / Founder of Bonobos, coined the now famous term DNVB — digitally native vertical brands. Since then, billions of VC dollars have poured into not only DNVB brands, but also the ecosystem supporting these brands and the broader ecommerce channel — “ecommerce enablement” software and services.
As we mapped this space, we estimate that this category has raised >$17B+ in venture capital. This list (and the market map above) is by no means all encompassing, with the number of companies and funding likely being far greater. We’ve also seen Amazon aggregators raise at least $15B+ and OpenStore, the most prominent Shopify aggregator, has raised $130M+ since its inception in 2021 with others like Everstores announcing fundraising rounds in 2022. Even more meta are the roll-ups of ecommerce enablement businesses — Cart.com alone has raised $380M+ to date. In totality, this opportunity has commanded close to $35B of venture capital dollars and has commanded a total market cap far greater (Shopify alone is valued at >$50b).
Fast forward to today, DNVB stocks are massively down — Warby Parker, Rent the Runway, Allbirds are down ~77%, ~80%, and almost 100% respectively since the IPO (as of 3/1/2023). Shopify saw a similar story — the stock is down ~70% since it’s November 2021 high. These companies are seeing incredible pressure on acquisition costs, return rates and pricing power. All this is leading to not only a breakdown of the core DTC thesis, but also the economics of these brands (which is reflected in their share price). While there has been plenty of hype around the “DTC” thesis, there has been little evidence of success to support all the capital behind it.
The Mismatch in Commerce vs. Capital Flows
Contrary to what venture capital flows would suggest, ecommerce dollars, particularly those attributable to DNVBs, make up a small part of all commerce flows. Retail is a gigantic industry — standing at $7T in spend in 2022 and making up 6% of US GDP. While ecommerce penetration now hovers at 15%, or $1T in spend, the vast majority of ecommerce volume goes to eRetailers / multi-brand retailers or third party marketplaces like Amazon. Direct-to-consumer actually only holds $160B in spend, with DNVBs at a measly $38B, roughly 1% of all retail activity. For context, that is nearly the same amount as the VC investment into tools supporting them.
Traditional brick & mortar still makes up 85% of all volume, representing $6T but the offline vs. online dichotomy doesn’t even tell the full story as it’s from the point of view of where consumers are transacting. Behind the scenes, the dollar flows are even more complicated. Wholesale remains a critical part of the industry as about 70% or $5T in spend goes through B2B distribution at some point regardless of where a consumer is ultimately purchasing the product — either online or offline. Similarly, off-price / disposition functions in similar ways and is a reliable channel for DNVBs and established traditional brands alike to liquidate excess inventory and accelerate their working capital cycles. This channel is also seeing incredible volumes with ~$270B in global sales in 2021. Not only were omnichannel and excess inventory THE buzzwords of 2022, but also the dollars flowing through B&M, wholesale, and disposition channels are magnitudes bigger than those through ecommerce alone.
Despite the massive economic opportunity, the investments into these areas have been extremely light. Brick & mortar has seen limited investment (with our portfolio company Leap demonstrating itself as the only player that has raised >$50m), despite demonstrating itself as a significantly better channel for brands than DTC. Off-price has seen tremendous success for retailers with companies like TJ Maxx ($89B market cap), Dollar Tree ($33B market cap), Dollar General ($48B market cap), but has been underinvested in other than our portfolio company Ghost.
Wholesale may be the exception to this dynamic with Faire, which has raised $1.7B to date and Ankorstore, its European-based competitor which has raised €365M and was last valued at $2B, being highly sought after venture darlings. These platforms, however, are primarily focused on the long tail of both brands and retailers, leaving the vast majority of wholesale activity untouched. While we have seen more early stage activity within wholesale in the last few quarters, the VC investments in the space is wildly disproportionate to the scale of the opportunity.
Follow the Money
As we noted in our Unbundling of Retail post, we have long been focused on helping brands 1) leverage third party platforms to achieve economic sustainability earlier in the life of their companies and 2) reduce their dependence on dominant 3rd party platforms like Facebook, Google and Amazon. This thesis was challenged by many amidst the capital raising environment of the last few years, but is more important than ever as brands reprioritize economics over irrational growth. We’ve been fortunate to see the maturation of this theme with our portfolio companies Leap and Ghost, as well as with the many other enabling solutions that partner with that have mutually aligned with this thesis. However, the severe imbalance in Commerce vs. Capital Flows shows that we are in the earliest days of the “Great Unbundling”. We see tremendous opportunities in enabling infrastructure and channel diversification with innovation opportunities necessary in wholesale, off-price, multi-channel enablement and reverse / return logistics.
If anyone’s building in these spaces or wants to “follow the money” with us, please reach out to Rick (zullo@equal.vc) or Chelsea (chelsea@equal.vc)!