Following a year of significant pull-back in 2022, venture capital (VC) and growth investors in private companies are continuing to be cautious with their money — a potentially long-term trend that’s impacting the growth trajectories of both emerging and high-growth brands in the retail sector.
Global funding in Q1 2023 was $76 billion, a 53% decline from the same period in 2022, according to data from Crunchbase. In addition, every separate funding stage was down by 44% to 54% YoY, which shows investors are comprehensively assessing all current and potential investments at all stages of growth.
There are still plenty of investment dollars available, but retailers seeking to access them will need to make their companies attractive to cautious investors. Here are four important fundamentals these retailers will need:
- Establish a core business advantage;
- Tie your advantage to a clear value proposition;
- Get your customer acquisition costs (CAC) and LTV in order; and
- Map a path for expansion and diversification.
Investment Darlings: Sustainability, AI and Personalization
While the industry is rife with new brands designed to challenge the marketplace and offer consumers more pointed solutions, investors are considering the ripple effects of external forces, like inflation, that will undoubtedly impact the long-term ROI of their investments. Another indicator that this pull-back is about caution rather than a lack of investable capital are the “record amounts” ($1.3 trillion) of dry powder — cash reserves VC firms have on tap for when an attractive investment emerges. So despite the slowdown, there are still opportunities for growth-minded operators in the retail and consumer goods industry to win buy-in through 2023.
RevTech Ventures, an early-stage venture capital firm that invests in both retailers and retail technology, sees potential in numerous areas. “We are most excited about brands and retailers in the apparel and grocery/food space that are leaning into sustainability to reduce waste in the supply chain through returns,” said Lindsay Lightman, Principal at RevTech Ventures in an interview with Retail TouchPoints. “We are also excited about beauty and health/wellness categories that are leaning into generative AI to create truly personalized products and experiences for their customers.”
Because it’s more critical than ever for brands and retailers to understand how investors are analyzing and responding to the broader market, the Retail Innovation Conference & Expo, taking place June 13-15 in Chicago, is hosting a panel of investors to share their perspectives with an audience of brand operators and executives.
DTC and VC: Is the Honeymoon Over?
The most notable shift has been in VC’s emphasis on direct-to-consumer (DTC) brands. Once considered the “golden children” of VC, companies like Allbirds have had to restructure and rethink their core offerings to set themselves on a path to recovery.
“From a business model perspective, we have found DTC to be a misnomer,” explained Sonia Nagar, General Partner at Pritzker Group Venture Capital. She is responsible for sourcing, diligence and oversight of the firm’s investments in marketplaces, consumer products and services, and emerging technology companies. “All brands that want to achieve scale eventually find they need to be omnichannel, and often that means partnering with retailers,” Nagar noted. “Investors are looking for capital-efficient consumer businesses; there’s been a return to looking for good unit economics and business fundamentals.”
But that doesn’t mean digitally native or digital-first brands are out of luck — as long as they have a business plan that nods to omnichannel: “For us to find a DTC an ideal investment, we would want to see a well-diversified marketing strategy, not heavily weighted in paid media, as well as a channel into physical retail,” Nagar explained. “In fact, we’ve made a big bet on the latter with multiple investments in companies that are focused on bridging the gap of DTC to physical, including Neighborhood Goods (the department store of the future) and Shelfleet, which allows services businesses to add retail to their locations via rentals.”
In addition to monitoring macroeconomic trends and the overall fundraising appetite of other VC firms, Lightman and her team keep close watch on growing tech categories and their overall impact on retail organizations, since her firm serves both entities. Unsurprisingly, generative AI is the tech du jour: “We are keeping a close eye on the development of generative AI,” she explained, “how it is being applied across the retail marketing and operations spectrum, and the impact this has on the future staffing and tech needs for retailers, based on the shift in their pain points from automation.”
4 Tips for Brands Seeking VC Backing
Before brand leaders seek investment from a VC firm, they should think critically about whether it is a better approach for the business than “a slower-growth, higher-profit equity path,” Nagar advised. But if operators do decide to pursue VC, they need to ensure they are seen as a hot target. Nagar and Lightman offered tips for success.
Tip 1: Establish a core business advantage.
“It’s more important than ever to have something proprietary and unique about what you’re selling to differentiate in a sea of sameness,” Nagar said, adding that “those customer acquisition advantages matter.” Lightman agreed, noting that a brand’s proprietary advantage could be its core product, a service or even the backend tech and operations powering the business.
Tip 2: Tie your advantage to a clear value proposition.
Brands need to establish how their products and services tie to a larger — and needed — value proposition: “Build a strong brand identity, experience and loyalty with your customers from day one,” Lightman advised. “Ideally, cater to an underserved target customer with a specific beachhead.”
In business terms, a “beachhead market” is a place where, once you gain a dominant market share, a brand has the strength and positioning to dive into adjacent markets that have new opportunities for expansion.
Lightman gave the example of Pressed Roots — a company that has created a distinct hair salon experience for women with textured hair: “They are now at three, soon to be four, locations. All locations are at capacity with appointments due to high customer demand and have close to zero marketing spend. This is all because of the incredible word of mouth driven by the uniqueness of the product and experience.”
Tip 3: Get your CAC and LTV in order.
A strong customer base, which is measured by customer acquisition costs and overall lifetime value, reaffirms strong business fundamentals and a clear path to revenue, according to Nagar. This is crucial for many firms, particularly after the market has seen the financial crumbling of many fast-growing, VC-pumped brands.
Tip 4: Map a path for expansion and diversification.
While having a strong current position is great, brand operators also need to have a clear vision for the future. Lightman recommended building a long-term roadmap for diversification, whether through new sales channels, new products or new services that drive recurring revenue, such as subscriptions or VIP clubs.