Why the Devil is in the detail for Angels and Venture Capitalists (VCs) when investing in an established Direct to Consumer (D2C) brand

Why the Devil is in the detail for Angels and Venture Capitalists (VCs) when investing in an established Direct to Consumer (D2C) brand

Investors can back many different safe sectors to spread their risk, Real Estate and Life Sciences being popular examples, however when it comes to Direct to Consumer (D2C) online brands one should ask themselves the question “WHY” back this very risky area of business?

The already overcrowded D2C online sector has seen many changes since its existence, but the last 3 years intensified by the pandemic, specifically saw this sector evolve rapidly bringing with it a lot of complexity and a fierce competitive landscape. Coupled with the current economic climate and consumers tightening their belts as a result, one needs to consider very carefully if investing in this sector is worth its gravy. If you decide to embark on the nail biting journey of investing in brands serving consumers online, you need to know one thing for sure, it’s not for the faint-hearted!

Why is it so risky to invest in a D2C online venture today and what needs to be considered?

Technology enabling entrepreneurs to find a product and open a webshop in hours has erupted overnight with plenty of affordable SaaS eCommerce providers like Shopify and BigCommerce widely available. Although this is generally good news for entrepreneurs, it has meant that the amount of investment opportunities and start-up pitches have quadrupled at almost the same rate as the very technology fuming this phenomenon, making the size of the market mountainous. This also means that competition is much easier to pop up as technology is no longer a barrier for selling online. Not only has it become more difficult to identify the winners because of the cosmic size of the online market, but at the same time it has become easier for competitors to compete online (and in many cases win).

It is this very competitive landscape that makes the task of finding new customers for online businesses so challenging. According to a recent report by Forbes, the costs of online advertising are increasing expeditiously while the return on ad spend (ROAS) is also decreasing. Advertising on Facebook, for example, costs on average 47% more than a year before.

Another blaring challenge is people and management. VCs are taking a number of key considerations into account when making an investment, and solid management is probably one of the most vital parts of that decision. Having a team that can grow and scale the business to the next level is often a case of make or break for any business, even more so in a crowded space such as selling online. Not all entrepreneurs are good managers, and certainly don't always come with the experience required to scale a business to become a future billion-dollar company. 

Sadly, even with the best intentions at heart and good business acumen, inventors are unable to push the business forward because of the lack of good data and insights. Just to clarify here, the data is certainly available for good decision making, however, it is hard to find and is highly fragmented. It is a physical impossibility to manually gather and connect the various sources of data-points required to make good informed business decisions when running an online business. Even if it was possible the time it would consume would make the insights outdated by the time they were produced.

Let's look at a practical example: 

A typical online store today would have data in at least the following mandatory services in order to operate at a very elementary level: 

  1. eCommerce platform such as BigCommerce, Magento or Shopify
  2. Google Analytics 
  3. Google Ads 
  4. META (Facebook) Ads 
  5. TikTok 
  6. Email or marketing automation (e.g. DotDigital, Klaviyo) 
  7. Loyalty programs (e.g. Loyalty Lion, Yotpo)
  8. Customer Support (e.g. Gladly, Gorgias)

This is a basic example and doesn’t include other services often required by a typical online business of a meaningful size, such as an Enterprise Resource Planning (ERP) System, a Fulfilment Service, Shipping solutions, Product Information Management (PIM) Software and potentially also a Point Of Sale (POS) system for pop-up or physical presence.

It is apparent that in order to get meaningful business insights, such as how to detect relevant changes in trends or to identify how to build better product bundles, one would need to look at relevant data, easily from 10-20 different sources of information. What is of critical importance is not just getting hold of the relevant data but to successfully identifying the relationship between the data, turning it into meaningful insights. This can be very challenging at times as different services and technologies store data in different formats. It makes it difficult to draw a relationship, if not completely familiar with each source’s data-structure, which is ever-changing as SaaS products develop continuously.

It is therefore paramount that Angels and VCs scrutinise a brand’s capability to draw insights, such as future sales forecasting, from various data sources and services in real-time automatically without relying on manual data pairing. The day-to-day operational demands of running an online store are onerous and eCom Managers typically won’t have the time to do manual calculations and keep spreadsheets up-to-date. Failure to have a clear view on insights spanning all online services could very well mean that the business is not able to detect and proactively act on threats and opportunities to stay ahead of the competition.

Following the right metrics is crucial 

There are out-of-the-box marketing tools available such as Triple Whale, Elevar and Segments to help brands with reporting and specific analytics. They are helping brands with customer acquisition and marketing attribution related challenges. What is needed however is a true Business Management Platform (BMP) such as Ellis not only to provide reporting capabilities, but also to provide the insights and actionable changes required to build growing, profitable and sustainable eCommerce businesses.

As a current or future investor, it’s very important to have easy access and automatically track the following values in real-time: Average Order Value (AOV), Customer Acquisition Cost (CAC), Lifetime Value (LV), Return On Advertising Spend (ROAS) and Retention to identify trends, but more importantly to get the insight on what actions to take to capitalise on trends, with proactive alerts to inform the business and stakeholders on what action is needed.

Important Gross Margin metrics that’s also vital for investors to make informed decisions are automatically provided by Ellis on a continuous basis across different stages of the production and online sales process, such as: GM1 (after product costs), GM2 (after logistics, payment, platform costs) & GM3 (after marketing costs).

It’s this data together with accurate sales forecasting for the next 30, 60 & 90 days that’s not available in other off-the-shelf reporting tools that’s essential for Angels and VCs to determine a brand’s future success and longevity.


Sustainability and responsibility 

Investors should also have their finger closely on the pulse when it comes to Sustainability and Responsibility, and how customer behaviours and their attitudes change towards these sentiments on a hyper local level (especially when selling in more than one market). We already know that roughly 65% of consumers say that they want to buy products that promote environmental sustainability but only about 26% of them actually put their money where their mouth is.

Online brands need to step up to the challenge and communicate accountability on how they are a profitable, growing and responsible e-commerce business! Ellis provides real-time insights on a brand’s current Sustainability impact with detailed metrics around Returns, Most Returned Products, Unsustainable Customers, Heavy Returners, etc. These allow brands to honestly, transparently and concretely communicate about the company's immediate and future Responsibility actions .

We envisage that this type of reporting and transparency on a brand’s Sustainability impact will become standard legislation in the not-to-distant future, and failure to have a Business Management Platform like Ellis in place to provide these compliance details risks increasing operational costs and decreasing GM2 margins (after logistics, payment, platform costs).

Good examples of brands that are already leading the way to be environmentally friendly and responsible are:

Patagonia - 1% of sales goes to the planet, offering a repair service & possibility to recycle and buy used clothes.

Wolf & Badger - Each product contains sustainability guarantees in easy-to-recognise icons.

House of Marley - Use of sustainable materials, such as bamboo, and recycled fabrics and silicone.

The stakes are high and taking all of these aspects into consideration could be overwhelming for Angels and VCs at the best of times. Then there is also the challenge of visualising what a useful Executive Summary could look like for investment purposes? Afterall, investors are busy people with little time to digest large data reports to find the high level information needed for decision making purposes. To help with this visualisation there is an example at the bottom of this article of an Executive Summary produced by Ellis, for the purposes of future investment of any existing online brand. (Please note that this is an example only and by no means exhaustive of the full capabilities of Ellis - for a full demo please visit Ellis or get in touch with the Author.)

It has, however, been proven with many online businesses that if a holistic approach is followed to make business decisions from insights across a brand’s entire ecosystem of services (and data-points) then achieving success is inevitable if the basic business principles are applied at the time of investment.

It’s reassuring that over 30% of all the top eCommerce brands globally are investor backed with some great examples of fast-growing online businesses such as Leesa, allbirds, inkbox, ThirdLove, Rothy’s, chubbies, brooklinen, Boll & Branch, etc. 

And it is even more impressive to follow the progress and great success stories the following investors have with their Brands:

Piper (with brands Bloom & Wild, Omlet & Wattbike)

BGF (with brands MorphCostumes, Primrose & Gousto)

True (with brands Urban Legend, Indē Wild, Bedfolk

Wayflyer (with brands Cigar Club & Dock & Bay)


The key to success

The conclusion being that there are certainly growing challenges when it comes to investing in an existing Direct to Consumer (D2C) online brand, however having a business management system in place to draw insights from a brand’s entire ecosystem of services (and data-points), without relying on manual human intervention could be the key to driving the business forward and successfully growing on investment. 

Closely evaluating important metrics and key indicators across various sources of services and data (like the report below) before embarking on a new investment, and being able to apply these insights across your entire ecommerce portfolio for all your ecommerce brands will allow you to scale your investment efforts for a more profitable portfolio.

Please feel free to get in touch directly with the Author, Hain Joubert (hain.joubert@woolman.io) of this article to discuss any of the points in more detail or if you have any questions, feedback or comments. 

About the Author: Hain Joubert (https://www.linkedin.com/in/hain-joubert-062b2a48/) has more than 20 years experience in the eCommerce industry and previously led business expansion for PayPal and Shopify in Europe. He is currently Managing Director at Woolman, an international full-service Shopify Plus Agency helping 350+ Shopify Plus merchants to be successful online. Hain works closely with VCs & PEs in the UK to accelerate their existing ecommerce portfolios and streamline the addition of new ones.