Unprofitable Direct-to-Consumer Startups, Marketing V Productocracy

[MitchC]

View: https://youtu.be/WcNbIm0fRxk


Super well put together video and covers a heap of ground in the dtc space.

It makes me want to give up ecom, it’s getting so competitive now it’s ridiculous.

 

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[doster.zach]

View: https://youtu.be/WcNbIm0fRxk


Super well put together video and covers a heap of ground in the dtc space.

It makes me want to give up ecom, it’s getting so competitive now it’s ridiculous.

Yeah, I think if you're not wanting to constantly cycle products every 6 months you gotta have something proprietary/patentable.

You can see huge numbers in top-line from eCom stores but most are lighting like half of their cash on fire in ads.

 

[Andy Black]

View: https://youtu.be/WcNbIm0fRxk


Super well put together video and covers a heap of ground in the dtc space.

It makes me want to give up ecom, it’s getting so competitive now it’s ridiculous.

I’d never heard of DTC. Sounds like a buzzword for eCommerce.

I think the video’s conclusions are all wrong.

Maybe those businesses struggling (online or otherwise) should look at Blaise Brosnan’s formula R+R=Profit
(Repeat Business + Referrals = Profit).

 

[MJ DeMarco]

View: https://youtu.be/WcNbIm0fRxk


Super well put together video and covers a heap of ground in the dtc space.

It makes me want to give up ecom, it’s getting so competitive now it’s ridiculous.

Lots of great points here, most which have me thinking, "Duh! Really?"

I didn't need to look at financial statements to make an educated guess that these mattress companies are barely making a profit, if any.

TLDW? We're not a productocracy, we're a marketing company pushing mattresses. And now marketing is too expensive and saturated to even think about profits. And because our product cycle is nearly a decade long, now we're really F*cked, as are our investors!

 

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[MitchC]

I’d never heard of DTC. Sounds like a buzzword for eCommerce.

I think the video’s conclusions are all wrong.

Maybe those businesses struggling (online or otherwise) should look at Blaise Brosnan’s formula R+R=Profit
(Repeat Business + Referrals = Profit).

It is, I think my negative point for myself is that we are competing for ads with these big funded companies that have huge teams and are still losing millions.

It’s amazing to me how many companies are supported by venture capital and govts and have employees basically working from home doing nothing and they’re losing money. It’s almost like the ubi is already here.

 

[MJ DeMarco]

I pulled this topic out of the Random thread because I think it is a fascinating case study on many things, from business model selection, to value skew, to companies running productocracies VS companies who are marketing rackets.

Note: If you stop advertising and you're business stops growing, you're likely running a marketing firm.

 

[Andy Black]

I did notice and find it funny that the video explained how Facebook Ads, Instagram Ads, etc were saturated, and that everyone online had seen the ads.

What about Google Ads and getting in front of people actively looking to buy? Ads get in front of different people each month, but with the same search intent. I always wonder why that never gets mentioned.

 

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[Andy Black]

Another observation at the end was how someone is interviewed and says “How many online businesses are profitable?” and they both laugh saying “None.”

So of one online business didn’t work then the logical conclusion is all online businesses don’t work?

What about dollar shave club and other successful subscription businesses?

And what do they mean by an online business anyway?

It seemed like a big circle jerk to me… both getting into this “new” DTC model (which just looks like eCommerce to me), and then dissing the model after a business failed (because they didn’t have Repeat Business or Referrals, not because they sold online).

 

[Two Dog]

My perennial favorite example - and one of the earliest - pioneering this path was Webvan.

$800 million in capital raised plus three years of operations got the company to this stage:

At its peak in 2000, Webvan had $178.5 million in sales but it also had $525.4 million in expenses.

Heck, even Bezos eventually made money after twenty years of fighting against it.

 

[Andy Black]

I worked for one of those startups that spent millions in investor money to acquire users fast with the hope they'll get bought out one day. They never made any profit and went bust. They had a big engineering team mind. Their goal was to "build a social network", not to "help millions of people find work".

Prior to that I worked for a company with a simple (and grey-hat) arbitrage business where they were "profitable from day one" and scaled to over €120k/day spend. Shame they didn't create any customers (people with a custom of buying from them) and they did go pop when Google banned them.

Lots of money spent by both, but ultimately it was all smoke and mirrors.

I'd rather be profitable from day one while "making customers". (That's a nod to Peter Druker's line that "The purpose of business is to create a customer" ... and my own belief that a customer is a someone with a *custom* of buying from you - aka is a repeat buyer.)

 

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[Nicole]

There's something about mattresses in particular. Where I live, a mattress sales store has some kind of giant 'GOING OUT OF BUSINESS! EVERYTHING MUST GO!' sign put up, almost every year. It'll be the same store every time, I forget what, Mattress Warehouse or something. It isn't even an online business. It's more like, any business that sells a durable good that doesn't need constant maintenance and repair (like a car), a product that isn't necessary in order for you to keep a job so that you can pay the rent (like a car), a product that doesn't break down easily and is still usable for its purpose even if it has some minor flaws or minor wear and tear, and it basically lasts forever. There are no trendy, popular fads and fashions with mattresses, in such a way that all of your friends and coworkers are going to see what kind of mattress you have, what style of mattress it is, what color of mattress it is, the way they see your car. Nobody sees the mattress except your family and a small number of people who come to your house, and it's not considered socially normal to loudly brag about what type of mattress you have, to everybody, to compete to have the most popular brand of mattress, or to gain social status or to virtue signal with your mattress. Mattresses don't go up in value, and then get sold for a profit, the way real estate does, so you don't see your mattress as 'gaining equity' or something, where you can take out mattress equity loans on your gold-plated mattress that's going up in value. Instead, people just throw mattresses in the dumpster. They relocate to a new home, probably because they're hoping to make a profit by selling their old home, and when they leave, or go to a new job in another town, it's too much trouble to waste money driving a moving van just to take the mattress, so it's thrown away. I've lived near State College, the town where Penn State University is located, for many years now, and I've seen enormous mountains of furniture that just get thrown into dumpsters, every single semester when students leave. If Casper would target the demographic of college students who hate carrying a mattress up three flights of stairs, they should make a lightweight, disposable mattress and claim that it's biodegradable or something. But college students who throw their mattresses in the dumpster every couple months are apparently not the same demographic that was buying Casper mattresses, I don't know. Also, once again, the business declined after the original creator sold it to someone else. The original owner's special talent must have been 'Talking to venture capitalists and convincing them that my company is great.' You can go a whole lifetime doing nothing but that, without actually producing anything, and probably get away with it.

 

[Nicole]

And actually, I think that's a good time to 'retool the factory.' If you can literally reset your factory to make some other kinds of products, instead of that one particular durable good like the mattress, then you can keep the business going. The business has to sell more than just one thing, it has to sell something else, something with a shorter lifespan, something non-durable.

This is why I think about things like starting a business from a cave, or a tent in the woods, where you wouldn't be paying any rent or any overhead costs. That way, if you saturated the market with mattresses, there would be no need for any revenues. Your mattress factory has to have its own attached subsistence farm and living quarters for all the employees there too.

 

[Mhesh]

View: https://youtu.be/WcNbIm0fRxk


Super well put together video and covers a heap of ground in the dtc space.

It makes me want to give up ecom, it’s getting so competitive now it’s ridiculous.

Cool.. DTC SOUNDS GREAT BUT The Mistake they did was trying to put money back into the marketing that’s just crazy I never heard anything like that just losing billions of dollars just like that.

 

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[Two Dog]

I didn't need to look at financial statements to make an educated guess that these mattress companies are barely making a profit, if any.

Well, "these" meaning all the VC funded Silicon Valley companies that believe themselves smarter than the average bear. It's just a modern Ponzi scheme. It only took hundreds of millions in losses for Casper to come around to what all those "stupid" boring antiquated companies selling mattresses have been doing for decades. The video is a great summary of the endless hubris of the tech bros and their VC partners.

Most of y'all are probably unfamiliar with how VC capital works. You might reasonably think it's savvy business people making brilliant investments in promising startups hoping to make a company successful. After all, these are the uber wealthiest, smartest, most business savvy people on the planet, right? You would be wrong.

It's much closer to PT Barnum in khakis and a collared golf shirt. Venture capital firms raise money from institutional investors who manage things like giant state retirement funds, college endowments and trusts. Wealthy individuals sometimes kick in a small bit e.g. celebrities interested in making a splash on social media.

The standard deal terms are 2/20.

That means the VC firm keeps 2% annually of funds raised as a management fee AND earns a whopping 20% of any profits earned by their investments in (mostly) tech startups. Brilliant or stupid, those 2% fees are collected every year exactly the same as any managed investment fund. There's a well known VC firm based in Boulder managing over $1B with four partners. Do the math on their annual take from fund management fees alone.

The 20% bonus carries exactly ZERO risk (other than reputation since it's not the partners personal money at stake), so the natural tendency is throwing money at the longest of long shots. Every once in awhile, one of their portfolio companies hits a grand slam and earns them an extra few billion. Those are the fabled unicorns. PR firms have a public orgy and the game continues. The reality is the grand slam is carefully orchestrated by manipulating the IPO price long before it actually hits the market by making private deals with investment firms who promote the stock to (yet again) another bunch of institutional investors.

And that is how the sausage is made.

 

[Mhesh]

I pulled this topic out of the Random thread because I think it is a fascinating case study on many things, from business model selection, to value skew, to companies running productocracies VS companies who are marketing rackets.

Note: If you stop advertising and you're business stops growing, you're likely running a marketing firm.

True if they stop advertising, they’ll be losing customers??? They rely on customers on ads??? But pouring all funds on advertising; going into there pockets for company expenses?? Ohh dear??

 

[MJ DeMarco]

Well, "these" meaning all the VC funded Silicon Valley companies that believe themselves smarter than the average bear. It's just a modern Ponzi scheme. It only took hundreds of millions in losses for Casper to come around to what all those "stupid" boring antiquated companies selling mattresses have been doing for decades. The video is a great summary of the endless hubris of the tech bros and their VC partners.

Most of y'all are probably unfamiliar with how VC capital works. You might reasonably think it's savvy business people making brilliant investments in promising startups hoping to make a company successful. After all, these are the uber wealthiest, smartest, most business savvy people on the planet, right? You would be wrong.

It's much closer to PT Barnum in khakis and a collared golf shirt. Venture capital firms raise money from institutional investors who manage things like giant state retirement funds, college endowments and trusts. Wealthy individuals sometimes kick in a small bit e.g. celebrities interested in making a splash on social media.

The standard deal terms are 2/20.

That means the VC firm keeps 2% annually of funds raised as a management fee AND earns a whopping 20% of any profits earned by their investments in (mostly) tech startups. Brilliant or stupid, those 2% fees are collected every year exactly the same as any managed investment fund. There's a well known VC firm based in Boulder managing over $1B with four partners. Do the math on their annual take from fund management fees alone.

The 20% bonus carries exactly ZERO risk (other than reputation since it's not the partners personal money at stake), so the natural tendency is throwing money at the longest of long shots. Every once in awhile, one of their portfolio companies hits a grand slam and earns them an extra few billion. Those are the fabled unicorns. PR firms have a public orgy and the game continues. The reality is the grand slam is carefully orchestrated by manipulating the IPO price long before it actually hits the market by making private deals with investment firms who promote the stock to (yet again) another bunch of institutional investors.

And that is how the sausage is made.

Awesome summation, thank you. In other words, its one steadily paying racket which funds another riskier racket.

"Management fees" are used to guarantee the investors a profit when there aren't any profits.

 

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[notorious]

Well, "these" meaning all the VC funded Silicon Valley companies that believe themselves smarter than the average bear. It's just a modern Ponzi scheme. It only took hundreds of millions in losses for Casper to come around to what all those "stupid" boring antiquated companies selling mattresses have been doing for decades. The video is a great summary of the endless hubris of the tech bros and their VC partners.

Most of y'all are probably unfamiliar with how VC capital works. You might reasonably think it's savvy business people making brilliant investments in promising startups hoping to make a company successful. After all, these are the uber wealthiest, smartest, most business savvy people on the planet, right? You would be wrong.

It's much closer to PT Barnum in khakis and a collared golf shirt. Venture capital firms raise money from institutional investors who manage things like giant state retirement funds, college endowments and trusts. Wealthy individuals sometimes kick in a small bit e.g. celebrities interested in making a splash on social media.

The standard deal terms are 2/20.

That means the VC firm keeps 2% annually of funds raised as a management fee AND earns a whopping 20% of any profits earned by their investments in (mostly) tech startups. Brilliant or stupid, those 2% fees are collected every year exactly the same as any managed investment fund. There's a well known VC firm based in Boulder managing over $1B with four partners. Do the math on their annual take from fund management fees alone.

The 20% bonus carries exactly ZERO risk (other than reputation since it's not the partners personal money at stake), so the natural tendency is throwing money at the longest of long shots. Every once in awhile, one of their portfolio companies hits a grand slam and earns them an extra few billion. Those are the fabled unicorns. PR firms have a public orgy and the game continues. The reality is the grand slam is carefully orchestrated by manipulating the IPO price long before it actually hits the market by making private deals with investment firms who promote the stock to (yet again) another bunch of institutional investors.

And that is how the sausage is made.

Isn't this how Elon Musk got rich as well? In most of the startups he joined, he didn't know much about the product and there were way better coders than him, but he did have those important VC connections that'd invest big money in all of those startups. Essentially, the startup team didn't need him for classic startup skills like coding, but more for his money-raising ability. Are you going to say to a guy who can relatively quickly get you 1-10 million in capital?

 

[Two Dog]

Isn't this how Elon Musk got rich as well? In most of the startups he joined, he didn't know much about the product and there were way better coders than him, but he did have those important VC connections that'd invest big money in all of those startups. Essentially, the startup team didn't need him for classic startup skills like coding, but more for his money-raising ability. Are you going to say to a guy who can relatively quickly get you 1-10 million in capital?

Elon did have two or three successful companies before moving into that world. It was something like Zip2 followed by PayPal, but the Wikipedia reference sounds right. Tesla was also dying quickly before getting its lifeline $700M loan from the US government.

Legend says Elon was down to his last few million and sleeping on his brother Kimbal's couch before convincing him to throw in another few million of his own to keep Tesla afloat. Kimbal owned a popular Boulder restaurant at the time that would never throw off millions. I always assumed he made money back in the day with Elon but never had a chance to ask him directly. You got me curious about the actual back story. Yes, it was a painting business. Probably one of the College Pro Painters franchises followed by jointly starting Zip2 which Compaq bought for $300M.

This has to be the single most successful 12 month internship in the history of business seeing how it led to Zip2. ;-)

I did a business in a box called College Pro Painters. They taught you how to paint houses, how to hire and fire, how to sell, how to deal with customers. You got a one-year franchise. It was the hardest year of my life in terms of hard work. I won manager of the year. It was very successful.

Kimbal Musk

 

[fastlane_dad]

Interesting video and always some truth and food for thought in all of it. And it's true - 'DTC' , and online ads have become very competitive, and almost untouchable for the 'fastlane' minded individual, most likely bootstrapping, having close to no access to advertising money to throw at their new product.

I have never been a fan of mattress in a box model and it has always been easier and more welcoming to hit the local mattress firm to find one I would be happy to lay my head on every night. I was always surprised there was a MARKET for online orders of this (hence maybe why customer acquisition is so dang expensive here!). By a quick glance, it seems like they are hitting their stride with retail sales - hinting at the fact you can't fully avoid it with mattresses, just took them longer then it should have to figure that out.

E-com will def live on, but the sources of marketing will definitely change, and new channels and opportunities will always live on, evolve and turn over.

Also - what I noticed through many many businessess and iterations myself is the small guy, starting out has MANY benefits and advantages over these VC ran , corporate structure like companies. Everything from being able to offer unrivaled customer service and pick up the phone, to making decisions swiftly, keeping overhead as low as possible - to not having to pay out thousands/hundreds of employees sitting around doing nothing all day.

@NeoDialectic and I literally witnessed that over the span of one year - while handing over our Amazon/FBA business to a much larger , corporate ran conglomerate. They introduce a LOT of slop to every decision made - and have abolished or turned away every mindset and key decision we have made in and to our business over the years - including many and all key actions that made the business a success throughout our time spent in it.

Yes - advertising on facebook , instagram, amazon etc is getting more and more cost prohibitive - but it doesn't mean there won't be a way forward even for the small guy to compete in e-com - just some additional ingenuity might need to enter the picture.

 

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