A couple of weeks ago on VC Cafe, I wrote about “DTC Startups Disrupting Traditional Brands” and got some great reactions from colleagues in the industry, as well as questions about what’s the status of European DTC brands. In addition, some pointed out of interesting posts written on the state of direct to consumer brands in Europe: Like this one from Levin Bunz from Global Founders with this outdated crowdsourced list of European DTC startups, this one on AI for DTC brads or this one by Max Niederhofer from Sunstone Capital who literally changed his LinkedIn title to VC for DTC brands.
I’ve asked three European VCs to chime in on what are the challenges and opportunities in European DTC startups.
Simon Menashy, partner at MMC Ventures shared a great set of learnings from backing a number of European DTC brands:
We’ve backed quite a few including Gousto (recipe boxes), Bloom & Wild (flowers) and Pact (coffee). Some lessons:
– Brand is SO important, and a distinct discipline. Your performance marketing talent may not be your brand talent. Decide who the customer is and know them well (+ get out of your London/Paris/Berlin bubble).
– Relentless focus on the customer proposition and experience pays dividends. Always be innovating. Have opinions and curate.
– High quality, high volume content creation needs to become a core competence and team.
– Your channels will top out (or become expensive to scale further). Always have experiments running. You probably can’t avoid above-the-line much past $10-20m revenue.
– Continual focus on operational excellence (margins, waste) delivers huge benefits over the long-term and is the difference between viable and uneconomic. Push and support your suppliers to innovate too – even put your people in their premises.
– There are unavoidable operational step changes (e.g. moving to a bigger warehouse, bringing more in-house over time). If you fuck one up you can be dead. Plan plan plan, test everything and consider sacrificing some cash to dual-run.
– Investing in ML can impact all of the above enormously (personalisation, demand forecasting, retention, warehouse efficiencies).
– You will have clones. Each of the companies I mentioned has at least ten. Don’t ignore them but don’t let them distract you.
Samaipata Ventures is a Spanish originated fund investing in marketplaces and e-commerce startups in Europe. Carmen Alfonso Rico, Principal at Samaipata, is ex Felix Capital, investor in several European DTC brands.
Challenges:
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Fragmentation – A clear challenge for European D2C brands is the fragmentation of the market when it comes to international expansion. US is one single market that shares a common language, as opposed to Europe, where different country languages, culture and regulations make scaling more challenging, all the way from product development to marketing and shipping. –
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Funding – I would say that another challenge for European brands is funding, especially on early stages, as many investors have questions on the scalability of a working capital intensive model and demand to see proof of differentiation in highly competitive spaces – how big can this become is a question D2C founders face on daily basis. This seems to be changing though, with more and more top-tier European VCs starting to look at D2C brands
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Exits – Finally, Europe hasn’t proved to be a very liquid market when it comes to D2C brands and we haven’t seen big exits in the space, with most coming from the US.
Opportunities:
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Blue Ocean – Europe has traditionally have an edge in many sectors that are leading the redefinition of commerce by D2C brands – food, fashion, beauty, art. It´s our heritage and that gives us a huge advantage in terms of know-how and talent – US commerce penetration as % of total retail sales in the US is higher (c. 14.8% in 2017, Statista) than the European average (c. 9% in 2017), but both the UK (c. 18% in 2017) and Germany (15.1% in 2017) are way ahead the US. UK and Germany are great testing grounds to then go after the US (if that’s the plan)
JamJar Investments is a fund born from the founder of Innocent, the iconic British smoothie brand that was eventually acquired by Coca Cola. Kirsty McDonnald, an investment manger, chimed in on the challenges and opportunities for European DTC brands:
Challenges:
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The cultural and language barriers across Europe have a huge impact on community building and brand, impacting more deeply in my opinion that ops and commercial challenges stemming from the same issue
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Product leads who can nail both physical and digital products and consumer journeys are like gold dust – they should be cherished
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The brand has to be disruptive to stand out whilst appealing to core demographic. I think there is a large challenge moving beyond the Red Antler aesthetic from the US. Europe needs to be different.
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Far too much focus on paid channels over WOM and community. Just because your paid channels are profitable now doesn’t mean they always will be.
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Where and how to build that community is always a question – we’re seeing a flood of similar brands across the main platforms following the same play book.
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We often see entrepreneurs branching out too quickly before nailing their core product or geography – it’s tempting but better to focus on being the best, not necessarily the first
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The Amazon threat is always in the background of course – you can never become a commodity
Opportunities
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True personalisation at scale builds an strong operational moat and is searched out by consumers. Both demand and supply side can shine here.
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The quicker you can listen to your consumers through all channels and then iterate your product and journey the greater the gap comes between you and your competitors and imitators. This can be a serious source of competitive advantage – companies should be set up from the beginning with this at core.
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I think a lot of products in the personal care and household categories are for the taking if done right on product, price, brand and frequency. The big FMCGs are taking their consumers for granted.
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There is a whole wave of exciting last mile delivery/mobility tech that is on the verge of breaking through. Test and learn on this – if you do experiment responsibly you could truly accelerate the consumer experience.
I’ll continue to monitor the digitally-native, vertically-integrated brand (DNVB) in Europe and Israel with Remagine Ventures. Would love to connect with founders starting up one of these.
I'm a former general partner at google ventures, head of Google for Entrepreneurs in Europe and founding head of Campus London, Google's first physical hub for startups.
I'm also the founder of Techbikers, a non-profit bringing together the startup ecosystem on cycling challenges in support of Room to Read. Since inception in 2012 we've built 11 schools and 50 libraries in the developing world.
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