There are infinite paths when it comes to scaling a direct-to-consumer brand, but eventually, every DTC company will have to decide whether to take an exit or maintain private operations. In this blog, we’ll explore common exit strategies, current trends in the DTC landscape, and the rationale for choosing one exit type over another.
In business, an exit strategy is a contingency plan used to further the growth of the company once it has reached a certain point in its lifecycle. DTC brands typically exit when they need more resources or capital to continue growing and serving their customers. Depending on the exit plan the company’s owners or investors choose, the goal may be to raise additional capital or to attain more resources to fuel the company’s next phase of growth.
There are two primary exit plans: an acquisition or merger with a larger company, or going public. Some companies choose not to exit at all and continue operating as an independent, private entity.
All direct-to-consumer companies past and present were born out of the same experience: their founder took personal affront to the status quo. And then they decided to change it.
But that’s about the only thing all founders have in common. Their experience, professional backgrounds, passions, and goals run the gamut. Some founders start their companies solely because they want to see their vision come to fruition; others start with the goal of building an empire; and some are eager to turn a profit and move on to their next venture.
The mindset of the company’s initial leaders will determine how they approach every element of the business, from funding to product development. For example, a founder whose sole goal is to bring a product to market might take an early buyout from a bigger company with the infrastructure and brand awareness to market it effectively. On the other hand, an entrepreneur looking to build a $1 billion business from the ground up may be very particular about the investors they’ll accept funding from so they’re able to grow at a healthy pace and maintain control of the company.
Of course, other factors like market stability, revenue growth, and gross margins will also factor into the company’s ultimate decision, as well as the immediate needs of the business, like bigger infrastructure, distribution, and marketing capital.
Once the company has reached a certain size—typically $80 million in annual revenue and 7-10 years of age, according to Airhouse research—the founder(s) will choose to go in one of three directions.
When it comes to exiting—or not—there’s no right or wrong answer. What the company chooses to do ultimately comes down to the founder’s goals, the business’ needs, and the options available to the company at that moment in time. An exit is the natural next step when the brand needs more resources to continue serving customers effectively.
As we previously mentioned, DTC companies have three options when it comes to exit strategy. Each corresponds to a different set of goals and needs that the company is striving to meet at the time of the exit.
Let’s explore these three exit plans in greater detail:
Acquisition is still the most common exit plan for DTC companies, but it’s becoming increasingly common for these brands to go public.
By far the most common exit strategy among DTC companies, acquisitions come in several forms. Typically the company is acquired by a larger company, and the acquired brand is often maintained within the parent company’s portfolio. Alternatively, a private entity may buy out a DTC business as an investment.
An acquisition can serve one of two purposes: either it allows the founder to turn a profit and move on to another venture, or it provides the established infrastructure (distribution channels, manufacturing capabilities, customer acquisition, and capital) that the acquired brand needs to keep growing. Acquisitions are ideal for companies that have reached a growth ceiling with their own resources and don’t yet have the legs to stand on their own by going public.
In order to attract a buyer, the company will need a strong value proposition and a clear path to continued revenue growth. They may be profitable, but that’s not a requirement for a successful exit.
Public exits have historically been scarce in the DTC landscape, but saw a significant uptick in 2021. Most companies that go public do so through an initial public offering (IPO), but a few have taken an alternative route through a special purpose acquisition company (SPAC). A SPAC is a public shell company created to pool funds for a future merger with a private company, allowing the private company to bypass the IPO process and regulations.
Companies that opt to go public have typically proven a successful track record of sustained, significant growth and are either profitable or have a clear path to profitability. These companies have a clear plan for continued standalone growth, but are seeking capital to pay down debts, fund further growth, or create liquidity, as well as to raise their public profile.
In order to successfully enter the public market, the DTC company must have a clear plan for continued growth and the ability to demonstrate either profitability or an attractive revenue growth rate.
Some founders will choose to keep control of the company even once they’re able to exit, or may opt not to exit at all. Airhouse research found that 14% of DTC companies that have surpassed the average age of exit are still operating independently, having never been acquired or gone public.
These companies have achieved a healthy, sustainable level of growth without the infrastructure or capital provided by an acquisition or IPO. Control of the company rests solely with internal leadership and some investors.
Brands that opt not to exit have typically achieved profitability early in the company’s lifecycle through a strong product offering, healthy margins, and cautious growth.
Airhouse’s independent study of 100 DTC brands found that 60% had exited. Of those, 25 were acquired, one completed a private merger, and 14 went public.
The research also showed that the time to exit is heavily dependent on the company’s market vertical. Supplements and personal care products like razors and deodorant had the fastest time to exit, averaging about 4 years, while apparel took the longest to exit at about 10 years on average.
We’ve established the rationale behind each exit plan, but every decision the company makes as it scales to its exit point has a profound impact on the options it will have when—or if—it reaches that threshold.
There are three foundational elements to scaling a business to its exit point:
Carve out enough of a market presence to enable steady growth.
To execute an exit strategy, the direct-to-consumer brand has to garner enough traction to stand out in the marketplace. When a new product launches—especially if it’s disruptive—copycats will immediately try to replicate it and turn a quick profit.
When the product is complicated to produce, the company selling it buys itself time to grow brand awareness and build a strong customer base before ripoffs enter the market. This “technical moat” around product construction is a foundational element to the company’s exit plan because, without it, the company likely won’t reach its exit threshold.
Remove growth hurdles and increase margins.
Reliable distribution is an often overlooked but critical aspect of growing a direct-to-consumer business. DTC brands are held to a higher standard by their customers, meaning inefficient, slow, or costly fulfillment can damage the brand’s reputation or ruin otherwise healthy margins.
The businesses that scale successfully establish strategic, high-quality distribution partners early in the company’s life for two reasons. First, because ecommerce fulfillment complexity increases exponentially as the company grows. Second, because distribution is an economy of scale, and the faster order volume grows, the faster manufacturing and fulfillment costs fall, making for healthier margins.
Several DTC brands that went public via IPO in recent years noted in their SEC filings that using an optimized network of third-party vendors, investing in robust technology, and reaching economies of scale across their distribution channels drove the cost of goods and services low enough to achieve gross margins of 40% or higher.
Use distribution, product strategy, and a mix of sales channels to achieve continuous revenue growth.
It’s no secret that sustained revenue growth is a major indicator of a healthy company. The real secret is how successful companies do it.
The now-public brands that boasted gross margins in excess of 40% attributed their impressive revenues to three core business decisions: the previously mentioned supply chain investment, product strategy, and a healthy mix of sales channels.
When it came to product strategy, these companies capitalized on customer feedback to improve their product and identify expansion opportunities or used strategic limited-edition product launches to drive sales of their core offering.
The companies also noted using a strategic mix of sales channels, including their own ecommerce site, online retailers, and brick-and-mortar retail partners to meet customers at whatever point of sale was most natural for them, lowering customer acquisition costs.
While there are actionable, foundational requirements for any brand seeking an exit, there are also mindsets that are shared by most companies that ultimately make it to the point of being acquired or entering the public market.
Raising capital is one of the first things a DTC brand has to do to launch a successful business, but it requires treading lightly and thinking long-term. Accepting large investments from the wrong partner—whether it’s a venture capital firm, equity partner, or corporation—can force the brand to adopt a “grow at all costs” mentality that sacrifices stability and efficiency. The company should consider whether the investors’ goals align with the company’s ethos and mission before accepting funding.
Then, once the company has secured some capital, the founder(s) should think carefully about how to spend it. Many first-time founders spend big in the beginning on costly marketing campaigns and internal teams when they should instead be investing in the things that will allow the company to scale and increase gross margins like an improved product offering and a reliable distribution network.
Airhouse research shows that DTC founders come from a huge variety of backgrounds, from education to biotech; but less than half had experience starting a business.
The companies that go on to become industry disruptors do so because of the strength of their founders’ intuition. These entrepreneurs have a knack for seeing unaddressed markets or needs and fundamentally change the conversation in that industry. Think Rothy’s use of recycled plastics and 3D knitting, Supergoop!’s ethos that sunscreen should be worn daily, and Eloquii’s observation that fashion sizing was not inclusive of nearly 70% of women.
This sixth sense for creating and promoting a product is an enormous strength. Founders should trust their gut when deciding how to market, distribute, and grow the product, and eventually, how to exit.