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- [00:00]
A
Today on the DTC podcast, we're getting into the real math behind DTC exits. I'm joined by fan Bai, founder of the Hedgehog company, who steps in when brands have 30 days left of cash and no clear path forward. He's bought and turned around dozens of distressed DTC brands and he's got the receipts on what actually makes a brand sellable in this market and what kills deals dead. We'll talk valuation myths, bridge rounds that go nowhere, how to tell if your brand's even worth selling, and the difference between product market fit and product channel fit, especially when meta is the main driver. If you're a fan founder thinking about an exit or just trying to survive the plateau, this one's for you. I hope you enjoy it. And on with the show.
- [00:39]
B
I grew up in the D2C generation of Dollar Shave Club and Bonobos. There was this idea that, you know, you could be a D2C business, be valued at three to five times revenue and very importantly, not profitable. Growing but not profitable. Being bought for three to five times revenue when you're not profitable, that doesn't exist anymore. We've been humbled by how challeng the current environment is the threshold for hey, are we going to be able to turn this around? Are we going to be able to do something differently and specifically better than these smart people that we're buying it from? That bar is continue to increase.
- [01:27]
A
This episode is brought to you by Contentful Marketers. You know that feeling when your creative clicks? When that social post sends engagement through the roof? When your outside of the box campaign hits ROI positive, When a personalized homepage turns prospects into customers? It's utter marketing bliss. Contentful helps you create tailored omnichannel experiences without working overtime. No stress, no limits, only possibilities. Get the feels@contentful.com welcome fan buy. What's the number one thing that DTC founders get wrong about how M and A actually works?
- [02:05]
B
Yeah, I think that. Look, I grew up in the DTC generation of dollar Shave Club and bonobos and there was that kind of initial burst, probably 2013 to maybe 2018 where there was this idea that you could be a DTC business, be valued at 3 to 5 times revenue. The early signal was that investors are willing to value the companies on this and then it was further validated. Kind of importantly, buy a couple of these large exits. Walmart buying bonobos for kind of three times revenue. Unilever buying dollar Shave Club for I think around seven times revenue and and very importantly, not profitable and growing. But not profitable. And so I think the big thing that's changed is that that doesn't exist anymore. Being bought for three to five times revenue when you're not profitable is extremely, extremely rare. It was rare back then, but it's even more rare now. And second of all, strategics have moved up market. So those deals were nine figure deals, but more so now acquirers are doing ten figure deals. The kind of half a dozen transactions that have been, well, half a dozen to dozen transactions that we've seen are largely 1 to 2 billion or half a billion dollar deals. So incumbents themselves are dropping some of their smaller brands. They're only looking to buy larger brands, which makes it really tough for the median DTC business.
- [03:44]
A
Obviously profitability is the name of the game. Describe to me just the state of the market we're in right now. I see a lot of things on DTC Twitter where seasoned founders are really giving up and coming found a reality check about the possibility of creating, you know, a lifestyle business or a really profitable business in this market and really laying down like the things that you have to have, you know, strong organic following, you know, all of these, all of these things. What, what, how do you see the, the sort of like ecosystem right now in terms of like, is it a good time, is it still the best time to have built a DTC brand?
- [04:21]
B
I think, you know, from a financial lens you're looking at two things. One, which is like how much net income can a DTC business generate through its kind of ordinary operations? And then second of all, like, can it exit for an exciting premium? And from an operating standpoint, this has been well stated. But acquisition remains more challenging than ever and increasingly challenging. You kind of in a naturally auction based marketplace of meta, like there's just increasing, there's more demand for impressions than there is supply. So yeah, it's harder and more expensive to acquire customers than it was three years ago, five years ago, seven years ago. Somehow Shopify is still doing an incredible job of growing gmv. But all it's doing is introducing more competitors for each of its merchants. And so yes, it's more expensive to acquire a customer. And then B, if there's no switching costs between one apparel business to another apparel business, retention becomes harder. And if there are fewer acquirers and they're moving up market, it becomes harder to sell the business for an exciting premium. This podcast isn't called the Anti DTC business, right? No, no, no.
- [05:30]
A
We're pro DTC here, but we understand what we want to deal with. In the reality as much as possible.
- [05:35]
B
Yeah. And I think that like, you know, it's, you know, you asked about the state of the market. It's very much a tale of two cities. You know, we have friends, you have friends that the top 3% of businesses, they're still getting 0 to 100 in two and a half years. With all the promise of the scalability of the Internet and reaching customers in all corners of the continent, let alone the world, finding people that can come back on a monthly or quarterly basis, we're still seeing winners for sure, but I think for the other 97% it's tough.
- [06:14]
A
I think of my friends like Bart Sinuski who's running, you know, dad Gang, or my friend Brock Mameser who's running Frostbuddy. And they're still like, they're not solopreneurs. They have teams but they're still shooting all their content. They're still living the DTC dream in a lot of ways where they're, it's like they have these small teams, they, they make a lot of their own content themselves. That's what's driving the business forward. Frostbuddy just, just had insane numbers on TikTok shops. You know, this, this sort of like, but they're, they're few and far between as you're sort of saying. These people that are, that are running these really lean, really high growth teams. What do you look for? Like obviously those are gonna be harder brands for you to acquire. You're, you're more interested I guess in acquiring brands that have strong fundamentals but are weak in specific areas. Like what's your criteria in this day and age for, for looking to acquire a brand new.
- [07:05]
B
Yeah, strong fundamentals. I'd say 20% plus post marketing contribution is a very strong metric that we look at. Usually that has bled into it some pretty strong repeat behavior. But maybe they're not the kind of one person plus small team shop. They've expanded their team too big. It often correlates to a venture backed business that is heavy on G and A and opex and the team is maybe a little bit too big for the business. Sometimes it means that it's had a few years of negative EBITDA or negative net income that's bled onto the balance sheet. And so the balance sheet kind of started to crack a little bit. They're the kinds of things that we can fix. What we can't fix is that there's no product market fit or there's no customer affinity or there's no kind of product channel fit with meta.
- [07:56]
A
I don't know if you can give me an anecdote, a specific story, but talk to me about maybe your favorite example of a brand that you kind of turned.
- [08:04]
B
Yeah, I mean, I think maybe one of our better known brands is a backpack business called Baboon to the Moon. Had raised a bunch of equity, built this really cool brand. It's maybe a Gen Z focus, like Neon colorways, Travel First Adventure. Yeah. Had a reasonably strong contribution margin, but again because it had built team and infrastructure ready to scale for growth that never quite got there. There was maybe some excess. And so we were able to take a team down from maybe high teens to less than a handful of people, continue to invest in the content strategy that had been working for them. So organic is a big part of the reach. Continue to invest in wholesale, specifically Urban and Nordstrom, which has continued to perform well. We've been able to benefit from having it being kind of pretty successful within the corporate channel. So B2B logo for Nike, etc. That'd be an example of something in the portfolio that we've been proud of.
- [09:06]
A
And then do you hold it, you build the portfolio and hold it or do you look to flip it or sell it up market?
- [09:12]
B
We're usually looking to sell the businesses some of the pieces from the intro that I gave earlier. I think naturally we're concerned about the longer term trends of DTC businesses. So we think that there are a ton of great operators out in the market and for ones that are really focused and naturally we run a portfolio strategy and someone that's really focused on a specific DTC business can maybe do a better job with it than we can. So yeah, our hold periods are pretty short. We're looking to come in, fix it up, fix up the income statement, fix up the balance sheet, get it profitable, get it stabilized and then leave kind of the upside for a new owner.
- [09:52]
A
You mentioned a lot of the big, the institutional players are moving up market, so they're looking for bigger deals. What sort of size deal are you looking for?
- [09:59]
B
Yeah, we're typically looking revenue of kind of 10 to 30 million.
- [10:04]
A
Describe maybe the trenches or like the landscape of like exits in this day and age. So you've got people in that range, maybe they're in that distressed category a little bit and that becomes an opportunity for you. What are the other sort of major tranches that brands find themselves in where they might be thinking about an acquisition? Like when you say move, moving up market, these institutional players, what size of deal are they looking for? And then are there any trenches like in between that are, that are attractive?
- [10:30]
B
Yeah. So if you look at the median Shopify plus business, that's probably something in the like maybe 3 to 10 million dollars range. And so maybe to answer your question, let's talk about trench. So maybe there's the like nascent seller, the 1 to 3 million dollar business. Even if you're profitable, it's really, really hard to sell that business for anywhere near what you think it might be worth. I think most of these transactions happen for a million dollars or less. So for the people out there that are running a $3 million business thinking that they're going to sell it for $10 million, I think that's tough. Then you get to kind of that median Shopify +business 3 to $10 million. If you're growing and you're bullish and you're focused, my advice would be to keep going. But if for whatever reason you can't, you really sold on a profitable profitability multiple. So maybe your $10 million business doing a million in Ebit, you're probably selling for 4 to 5 million dollars. Once you get to kind of mid market size, maybe 10 to $50 million in revenue, they're probably still not the, the strategic buyers. But you might get other PE firms or other trade buyers like a manufacturer or a distributor, maybe a boutique licensing firm. You start to get a little bit what's called multiple expansion. So rather than kind of three to five times EBIT, you might be looking at four to eight times EBIT. So even double your size, that $10 million business doing a million, a million and a half of ebit, selling it four times, you could be a $20 million business doing $3 million EBIT, maybe selling it six to eight times. And so this, there can be quite a bit of a jump, but then very category specific and not necessarily dtc, but still kind of consumer brands. Once you're in that kind of $100 million plus revenue and you're printing kind of 15 to 20% EBIT, there's much more multiple expansion. Obviously we've seen a handful of huge food and bed deals. We haven't really seen anything material in apparel for a number of years now. We've seen a good number of personal care deals. So it's very category dependent because naturally it's based on the kind of corporate development strategy of some of these legacy brands and you know how well they're doing and what their balance sheets look.
- [12:45]
A
Like and D2C like the other thing too, I guess as opposed to the early days is D2C is not usually a standalone effective path to one of these deals. I'm looking at some of the brands that you're highlighting. You got to go find, you got to find fan. I'll link to them on, on LinkedIn here. But you're posting all the time about interesting deals that you find in the and the one thing I'm seeing is a lot of them are, you know, they're the omnichannel, they're retail, they have these big customer bases, they're consumable repeat purchases. I'm just looking at your post on Laird here. What made what made Laird Superfood such an interesting acquisition to call attention to.
- [13:24]
B
I think there's a few things interesting about Laird. One which is they decided to go public even as a kind of smallish brand they wanted to tap. I think it was kind of peak ZIRP era. So a few companies did this. They're one of the few that have kind of survived in the public markets. So yeah, the fact that they're a small kind of micro cap is always interesting. They've never really been profitable and yet kind of surviving in the public markets. And then yeah, it looks like that they're trying to do a multi brand platform which has been tried a lot in the last five years. So I think that's interesting.
- [13:57]
A
And then you have another post here about the most interesting capital move in beauty isn't growth, it's repair. What do you mean? Is that sort of like, like a skin service or skin skin repair?
- [14:07]
B
Essentially, that's a, it's, it's financial repair, not product repair. So yes, the, the founder of this beauty business put in $200 million of her own money. So she exited, I think had a maybe $600 million exit to a PE firm, didn't go well. PE firm took on a bunch of debt. She's now recapping the business the $200 million of her own money from the exit to come back, take control. And the point of the post is more that I think we'll see some more of these founder takebacks, whether it's selling back to the founder or the founder investing at a steeply low valuation. To recap the business, they're one of the same. And yeah, I just think we'll see a little bit more of that as investors try to move on from some of the stuff that isn't working when.
- [14:53]
A
You look to engage on a DTC deal. What are some of the Things that can kind of kill that deal the fastest when it comes to those situations.
- [15:02]
B
Yeah, maybe not the fastest and I, but I'm the first thing that jumped into my mind because we're kind of on a couple of these right now and one of them is moving particularly slowly. People say that speed kills all deals and I think when one of the two parties even just. Yeah, even just one of the two parties, the other one, both parties replying to each other instead of talking a couple of times a day, it's talking a couple of times every few days or talking once every few days. Deals need momentum if you're really slow moving really hard to get a deal done. I think the order of information is sometimes interesting. This is getting really tactical, but some people share a lot of information before the first kind of loi gate of the letter of intent gate. Just to make sure everyone's got information and you can make a really thoughtful offer. The opposite is also true. Hey, we'll give really skinny information, try to get a lot of offers, hopefully get kind of a non normalized offer outside of the band, something way above like what everyone else is because there's limited information. Get that under a contract. What we often see is that a lot of those processes end up getting broken because the top bidder is like, oh, actually now that I've dug into it more. So that's always interesting how people decide to run their M and A process. I think a bad version is like, hey, let's just have like a couple of conversations this week. Oh, nothing kind of came of it. Let's have a few more conversations next month. Nothing. You know, you kind of really need to collapse it all and run kind of a very rigorous sale process.
- [16:38]
A
That's what I was going to ask next was just sort of what a good M and A process look like for brands under 20 million. Like how, how long should it take? Or what? Or in your best examples, how long has it taken?
- [16:50]
B
Yeah, I'd say like the median from really from beginning to end. It's probably like maybe four and a half months. You find out in the first three weeks if you're going to get traction or not. The best way to get traction is to expand the top of the funnel. Everyone in your ecosystem, competitors, financial sponsors, manufacturers, distributors, anyone that's reached out to you in the past expressing interest, collapsing all of that, trying to come up with a minimum 50 names and tell everyone that you're in market, reach out to all of them and be like, hey, we're running a process. Maybe we're giving you an early peak before we kind of open up to the market next week. Have a good amount of information and maybe not everything but a good amount of information so people can make informed decisions. Yeah. Hopefully create some heat.
- [17:40]
A
One of the things we talked about in the pre interview is this idea of bridge to nowhere brands and brands that are kind of maybe stuck in a, in a traction loop essentially. What are some instances where a bridge round, a bridge round of funding is actually just sort of kicking the can and is maybe helping that brand sink deeper.
- [17:57]
B
I think most bridge rounds have the story of we're going to, we just need to grow an extra 30% to get to break even. That's kind of the normal bridge round. And the reality is if it hasn't grown the 30% previously, it's going to be like most people aren't taking a big enough bet in that bridge round because it is supposed to be a short bridge. You know, if you really pressure tested it, it's like they're mostly underwriting like miraculously finding some creative that's going to give them more efficiency which again to everything we talked about earlier is just hard. And what probably needs to happen is that it needs to be something fundamentally changed about the business that probably gives it the better shot rather than hey, let's just kind of try to iterate around the same thing but give us six more months of cash to do it.
- [18:50]
A
If you've got a leaky bucket, it's going to leak. Yeah, I'm just interested in this space overall because I've been investing on the side into, into AI companies, into microprocessors. There's so many things happening. It like it feels like the, the whole US economy right now is really being fueled by these like really high end technology plays. And it's like, do you, do you ever see a point in the future where CPG and D2C brands will be as attractive as they were in those early days? Like I guess everything is, is cyclical. But do, do you see a point in the future where, where CPG and D2C deals will kind of return to prominence? Or is this do AI microprocessor world now?
- [19:34]
B
Yeah, I think when you're moving physical product just doesn't have the natural scalability of software. And yeah, look, I think that there are going to continue to be great transactions, continue to be great brands that are worth a lot of money and there are going to be, continue to be investors that make a lot of money from those and I think the last two years have really shown that. I think the probably biggest difference is whether it's AI or software, it's really the switching cost. You and I will probably be using our favorite LLM for the next five to 10 years in the same way that we've been using Google as our main search and Google's been monetizing us to the tune of hundreds of dollars per user for the last 10 plus years. But just with consumer brands the switching cost is so much lower. Constantly bombarded with new ads to try different kind of competitors. So staying relevant, maintaining that margin over the long term I think is challenging. But yeah, they'll continue to be brands that catch lightning in a bottle and hopefully they exit at the right time.
- [20:42]
A
Is the aggregator play mostly dead at this point? Is it mostly just funds and individuals who are buying or is there still an aggregator play active?
- [20:51]
B
It's very, very rare. We certainly come across multi brand platforms but it's you know, 1/100th of, you know what it was maybe even less so than it was in the 21 peak.
- [21:02]
A
Makes sense. Can you give me an example of a brand that you maybe recently passed on? You don't need to say who they were obviously, but maybe sort of some of the reasons you did pass on them.
- [21:12]
B
Yeah, I'm surprising that I'm going to say this but like maybe after doing this for a while we've come a little bit more, even more skeptical. And that's even, you know, we've had to accept, you know, be humble. We've been humbled by how challenging the current environment is. And so the threshold for hey, are we going to be able to turn this around? Are we going to be able to do something differently and specifically better than these smart people that we're buying it from? That bar is continue to increase. And so most of it, it's just that margin of safety of do we believe commensurately even at this 20% contribution margin, but maybe the revenue is declining or hey, it's a subscription business but really masquerading because China is so high. It's really just a transactional business. Yeah, there's some of the traits of meaning that we're moving on.
- [22:14]
A
How do you assess product market fit? How, how you know, product market. A brand has to have product market fit to be considered here. What are the metrics or like or the things that you're looking at in these brands even if they're not or they're, they're dipping in profitability, dipping in revenue, what Are the diamonds in the rough that you're looking for, the metrics that you're looking at that help you determine okay, this does have product market fit.
- [22:36]
B
Yeah, I think it's really about kind of product channel fit with meta first and that's what's going to drive the acquisition. And the product market fit is really the retention because I think a lot of people, especially if it's you know, sub $100 AOB purchase, there's a lot of trial happening but hey, once they get it, once they try it, are they excited to come back and you have that, the product skew to drive that kind of repeat velocity. So it's equally both of those things because yeah, if someone's willing to come back after they like it, but it's so hard to acquire customers, you probably also don't have a great business. So it's really that product channel fit as well as that product market fit.
- [23:17]
A
And then when it comes to category, you know, you, you built an apparel brand but I think apparel is sort of notoriously challenging when it comes to scaling just because you've got sizes and you know the switching cost is low as you mentioned, or non existent really. Are there categories you look to more than others in today's market?
- [23:36]
B
I mean I think it's where we've come back to and most investors that we know and talk to is we're looking for businesses that resemble software businesses that have high revenue quality, high margin. The revenue quality is really baked with mostly repeat business and that has an attractive LTV to CAC curve that is highly predictable with a relatively short payback window. And naturally those businesses are often in kind of VMs or personal care which is why those categories have been so hot.
- [24:08]
A
I mentioned a few of my friends, Benzer, Frostbuddy and dad Gang. There's countless sort of Unicorn or great examples out there. Are there any brands that you really keep your eye on as ones that are sort of bucking trends or really represent? You know, I guess the term unicorn probably isn't as applicable. We're not talking about dollar shave clubs maybe at this point but are there any brands out there that you think of as sort of best in class that you kind of look for success signals?
- [24:35]
B
Look, I think that. Look, I don't know Bar personally but you know, I've kind of observed from the outside of dad Gang as it's one of those things that are really hard to predict. And I think of dad Gang because a good friend of mine, he's maybe the president I Can't remember what his exact title is of a blanket company called Lola. I think it's near nine figures. Started maybe three or four years ago. Incredible business. And I'm like, how's this blanket business? When so many other blanket businesses have gone by the wayside that have peaked and then trough. How's this blanket business like continuing to crush. Grow unbelievably in a. I'm sure the product is amazing. I don't have one personally but like not like super differentiated, you know. And it just makes me think that like you really have to catch lightning in a bottle. Like right place, right time, right ad creative, right. You know, you've caught the zeitgeist and you need that to win.
- [25:28]
A
I think of I just released this past Monday. This will be out in a few weeks. But a couple episodes ago, Pretty Litter. Daniel Rotman from Pretty Litter and his story is just incredible. And, and to me it's like he, he took a, a product that hadn't been evolved in 100 years with Kit Clay kitty litter, turned it into a different material that took up 30% less space in order to ship. So you've got a win, I've got a D2C win right there. Then the product is a silica that actually shows you if your cat's urine is too acidic or too base. And so it's like a diagnostic tool. It's in the pet lovers space. You know, pet owners spend a lot of money. It just had like all signs go to it being this incredible brand and he scaled it to like I think 3 or 400 million in with like 12 people and no funding. So it's like to me that, that's incredible. Really represents what I would call a unicorn in the space. But he had literally everything going for him from form factor to product market fit to you know, all of these different things that really worked for him. And so it's definitely possible. But to me it's interesting that it happened in the least sexy possible, you know, category. It's literally cat shit.
- [26:34]
B
Yeah. And I think what I will say is that founders are so much more sophisticated now than they were five years ago, 10 years ago, 15 years ago. Of they're looking for their starting, they're looking to make sure that, you know, they're designing the P and L and their business so it has a huge right to win. It's not a like, oh, I have an idea, let's like launch it on Shopify and see what happens. It's hey, like let's reverse engineer like the kind of margin to be. What do we need the CAC to be? What do we need the retention cohorts to be? And yeah, how do we edge all of those into our. Into our favor?
- [27:08]
A
If you had to start a brand today, someone's got a gun to your head. Said fan, you got to start a brand today. What would be. I think we've talked around it, but what would do you have an idea or a category that you would want to build in? Or would you just say, no, it's not worth it right now?
- [27:22]
B
Look, there's nothing like the pretty litter story in my head of like, hey, this is a here's some white space or Dan from Create Dummies or like, you know, here's a white space, but then also has all the attributes that we just talked about. And without something really compelling, I wouldn't just be like, I want to go into the daily knife fight of acquiring each customer that doesn't come back.
- [27:49]
A
Yeah, fair. Daily knife fight. That's what I'll name my my new podcast in the DTC space, the Daily DTC Knife Fight. Well, thanks for coming on and explaining the lay of the land. I bet we have a lot of brands on the on listening here. So what's pump your podcast again? What's your podcast called?
- [28:06]
B
In the Money? Easy to find on Spotify and. And YouTube. Yeah. If you search in the money D2C. Yeah, I think both on the podcast as well as kind of our work in general, we're always happy to talk to brands, especially ones that are thinking about exiting. Maybe they have some hair in their business and because I think it's not. Not really talked about, but I actually think it's the median Shopify business and hey, we're in the situation. What do we do? And then again, just also talking about the flow of money in DTC and CPG for that matter of want to make sure that everyone's kind of being eyes wide open about what's going on.
- [28:38]
A
Nice. Well, thanks for coming on today, fan. It's a lot of fun.
- [28:40]
B
Yeah, thanks so much for having me.
- [28:48]
A
Thanks so much for listening to today's episode. If you're not a subscriber to our newsletter, you can do that right now at Direct to consumeralloneword Co. I'm Eric Dick and this has been the D to C podcast. We'll see you next time.