Last week The Information reported that Brandless, which sells private label-priced goods without any of the infrastructure of a retailer that sells private labels, is falling apart at the seams. 

Private labels are so powerful not because they are better products, have superior packaging or are sold with stronger messaging, but because they have unfiltered access to a retailer’s existing customer base. This means their marketing expenses are a fraction of their name-brand competition, allowing companies to pass down savings to the consumer and sell products at a lower price. In turn, private labels are more competitive against their name-brand competition, and win over price-conscious consumers. Let’s call this the Private Label Flywheel. 

But Brandless had no customers on day one. It had to build its audience from scratch, which today is an insanely expensive feat. As a result, the company needed capital and likely exhausted the nearly $50 million that it raised between March 2016 and July 2017. This led it to accept a whopping $240 million in its next funding round, with $200 million coming from Softbank’s $100 billion Vision Fund, valuing the company at $500 million. This was a private equity-like investment, with Softbank now owning 40% of the startup. When the deal was announced, a Vision Fund partner credited Brandless for “compelling unit economics.”

Since then, however, a lot has changed: 

  • Brandless abandoned the $3 flat price for every item, which was likely throwing off too little cash to reinvest in customer acquisition, since it seems unlikely that Brandless made any money on the first order from a customer with such low prices and high advertising and fulfillment costs. 
  • It experienced further issues with product quality, likely the result of Brandless’ value prop, which meant it had minimal margin to invest in high-quality products.
  • It met challenges with inventory management, given the need to service over 300 SKUs at the time of the financing round and the working capital required to produce large runs of cheap products.
  • It laid off 10% of its staff and saw the departure of its founder/CEO, in addition to a large portion of the executive team.

All of this contributed to declining customer retention, which peaked in January 2019 and continued to fall, according to Second Measure.

This is proof of the fallacy in the consumer goods space that more capital means better unit economics and a better business—a perspective that is unfortunately still alive and well. Many consumer categories, especially in today’s acquisition landscape, see their unit economics deteriorate as they grow, since they saturate their early adopters and most eager customers and have to spend large sums finding shoppers outside of their core. Product-market fit itself is not a constant, but rather dynamically changes as a business evolves and its market changes, further evidence that there is no formula to building digital brands—a core thesis of ours since day one. 

While some may look at the quick succession of investment as proof that Brandless found its “formula” so early on in its lifecycle, the disproportionate amount of capital required to do so and scale further should have been a warning sign. Few businesses that are actually strong and sustainable need that much money so soon. As further proof of these issues, Brandless didn’t even get access to all of the $240 million that it technically raised, since the Vision Fund allocated money in tranches that are tied to certain performance goals. Softbank only gave Brandless half of the $200 million it promised (the delivery of the final $100 million remains in jeopardy). This means that all of Brandless’ problems happened with only half of the funds that it intended to use, which is even more concerning. 

The extreme amount of money at its disposal so early on only made its structurally problematic reality arrive sooner than anticipated. Maybe the hope was to build Brandless like Marc Lore built Jet.com, flipping it to a larger retailer within a few years of inception. But the case for a bigger retailer to make such an expensive purchase is weak, especially as Target, Walmart, Amazon and many other retailers see massive growth in their own private labels, providing a stark foil to Brandless thanks to their massive, already existing audiences. If Brandless’ business went on the market, it would only be selling a brand, which would be… ironic. 

The lesson from all of this? Capital does not solve product-market fit problems. Instead, it often makes them bigger. Private labels have and always will work for major retailers with a large existing customer base to sell to. No amount of money or strategy can shortcut the time it takes to build this advantage. The private-label brand itself remains strong—Brandless, on the other hand, does not.