Executive Summary

For hundreds of years, the playbook for building consumer product companies has incrementally improved. There have been marginal advances, but the fundamental premise of selling goods locally never wavered.

Then the internet happened, promising to fundamentally reshape the brand-building playbook. Today, there are more brands vying for the spotlight than ever before.

But will the new playbook—and the brands that use it—be as big, successful and long lasting as those that came before it? This report seeks to answer this question by looking into 13 different case studies of brands that started during the 20th and 21st centuries.

We created three different cohorts of brands for this study: Heritage Brands, Digitally-Native Phase 1 Brands and Digitally-Native Phase 2 Brands.

The Heritage Brands we studied, which include Comme De Garçons, Nike, Patagonia, Ralph Lauren, and Victoria’s Secret, all existed before the internet. They were mainly product and marketing companies that focused on designing and manufacturing reputable products, which they would then market and distribute through wholesale or in their own retail stores. Heritage Brands still hold the largest amount of market share, with a combined revenue of $45.5 billion, and live in the hearts and minds of consumers. Longevity is difficult to come by — almost 80% of companies traded on the U.S. stock market from 1960-2009 were gone by 2009. The average Heritage Brand we studied has been in business for 47 years. These early days and milestones provide crucial insights as to why these brands are still in business today.

The Digitally-Native Phase 1 Brands we studied, which include, Bonobos, The Honest Company, Happy Socks, Nasty Gal, and Warby Parker, all started between 2008-2012 and were a product of the internet era. We will refer to them as Digitally-Native Phase 1 Brands. These brands mainly took existing products and ported them over to the internet. They started building the skillsets needed to thrive online and used a digital-first mindset to evolve the core shopping experience. Phase 1 Brands brands have revenues in the low hundreds of millions of dollars, but because of their often sky-high valuations, their viability as either independent companies or potential acquisition targets is still unclear.

The newest brands we studied, which include Allbirds, Casper, and Away, were all founded after 2012 and also started online. However, shopping habits and social media have changed the ecosystem since Digitally-Native Phase 1 Brands launched. Digitally-Native Phase 2 Brands, as we’ll call them, are increasingly focused on building communities around their products and creating lifestyle brands from the beginning. These brands are growing faster, raising more money, and opening more stores than their Phase 1 and Heritage Brand counterparts. They are also performing better than the Heritage Brands did in their early days. Even so the future of Phase 2 Brands as long-lasting companies is still up in the air.

What follows is a detailed analysis of Heritage Brands and Digitally-Native Brands across six different vectors:

  1. How did the brands fund themselves in the early days?
  2. How long did it take for the brands to open their first stores and how many stores did they have after ten years?
  3. How many years did it take the brands to reach $10 million in revenue?
  4. How long did it take the brands to become profitable?
  5. How long did it take the brands to reach $100 million in sales?
  6. How long did it take the brands to run into their first financial crisis?

The best way to understand the new brand building playbook is to look at how it has changed since the old one was written. Only then can one determine the longevity of brands in the new era.

Methodology

All data in this report comes from publicly reported information, books, and data sources such as Pitchbook. We calculated averages or estimated when numbers from multiple sources differed. Because some of the brands we studied are private companies, we confirmed information to the best of our abilities, which included reaching out to each company individually. Most refused to comment, although we gave each of them an opportunity to.

All of the revenue, profit and acquisition amounts shown below for Heritage Brands and Digitally-Native Phase 1 Brands are adjusted for inflation at 2016 rates.

How did the brands fund themselves in their first ten years?

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Building consumer goods is a capital-intensive business. It takes time and money to develop products, a process which happens long before the first sale. When Heritage Brands were starting out in the 1960s and early 1970s, institutional capital was not nearly as sizeable or available as it is today. These brands had to rely on different and more limited sources of income to bootstrap their companies and prove their worth.

Today, Digitally-Native brands have specific avenues to secure early capital and start building. Low bond yields in the current decade have led investors to flood the equity markets with money, giving venture capitalists more capital to invest than they know what to do with. Investors hope this influx of cash will help companies expand rapidly and dominate for years to come. The difference between the amount of money raised for Heritage Brands and the amount of money raised for modern brands during the first ten years is staggering, with Heritage Brands raising hundreds of thousands in their first few years and Digitally-Native Phase 1 and 2 Brands raising tens of millions.

Heritage Brands

When Heritage Brands were making their names, there was not much potential to quickly scale a brand and capital was much more constrained. Instead, Heritage Brands had to rely on more limited sources of money like savings, bank loans, family money, and operating cash flow in order to start and grow their companies. The type of investment needed to quickly scale a good idea was counterintuitive to banks, who wanted to back riskless ventures and give loans to small businesses that would become profitable right away and consistently pay them back.

Brands didn’t have much money to spend in order to continue fueling growth. They had to be profitable and quickly prove they were building a viable business. Early on, few brands spent as heavily on marketing as many Digitally-Native brands do today making the growth history of Heritage Brands slower and more methodical.

Victoria’s Secret

Victoria’s Secret did not have access to large sums of money when it first started. The idea for the company came about when founder Roy Raymond had to deal with purchasing lingerie for his wife in an old-fashioned department store filled with prying eyes and boring options. He saw a white space in the market and came up with the idea of selling sexier lingerie to the mass consumer in its own separate storefront, which would provide a more exciting and comfortable experience. Previously, shoppers mostly visited high-end stores like Frederick’s of Hollywood for special occasions like wedding nights. However, Raymond believed that the lingerie market could be larger if it were more accessible and thought up the idea for Victoria’s Secret.

In 1977 — the year the company was founded — he and his wife used their savings, money from friends, and a bank loan to get the idea off the ground. With this $322,000, they leased a storefront inside a mall in Palo Alto, California and created a store in the style of a Victorian boudoir. The company made approximately $2 million in its first year and continued to moderately grow, making around $15 million five years later in 1982. At that point, it had four storefronts and a growing catalog business, which helped spur sales. Before the internet existed, catalogs were the primary tool for reaching a national audience without needing to continually open stores.

Through its self-funding, Victoria’s Secret soon caught the attention of executives at holding company The Limited, who had never seen anything like it before. The holding company felt it could make the brand a household name and offered to buy it. Since Raymond was already having growing pains and was in search of additional resources, he decided to sell the brand to The Limited in 1982 for around $2.5 million. (The fact that he sold the business for 16% of revenue is emblematic of the times.) The Limited then poured capital into the store, growing it into the mega-brand it is today.

Ralph Lauren

Ralph Lauren was working as a men’s clothing salesman during the 1960s when he convinced Beau Brummel, a manufacturer, to produce his own line. He started off selling his products at specialty stores and, soon after, at Bloomingdale’s. After testing out the concept, he decided to create his own company with a $366,000 loan from his brother and the clothing manufacturer Norman Hilton. He used this money to design, manufacture, and distribute his new menswear collection, which he sold primarily out of Bloomingdale’s.

Ralph Lauren secured funding, partners and materials through his retail industry connections. Using Bloomingdale’s as a strategic partner and Beau Brummel as a manufacturing partner gave him an initial audience, in addition to expertise and capital. All of this put Ralph Lauren in a good position to sell profitably and grow sustainably in its early days. His unique aesthetic quickly got the attention of the fashion community as his clothes invoked a sense of upper-class American style that was highly regarded. He used this same approach to create a women’s line and other adjacent labels.

Digitally-Native Phase 1 Brands

The brands we studied that were founded between 2008-2012 almost exclusively went for professional and institutional money to launch and grow. They rarely used their own savings or took on debt. Instead, they billed themselves as tech companies — first-movers and fast-growers — in order to grab venture money early on, using terms like “direct to consumer” to play into the investor appetite for “disruption” at every turn. Many of these brands sought to redefine industries they felt were stale, much like Victoria’s Secret did for lingerie in the 1980s. Starting as digital-first companies and wielding the web as a crucial tool was attractive to investors looking to capitalize on the internet revolution.

Nasty Gal

Nasty Gal was founded in 2006 as an eBay store and grew quickly into a coveted brand among young girls in California. Early on, the brand made money by finding clothes from Salvation Army stores and then selling them online for a profit. This worked well since its founder, Sophia Amoruso, had a knack for branding products in a way that drew attention. She would style the clothes, take pictures, add captions and then post the products online to sell to the general public.

In 2008, Nasty Gal had around $215,000 in revenue, growing to $28 million only three years later in 2011. It raised $9 million in venture money in March of 2012, $40 million in August 2012, and then $16 million in February 2015. These consecutive infusions of capital forced a nicely growing business to hyper-scale since investors needed a big return in their expected fund lifecycle of seven to ten years. This transformed the company from one focused on profitability to one focused on rapid growth at all costs. This would prove ineffective and lead the company into turbulent waters, which is further discussed in the Financial Crisis section of this report.

Digitally-Native Phase 2

Brands founded after 2012 view themselves as companies that can scale even more quickly than their Phase 1 counterparts. They raised more capital more quickly to realize this supposed advantage.

Casper

Casper raised money right in the middle of the Digitally-Native boom, calling itself the Warby Parker of mattresses by delivering a superior product at a cheaper price. It raised institutional capital from the beginning, starting with $1.6 million in January 2014 and then another $15 million a few months later. Its valuation ballooned from $7 million to $59 million and its revenue reached $30 million by the end of the year. This money,strategic prowess and never-ending subway advertising resulted in the company becoming the top-of-mind choice in the easy-delivery mattress space, even though similar competitors already existed in the marketplace.

Away

The founders of Away also came of age right in the middle of the Digitally-Native boom. Steph Korey and Jen Rubio worked at Warby Parker in 2011 and helped the company grow from 20 to 300 employees. They felt that the future of retail was direct to consumer, so they looked for another category in which to cut out the middleman.

With their hope of growing fast and disrupting the travel industry, venture money was a no-brainer. This additional capital would help them leapfrog into a bigger business with the potential of owning a piece of the overall market. Away raised $2.5 million at a $7.2 million valuation in 2015 before it sold any product. It followed with $8.5 million at a $40 million valuation one year later and then $20 million at a $120 million valuation in 2017, with $28 million of revenue.

The founders have admitted that they raised more money than they were looking for, evidence that there is an abundance of capital available to brands in the current landscape.

Questions:

  • How do phased funding rounds change the strategy of the company? What are the risks associated with raising excess capital for growth in early stages? What are the necessary steps that an early brand should focus on to build brand awareness and sales?
  • What would it take for young brand founders today to build up the business acumen to create billion-dollar businesses from scratch with less invested capital? What affect would this have on the brand, the founders’ equity and the employees stock options?
  • What does a high valuation predict in terms of long-term investment potential? Can investors expect returns based on valuation? If not, what are the leading metrics for financial return?
  • Are Digitally-Native Brands spending more money than they need to by selling only direct to consumer and ignoring wholesale? Is it possible to acquire customers sustainably without wholesale?
  • Is the idea of cutting out the middleman overplayed or is it actually something that can help grow these businesses into successful competitors?

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