Image courtesy of Bevel

Tristan Walker founded Walker & Company (W&C) back in 2013 as a holding company focused on creating consumer products for people of color—a traditionally underserved but large customer base of more than 93 million Americans. In five short years, he raised a good chunk of money, launched two brands, evolved their distribution strategy, and hired a seemingly well-qualified team.

Last week, the founder sold the holding company to Procter & Gamble, reportedly for under $40 million—less than the amount of money he raised. Despite the significant upside for Walker and his team, who are now part of P&G and can grow the brand many times over under its umbrella, this is surely not the financial outcome Walker, his employees or investors wanted.

W&C’s existing position speaks volumes about the state of building digitally-native and direct-to-consumer brands. In the past year or two, the leverage has shifted away from startup brands toward established ones. While Walker and many other founders have not achieved their desired results as independent companies, it’s increasingly clear that the challenges these brands need to overcome are much bigger than any one can manage on its own, while big CPG conglomerates hold many potential solutions.  

Walker & Company’s path

From direct to distributed

W&C’s two brands, like almost all newcomers, started selling direct-to-consumer on its website. Bevel, it’s men’s shaving brand, sold entirely through this channel for the first two years, accompanied by grassroots and word-of-mouth marketing. According to W&C, subscriptions grew an average of 50% month over month with a 90% repeat customer rate in its first year. By 2016, Bevel had a 97% subscription renewal rate and sales increased 200% to an estimated $10-15 million in revenue.

In 2015, Bevel started selling through Target—W&C’s first foray into wholesale. Customer acquisition has been both time consuming and expensive (more on this later) for brands over the past few years, rationalizing Bevel’s move into Target, where many of its potential customers already shopped. Soon enough, the brand was also selling on Amazon and Walmart’s, giving it coverage in three of the largest retailers in the U.S. In 2017, with revenue at an estimated $15-$25 million for the holding company, Walker said that he expected a 50-50 split between Bevel’s retail sales and subscription sales for the year—a significant turn away from the pure direct-to-consumer model.

When W&C launched FORM, its second brand selling customized hair care products for women, it also started by selling direct. But it quickly integrated Bevel’s learnings on the limits of digital acquisition and the upside of selling through a large retailer, launching on only a few months after its debut, followed by Sephora stores. Even so, FORM probably contributed no more than $10-$15 million to W&C’s revenue—the price P&G paid in its acquisition is likely a multiple of around 1x revenue, compared to Dollar Shave Club’s sale to Unilever in 2016 at 5x revenue.  

Fundraising whiplash

Central to W&C’s story is the quest for capital, which Walker had a challenging time raising and has been rightfully outspoken about. W&C raised a $2.4 million seed round at the end of 2013 and launched Bevel around the same time. That was followed by a $7 million series A round in the middle of 2014 and a $24 million series B raise at the end of 2015.

Even with a resume and connections that top many others, the majority white male venture class likely knew little about the market Walker aimed to serve and didn’t have many people to ask about it either. Beyond this problem, which is challenging enough, repeated strategic shifts—which were fully justified for the business—likely hurt investor potential:

  • Walker initially called W&C a “tech company” to challenge common perceptions against CPG companies, which garner less investor interest, but he later backed down and acknowledged that he was indeed building a CPG brand.
  • Investors might have seen the multi-brand nature of W&C as unfocused, despite the potential benefits that come from being a holding company.
  • The shift to wholesale likely hurt his fundraising chances even more, since the latter is less exciting and understood among VCs, even if it is a better long-term choice.

The company did not raise after 2015, which could have been Walker’s choice or simply tied to a lack of investor interest. This likely left Walker with a pivotal decision this year: keep raising money or find a home for his holding company that would put it on a sustainable path. While the immediate financial outcome for W&C’s investors was not ideal (or “exciting” as they like to say), the sale was arguably the most prudent choice for the holding company’s future, as it likely will be for many other brands trying to find their path in the current ecosystem.

The digital-advertising growth ceiling and the one remaining battering ram

Digitally-native brands, from Walker & Company to Casper to Hims have been built on the backs of Facebook and Google’s direct-response advertising, which enabled them to hyper-target customer bases and track the process all the way to checkout. But since advertising marketplaces are priced as dynamic markets, more demand means less supply—see Facebook shifting its algorithm to be more family- and friends-focused and the continued fallout from numerous privacy scandals—which results in higher prices. The cost of the average Facebook ad has increased almost 22 times from 2011 to Q3 2018, according to our Q3 2018 Megaphone Report, which has made the channel increasingly unsustainable for young brands.

These rapid price increases are the effect, not the cause, of Facebook and Google’s efforts to grow their businesses. Facebook and Google have been courting the large CPG conglomerates, teaching them the ways of direct-response advertising in the hopes that they will shift a large amount of their spend away from the brand advertising that dominates Super Bowl commercials, magazines and other major promotional avenues. In Facebook’s Q4 2015 earnings call, COO Sheryl Sandberg remarked how the company was increasing its focus on helping large CPG brands and retailers make the shift:

Our third priority is improving the relevance and effectiveness of our ads. We shipped a lot of new ad products this past year. These products help deliver personalized marketing at scale and drive business for our clients. Leading up to Black Friday, Shop Direct, the UK’s second largest online retailer, teased upcoming sales with a cinemagraph video to build awareness. They then retargeted people who saw the video with one-day only deals. On Black Friday, they used our Carousel and DPA ads to promote products people had shown interest in. They saw a 20 times return on ad spend from this campaign, helping them achieve their biggest Black Friday and their most successful sales day ever.

Facebook’s growing interest in these companies makes sense, given the billions of dollars of advertising budgets they have to spend. But this focus also was the beginning of the end for startups that were hooked on the channel’s highly effective ROI during the first half of the last decade, back when the Bonobos’ and Warby Parkers of the world launched and scaled. We are in a dramatically different time and that Golden Age likely will never repeat itself as long as these major platforms continue to dominate attention.

The return of the CPG behemoth

The consumer product business has always been a business of scale—the bigger a company can be while maintaining its relative consistency on the back end and the front end at scale, the more successful it will be. Startups play a crucial role, especially in driving innovation, but they remain a fraction of the size of many of the biggest players in any given category.  

The rhetoric over the last decade around consumer brands is that these legacy conglomerates have nothing to add, and their market share is only there for the taking. While this has been partially true—small brands are objectively stealing market share from big brands as one can see quarter after quarter on public company earnings calls—the power of the CPG conglomerate is growing again. We are seeing digitally-native brands collectively hit a marketing—and therefore scalability—wall, where prices continue rising and business models are slowly falling apart.  

While many different entities are aiming to build the P&G or LVMH of the future, which aim to go beyond the potential financial efficiency that a traditional holding company provides, there is still significant value in having a stronger balance sheet and negotiating leverage, especially against the big social media platforms.

Through this lens, it makes total sense that W&C, which might have spent around $5-$10 million a year on digital advertising (a possible overestimate), would be much more successful with P&G, which spent $7 billion on advertising across its entire brand portfolio in 2017, advocating on its behalf. (At the same time, P&G’s $7 billion annual marketing spend is more than twice that of Walmart, which spends only about $3 billion a year on marketing, an interesting consideration for founders looking to sell their company to the right buyer.) The negotiating leverage of these conglomerates is essential and will only become more important as advertising costs continue to rise, which Walker alluded to in a recent interview. Media companies like BuzzFeed and Vox are similarly talking about a set of mega-mergers to ensure they have more leverage negotiating against these same social media platforms that have similarly hurt their businesses.

While VCs and other industry opiners have been quick to say that the big CPG conglomerates are the ones getting played, it’s starting to look like it’s VCs who are getting the short end of the stick. They are pumping billions of dollars into consumer startups, with few solid exits to show for it, and watching companies like P&G and Walmart scoop up their investments like Walker & Company, Bonobos, ModCloth and Eloquii for low-to-flat revenue multiples—a far cry from the 5-10x exit they are looking for.

While selling to these conglomerates doesn’t ensure future success—Unilever’s massive writedown of Dollar Shave Club is a worthwhile lesson—these holding companies still have a lot of leverage and a huge opportunity before them if they can buy up younger companies and let them do their thing, armed with the additional, cost-efficient resources.

After a decade of brands reigning supreme, the leverage is shifting back to retailers (Farfetch also just bought Stadium Goods for $250 million) and conglomerates, which are starting to put their cash to use. While Walker & Company is likely in a better place going forward, it serves as an important lesson about who holds the keys to the future of the consumer brand ecosystem. Both emerging and established brands need each other, but it’s increasingly clear that the small ones might need the big ones more—especially if they want to build something that lasts.