Member Brief: The DTC Acquisition Corp

This Member Exclusive is temporarily unlocked. On occasion, we make these reports available to the greater audience for topics that are widely important. This content is part of our Executive Membership. I invite you to join. 

There are three key narratives to consider. Observe them and study how they may interact. You’ll understand where the retail industries may be headed.

Retail landlords are beginning to negotiate for a percentage of online retail revenue.

Some property owners think this would be a fair trade off in the clamor for more flexible rent arrangements. So far, though, there is no good way to measure what landlords might be entitled to and tenants have few reasons to play ball. [4]

Mall ownership groups are acquiring dying brands with the hope of propping up existing rent revenues in the short term while benefiting from licensing deals in the longer term.

Authentic Brands Group is on the acquisition hunt, after bolstering its war chest by $600 million. CEO Jamie Salter said the cash injection from BlackRock, General Atlantic and Leonard Green & Partners now brings the apparel licensing firm’s total cash up to $1 billion, according to CNBC. [5]

And we are in the reemergence of the reverse merger. Well, at least something very similar to it. These three developments are running in parallel, but only for now. This essay explains.

In the nearly 15 years of the direct-to-consumer era of retail, fewer than seven IPOs have been earned, according to industry veteran and fellow firebrand Nate Poulin [1]. With the exception of a small number of digitally-native brand founders who’ve sold in the seven figures of secondary shares, few brand executives have had the resources to reinvest time and money into the industry. Most former brand executives have moved on to take roles at agencies, enterprise brands, or the technical platforms that support them. Unlike other venture-backed categories, the trickle-down of knowledge and resources has failed to impress. The industry has fallen short, and delayed founder liquidity is often to blame. For every Andy Dunn, Katrina Lake, Michael Dubin, or Tristan Walker – there should be dozens more. But to get there, the DTC industrial complex will need to adopt new exit strategies. This is an argument for SPACs as DTC acquisition corporations.

Pioneered in the 1970s, the Special Purpose Acquisition Corporation (SPAC) is a derivative of the reverse merger format. It has grown steadier governance and sponsors that are more credible than the pump-and-dump era of the 70s and 80s. A SPAC listing has become a route for serious-minded companies to pursue public market growth. In 2020 alone, the first half of the year has amassed a figure close to the wealth collected from 2019’s slate of SPACs. Why? There’s been a drastic improvement in the quality of investors involved. Kevin Hartz is the Co-Founder of Eventbrite, a Partner at Founders Fund. After raising funds for a $200 million SPAC, Hartz explained to TechCrunch:

We’ve had a lot of requests in. We think we’re going to convert [famed VC] Bill Gurley from being a direct listings champion to the SPAC champion very soon. [1]

Ideally, a SPAC would take public a small cohort of the enterprise-caliber of brands. This new-age reverse merger would forge a new holding company with operational synergy and supply chain efficiency. Part LVMH, part Proctor & Gamble: these brands would have added purchasing power and better negotiating power. With shared resources and access to the public markets, they would be able to better compete with the traditional brands and scale through traditional channels.

Occidental Petroleum, Texas Instruments, Ted Turner Broadcasting, Blockbuster Entertainment, the New York Stock Exchange, and Berkshire Hathaway shared a common trait: each corporation went public through a reverse merger. A reverse merger is a fast-paced alternative to the traditional, initial public offering (IPO). It’s a financing strategy used to take a private company public through a shell company: one with virtually “no business or usually limited assets.” Today, the method bears similarities to the resurgent financing vehicle pioneered in the 1970’s known as the SPAC: a Special Purpose Acquisition Corporation. And they are quickly becoming the IPO device of choice.

In 2019, 59 SPAC IPOs earned nearly $14 billion. In 2020, the record will be exceeded by quite a bit. As of September 2020, 32 SPACs have gone public. These companies have raised nearly $10.4 billion. Once a commonly-used tool for sponsors who couldn’t normally raise capital through conventional means, today’s SPACs are being facilitated by some of private equity and venture capital’s finest. It may be the perfect structure for long-needed liquidity in the DTC industry.

SPACs are an increasingly popular vehicle for companies to enter the public markets. They offer a way for private companies to go public on an accelerated timeline without jumping through certain regulatory hoops. “We’ve taken a roadmap that was two to three years long and compressed it into a few months,” said [Hims] CEO Andrew Dudum. “We’ve launched a primary care division, at home Covid-19 saliva test and a mental health platform, which were all things we wanted to do.” The company will be valued at $1.6 billion, and the transaction will deliver up to $280 million in cash. [2]

Unlike the traditional reverse merger, a SPAC serves as a clean public shell company, a vehicle with a greater likelihood of growth capital in place, and a built-in institutional investor base. What a SPAC doesn’t typically include is an operational management team to direct the actions and opportunities of the acquired entities. Social Capital has taken a step in the right direction: former Twitter COO Adam Bain will join the board once the transaction has completed.

OpenDoor is a prime example of how an eCommerce-driven operation can be taken public. Now operating in 18 markets, Social Capital’s Chamath Palihapitiya is now focused on direct-to-consumer. After his first iteration of doing so last year with space-tourism company Virgin Galactic, he’s found his next target: Opendoor, an online marketplace for buying and selling houses. [3]

If you consider the vast number of direct-to-consumer brands launched over the last fifteen years, the one takeaway has been the industry’s lack of exit optionality. Many have raised sums of money under the guise of potential tech or software returns. Others have yet to reach a scale worthy of a public market possibility. The illiquidity of the industry has been a source of frustration for investors, founders, and early employees alike. This, especially as retail shifts to online channels, malls began to fail, and many have wondered how the burgeoning industry of digitally-native brands and the industrial complex around them could survive with so few exit outcomes or paths to profitability. Simply put, few modern brands have exited and it’s begun to strain the system.

Many of the forty that have exited, did so through private market acquisition. Peloton, StitchFix, Yeti, Casper, and Purple round out a very short list of IPOs. And yet, a number of the DTC Power List’s brands feature the retailers that are most coveted by mall ownership groups to replace the retailers of old.

Against the backdrop of Simon Property Group, Brookfield Properties, and Authentic Brands Group acquiring struggling specialty retailers like Brooks Brothers, Ascena Retail, and JCPenney: I’d contend that it’s the top digitally-native brands that they should be the acquisition targets. As eCommerce continues to claw more and more of a percentage of overall retail spend, it’s an opportunity for traditional retail to invest in the next iterations of the brands that will carry their remaining malls and strip centers, and online stores – forward. These are brands with $1 billion or more in prospective market capitalization.

The ideal format for the DTC Acquisition Corporation is one funded with the help of the top consumer investors and co-managed by the retail development groups that will need these brands in each of their developments. In the next few years, traditional retail will be a shell of what we see today. New companies will need to take their places. It’s incumbent upon these management groups to consider whether investing in the past is more reasonable than investing in their industry’s future. If you’re reading this, you understand the correct approach.

The DTC Acquisition Corporation and the SPAC that facilitates it will fortify an industry in need of more winners. And it will begin to repair another industry that is – so desperately – in need of a long-term win. It’s exit time.

Report by Web Smith | Editor: Grace Clarke | Art by Alex Remy | About 2PM