Memo: Brand-Proofing In The Post-SVB Age

Profitability in online retail is no longer a journey, it’s a race. The SVB crash, while minimally impactful on many companies in direct-to-consumer or retail technology, will still accelerate brands’ and software companies’ need to reach a form of sustainable profitability moving forward. The past few years have been a slog for many, personally and professionally. First, the pandemic, then the crypto crash, and now this.

While the SVB contagion has yet to spread like the 2008 meltdown, the assets involved reached near 2008 numbers, with more fallout to come.

World War I and the Spanish Flu pandemic inspired creators like Ernest Hemingway to publish their first works. Hemingway followed with The Sun Also Rises, a pioneering, modernist novel shortly after. The Civil Rights movement inspired some of the greatest musical acts of the past century. Sam Cooke, Nina Simone, Bob Dylan, and Gil Scott-Heron’s music filled the radio waves. Each were inspired by their interesting times. And the Great Recession of 2008 inspired creators of another kind. Companies like Venmo, Uber, Pinterest, and Instagram navigated the interesting times of a formative decade. [2PM]

The most interesting times inspire the greatest creativity; brands will need to employ that creativity to survive macroeconomic headwinds. Tough times can actually produce tailwinds if handled directly. Here is a rundown of five changes that we foresee and how brands can proof themselves with the hopes of turning a headwind into a tailwind.

Reduced access to funding and capital:

One of the primary consequences of the SVB crash will be a reduction in available funding for startups and businesses, including DTC brands. SVB and other similar financial institutions often provide loans, lines of credit, and other financial services to help these companies grow. With a crash or significant financial disruption, these resources might become scarce, making it more challenging for DTC brands to secure the necessary funds to expand their operations, invest in marketing, or develop new products.

SVB was the largest venture debt lender, regularly offering the best rates to a riskier class of business. Many of these companies will have difficulty finding comparable terms. Another impact is the decreased valuations that will result as traditional venture firms gain more leverage as financing options shrink.

The declining access to capital brought about by the demise of SVB and the chill it’s brought to the venture debt space will mean VCs have more leverage to drive down valuations.

Stripe’s valuation is the most significant marker here. Once privately valued at $95 billion, the company recently raised $2 billion at a $55 billion valuation.

Decline in consumer confidence:

As the SVB contagion continues to materialize, a significant financial crash could lead to a decline in consumer confidence and spending, which will have an outsized impact on modern brands. A contagion is typically described as an “initial shock” that propagates across global markets for securities, savings, and loans. This often happens without relationship to the “patient zero” bank. This correlates with consumer spending crashes.

As consumers become more cautious with their spending, they might cut back on purchases of non-essential items. This decline in consumer spending could lead to lower revenues and slower growth for these businesses. So far, the contagions spread seems to be mitigated as well as possible. From the Northlines:

The rescue was necessary to preserve the Silicon Valley ecosystem, as Larry Summers described in a conversation with the Economist magazine. Secondly, as he sensed, it was to stop what could be a “21st Century contagion”. A failure would have consequences for a large group of players.

Credit Suisse’s firesale acquisition by UBS is the latest example of this phenomenon. And First Republic Bank is down 42% despite a $30 billion infusion as consumers still lack confidence in the bank’s long-term viability.

Increased competition:

In the face of reduced funding and declining consumer confidence, DTC brands will find themselves facing increased competition, both from other DTC companies and traditional retailers. As businesses scramble to secure their share of a shrinking market, they might be forced to lower prices or offer promotions to entice consumers, which could further squeeze profit margins.

As a result of the challenges mentioned above, modern retail brands will need to place a greater emphasis on cost-efficiency and profitability. This could involve cutting operational costs, streamlining supply chains, and finding innovative ways to reach customers with minimal marketing spend. This will mean that more retail brands will pursue lean business models by reducing SKU count and focusing solely on core products while focusing marketing spend on products with the highest margin. A recent McKinsey study adds:

Some plan to cut the number of annual collections, while others are focusing on creating streamlined brand narratives, imposing demanding efficiencies, and introducing tighter cost discipline. In all cases, identifying whether a product is a statement piece, a margin driver, or something else, and baking these perspectives into the planning process, is key.

In the long term, this focus on efficiency could help modern brands become more resilient and better prepared for future market fluctuations.

Shift in investor priorities:

In the aftermath of the SVB crash, angel investors and venture capitalists will become more risk-averse and shift their priorities towards businesses with proven track records and strong fundamentals. This could make it more difficult for unproven brands and retail technologies, particularly those in their early stages, to secure funding. In response, early stage companies will need to demonstrate their ability to generate profits and achieve sustainable growth to attract investment. I found this quote helpful in a recently published report by India’s The Telegraph:

Start-ups would have to cut out fat and focus on profitable lines of business to stay afloat. The impact on employees will be high in the form of delayed joining, low investment in new skill building, and fewer opportunities for global projects.

Early business models will matter more than ever and investors will make faster decisions on which businesses they feel are worth keeping afloat through traditional venture capital.

Importance of brand loyalty and customer retention:

In a challenging market environment, modern brands will need to focus on building brand loyalty and retaining customers to maintain revenue streams. This could involve investing in customer service, personalization, and targeted marketing efforts to nurture existing customer relationships and encourage repeat purchases. By fostering strong connections with their customer base, retail technologies and brands could better weather the storm of the slowly spreading SVB contagion.

Understanding the SVB contagion’s potential impact on modern retail brands can provide valuable insights for businesses looking to navigate further financial disruption. By considering the five points and focusing on cost-efficiency, profitability, and customer retention, the retail industry can position itself for success in a market landscape influenced by heightened price sensitivity, an increase in “utility purchases,” and general uncertainty.

Brand-proofing in the post-SVB age will produce some of the most durable brands since the Great Recession of 2008. While the number of banks impacted will not resemble 2008’s fiasco, the assets under management does reflect similar levels of damage. It’s best to operate with principles that reflect the potential for SVB’s crash to influence our economy in similar ways over a longer-term.

By Web Smith | Edited by Hilary Milnes with art by Alex Remy

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