Over nearly 20 years, the DTC brand landscape has seen an explosion and relative decline. These brands, known for their innovative marketing strategies and unique product offerings, captured the hearts of consumers, media groups, and investors alike. However, beneath the glossy surface of perfect branding, careful narratives, and paid marketing, the financial reality often trailed brand equity for the companies and their founders. Parade, a once-promising DTC intimates startup, is a poignant example of how even seemingly thriving brands can find themselves on the precipice of insolvency.
The superpower of the DTC industry has never been branding (that can be easily duplicated) or platform (Shopify and BigCommerce democratized eCommerce) or even the manufacturing of a novel product. The superpower has been the ability to identify arbitrage opportunity and capitalize on it. The superpower of DTC is getting there first. In this case, there is a geographical location.
In Steady Brand vs. Cool Brand, I wrote about two brands who both lost sight of the hidden advantages of being an agile DTC brand:
But the constraints faced by the brand, including the product’s increasingly commoditized nature and shifting preferences in raw material usage, may limit its exit optionality.
Then, I published on a brand who seemed to exercise its understanding of its super power at every stage of its growth. Solo Brands began as Solo Stove, a quiet but profitable manufacturer of portable firepits. Few paid attention to the brand outside of its loyal customer base. The founders were near-anonymous; this was a byproduct of the brand being founded outside of the New York / Los Angeles / Miami brand bubble. I explained in the Solo Brands Novel Strategy:
A once-obscure brand just outside of Dallas, Texas evolved into a generational model for how business is done, brands are built, and liquidity is achieved for stakeholders. Founded in 2010 and trading today at $DTC with a market cap that hovers around $500 million, Solo Brands has an exceptional story.
While the two stories paint different pictures (stuck in pre-exit vs. post-exit), this essay is about what brands can do to make it easier on themselves by pursuing high value, lower risk arbitrage opportunities.
Arbitrage in this context refers to the strategic exploitation of discrepancies or gaps in the market, whether they pertain to technology, product branding techniques, or new marketing channels.
Part One: The DTC Brand And The Unspoken Crisis
The purchase of Parade by lingerie manufacturer Ariela & Associates International in August was initially perceived as a standard acquisition, in line with the trend of larger companies snapping up promising digitally native brands. Yet, what unfolded was far from ordinary. Parade, once valued at around $200 million by investors, ended up in a last-ditch sale, resembling a bankruptcy liquidation process. What’s more, this sale obliterated the investments of all its shareholders, painting a grim picture of the brand’s financial health.
Behind the scenes, internal financial data revealed that Parade was teetering on the edge of insolvency. By the end of 2022, the company’s cash reserves had dwindled to $7.3 million, which was inadequate to sustain the brand’s operations, given its projected cash burn rate for 2023. The story of Parade serves as a stark reminder of the intense financial pressures that many DTC startups currently face, particularly those that pursue rapid growth through heavy investments in paid marketing:
Although the company cut its paid advertising costs to around 40% of net revenue in 2022, it still burned more than $33 million in cash last year. As of this spring, the company had forecast its cash balance would dip below zero by August of this year, according to the documents. (The Information)
The company’s success was further buoyed by high-profile collaborations with industry giants like Coca-Cola and Swarovski as well as a number of partnerships with celebrities and influencers. Parade’s net revenue exhibited impressive growth, more than doubling in 2021 and increasing by 50% to nearly $32 million in 2022. However, this growth came at a steep cost. Parade committed substantial resources to paid marketing, with advertising expenses devouring more than 60% of its net revenue in 2021. The brand expended significant sums to acquire new customers, with the cost of acquiring each new buyer roughly equivalent to the average order value (AOV).
The result was the drain on Parade’s cash reserves. Despite efforts to rein in advertising expenses in 2022, the company still hemorrhaged. The reported figures, in comparison to other DTC companies, were unsustainable and served as a warning of impending financial catastrophe.
While Parade scrambled to secure a buyer, it ultimately fell into the arms of Ariela & Associates International. It’s been noted that investors made nothing. This financial wipeout was largely attributed to Parade’s mounting debt, which stood at over $19 million in bank loans, convertible notes, and credit card debt as of May. Before the distress sale, Parade had raised a significant $56 million from investors, including Maveron, Lerer Hippeau, and Greycroft Partners.
The story of Parade highlights the vulnerability that many DTC brands currently face. While the DTC model offers unique advantages in terms of brand control and customer engagement, it also comes with significant financial risks. Parade’s rapid growth, fueled by aggressive marketing spending, ultimately led to its financial downfall. There are broader implications of Parade’s predicament and its connection to a larger movement toward insolvency in the DTC industry. Parade’s outcome is far from unique in this respect. In fact, the distress sale of DTC brands will seem more common than the conventional exit over the next 12-24 months.