The dot-bomb era has given way to a renewed focus on product and value, according to a new analysis by investment bank Solomon.The dot-bomb era has given way to a renewed focus on product and value, according to a new analysis by investment bank Solomon.
The getting was good for fashion’s digital darlings in 2021.
The pandemic supercharged e-commerce, pushing a host of direct-to-consumer companies into the public markets.
But the good times didn’t last with the first-gen dot-coms mostly turning into dot-bombs.
Now a new wave has arrived and Brandon Yoshimura, a managing director in the consumer retail space at investment bank Solomon, argues in a new analysis that they are just built differently.
The study zeros in on companies like Quince, Vuori and Skims that had e-commerce tech at their fingertips from Day One, know how to make do with less and have paid close attention to what they’re actually selling.
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If focusing on product sounds basic, it’s one of those basics that can get lost in the rush of a hot market, as was the case in 2021, when investors mixed up process (selling digitally) with product (carrying goods people actually want).
“People presupposed when they were making bets and investments that the products that got delivered to you over the internet were going to be great products on top of that,” Yoshimura told WWD in an interview. “You’ve had a very mixed set of outcomes for companies that came up in that wave.”
The report details the 2021 digital “euphoria” by running the numbers on the 12 DTC companies that went public that year — including Warby Parker, Figs, Allbirds, Honest Co., Solo Brands and more. All together, the group was valued at a total of about $31.4 billion when they went public.
Those valuations were pegged largely on revenues since profits were still a distant thought for many. Allbirds, for instance, traded at 17.5-times revenues shortly after its offering.
Collectively, those 12 companies are now valued at closer to $7.6 billion, with Warby Parker and Figs holding up best. In March, Allbirds agreed to sell its IP and assets to American Exchange Group for $39 million, which the Solomon report pegs as a 99 percent haircut from the IPO valuation.
Yoshimura argued the next generation is building on a stronger foundation.
“E-commerce has not been the reason for their success, but the fact that they’ve been able to build with third-party tools … has allowed them to relentlessly focus on product and brand while being digitally native and fluent and socially conversant and all that,” he said.
“These brands that have awesome products, are executing well and are digitally native are actually becoming really big, really fast,” Yoshimura said.
“They scaled in a very different capital environment. This isn’t like zero-interest rate companies where there’s a lot of venture money flooding the space. They were built in a very capital-constrained environment. It’s like a plant in the desert, you have to be really efficient. You don’t have the luxury of being able to make expensive mistakes. It requires a level of operational discipline, rigor. The net outcome of that is if you have all these companies that grew up in a more challenged capital environment, they are just definitionally stronger now at scale.”
That second wave includes Quince, Vuori and Skims, but also Alo, Hailey Bieber’s Rhode, Coterie, Grüns, AG1 and Dr. Squatch — a group of brands that Solomon said was valued at a collective $31.5 billion.
Each has come to the fore in their own way.
“There’s no, you have to be digital only or you have to enter into wholesale or you have to open boxes,” Yoshimura said. “There’s different playbooks. The common themes are more about brand product centricity, discipline around margins, execution excellence.”
While the world can’t stop talking about all things AI, Yoshimura said the new tech was only part of the picture at this next wave of digital companies.
“One of the realities of digital-centric retailing is there’s a ton of data available,” he said. “One of the challenges is being able to leverage it efficiently. So I think there’s a huge opportunity.”
There is, however, a big “but.”
“I just don’t know that we’ve seen technology be like the singular determinant of success over a long period of time,” he said.
Hence, the focus in the report — and the next wave digital players — on providing strong product and providing good value.
The stakes are high not only for this next wave, but the rest of the industry.
Prices on Wall Street tend to trickle down to the industry in general — and if brands fetch top dollar there, it sets a precedent that can help smaller companies get their best price in a deal.
“I think we are in the process of a reset in terms of how people are looking at these companies and brands and opportunities,” Yoshimura said. “There’s a group of businesses that have scaled to a level where M&A is probably unlikely or impractical, in which case public markets become a logical path. That would be hugely constructive, will be hugely constructive for this space because the public will get to see just how scale, profitable, global a lot of these companies are.
“If you get the equity capital markets reopened, some of these big category-defining names get public…that should help with capital formation in the middle market,” he said.
In short, it’s a question of just how long Kim Kardashian’s coattails are if she does end up taking Skims public at a big valuation.
