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The digitally native vertical brand (DNVB) model started gaining traction about a decade ago, but has only really exploded over the past few years. It’s become the talk of the town as more and more startups and venture capitalists jump on the bandwagon and place their bets. Glossier, Casper, Honest Company and Harry’s are some of the most notable examples of DNVBs that have reached unicorn valuations.
But these direct-to-consumer (DTC) brands face a big problem. DNVBs have been raising so much venture capital that they are at tremendous risk of not being able to meet the return requirements of their investors.
And that’s how the pivot towards the DTC holding company model has garnered popularity. The model can benefit DTC companies, subscription box companies, B2B SaaS companies, online retailers and companies offering mobile apps with in-app purchases.
If you run any of these types of businesses and you’re struggling to build sustainable growth, read on to learn how you can potentially benefit from shifting to a DTC holding company.
What exactly is a digitally native vertical brand?
Digitally native vertical brands are a form of DTC business model since they sell directly to consumers without the need of any third parties via their own websites. Both businesses and consumers benefit from this type of model because DNVBs are in complete control of their own production and distribution.
They usually don’t own their own manufacturing facilities. Instead, they develop the products and give specific specifications to vendors, ensuring they know fully well how the products are made and what goes into them. By maintaining full transparency throughout both production and distribution, they determine how their products are sold, and are able to answer any questions consumers may have about the product.
Access to customer data is another big advantage of a DNVB. By being in full control, they are able to gather the necessary customer data for optimizing customer experience and marketing strategies. The goldmine of data enables these brands to better target their online customer base, run more effective PPC campaigns and improve their SEO efforts, just to name a few applications.
The massive success of the digitally native vertical brand model has birthed more DNVBs over the past three years than over the previous decade. But the trend is becoming a real problem. Here’s why.
The venture capital conundrum
Digitally native vertical brands have been raising a lot of venture capital. It sounds like a lucrative market, but digging a bit deeper into the situation, these brands are at great risk in being able to meet the ROI requirements of their investors.
They would need a massive purchase offer or IPO valuation. Consequently, according to the latest PitchBook’s M&A Report, more than 85% of acquisitions in the third quarter of 2019 failed to meet their investor expectations. As a solution to this high-risk situation, a new DTC model has come into the market.
The evolution of the DTC holding company model
The DTC holding company model focuses on risk diversification. That is, expanding to as many verticals as possible. So, instead of focusing on only one niche, DNVBs have started spreading the risk across other verticals in case any one particular vertical suffers.
If a digitally native vertical brands wants to transition to a DTC holding company model, it needs to:
- Diversify into other markets to expand their audiences and meet the needs of those consumers.
- Have a data-first mindset focused on delivering excellent customer experiences.
- Prioritize operational and capital efficiencies as opposed to depending on venture capital as the main source of funding.
A great example of a DNVB that has successfully shifted to the DTC holding company model is Harry’s. Harry’s has focused on diversifying beyond the original sale of men’s shaving products. They now offer a range of personal care products for men and women, household items and baby products. As a result of this pivot in business model, Edgewell Personal Care, which owns brands such as Schick, Banana Boat and Wet Ones, acquired Harry’s for $ 1.37 billion last year.
Venture capital funding still plays a big part in the success of DNVBs. However, it’s also vital for these types of online businesses to be able to transition to alternative models in order to achieve the desired economic growth. Therefore, evolving the focus on a single, niche vertical to a multi-vertical DTC holding company is necessary to consider for continued success.
Watch the whole discussion here: