Manufacture, distribution, and sales of consumer goods are being transformed by tech. In many areas, even the raw materials from which goods are made are being revolutionized. This has produced a new category of Digitally Native Vertical Brands, with these attributes:
1. Sold online primarily; bricks and mortar for marketing only
2. Can be micro-manufactured and shipped straightforwardly; preferably, but not always, using new tech materials or ingredients
3. Allow for a type of product design or economics not feasible in traditional channels (e.g., subscription boxes, customized products)
4. High customer lifetime value (LTV)
5. High margins on the product in part due to new materials, manufacturing and piggyback shipping
6. Propensity to be shared via social media or garner earned media
7. Timelessness of the product (products like household goods, personal care, and over-the-counter medications stay relatively consistent over time; fashion, by contrast, does not)
We see an enormous investment opportunity in this emerging class of companies. They have fundamental advantages over traditional consumer goods manufacturers and merchants. As a result, they are disrupting one consumer goods category after another. And, for the first time, we see margins here that once were only possible in software.
Our funds will focus on the categories that have the highest potential to deliver new DNVBs, have the best margin/LTV potential, the largest addressable markets or, hopefully, all three.
For 2018, here is where we see the greatest opportunity:
1. Strongest DNVB Potential:
- Cosmetics/Anti-Aging. We will focus both on the products themselves and on new ingredients.
- Supplements/Vitamins. There is a fair amount of superficial hucksterism here. Our focus is only on those driven by deep science.
- Eyewear/Contacts. There have already been big successes here, but new technologies and use cases continue to open opportunities. However, to gain our interest, companies will need to bring more than just a new brand to the table.
2. Largest markets/best margins, but less near-term DNVB potential:
- Luggage and Apparel (high margin, low frequency). The margins here are stunning, but we are still looking for fundamental product innovation we feel can stand up to a tsunami of competition as well as likely ferocious response from entrenched market leaders.
- Contraception and Underwear (strong market growth). Women producing products for women is taking off among the rising generation. The adoption of new female-only products has been dramatic. We are also seeing business model innovation here, as a new openness to discuss (even celebrate) once outre products makes brings new approaches forward.
- Pet Care (market size exploding). Humans are spending more and more money on pets. The activity is so immense it has moved beyond a fad or trend to indicate some kind of deep need in the rising generation for the real-world connection and warmth that pets provide. This is true worldwide. We will focus on companies with tech or ingredient innovation at their core and the capacity to impact broadly across this space, as opposed to being limited to a single kind of animal companion.
Every six months, our funds take the unique approach of analyzing deeply where social/mobile technology stands poised to have its next big impact; thus, these changes were revealed to us early. We jumped in and have been delighted with the results we’ve seen so far.