Like any big startup acquisition, there is a rush to unpack it, especially when the price tag is rumored to start with a “B.” There’s a lot of bragging rights and credibility wrapped up in that number, and the ecosystem will even fudge numbers a smidge to make sure it’s in the headline. The most recent Big B exit in the startup world, like the ones before it, caught everyone by surprise: Unilever purchased Dollar Shave Club for $1 billion.
[I will not be able to recount all the fascinating angles of the event, so would kindly point you to the great posts by Ben Thompson on Stratechery (an angle on industrial strategy and disruption) and David Pakman, a Dollar Shave board member, who led an investment in the company’s Series A and Series B financings. Please make sure to read their work.]
I wanted to focus on a different angle, more narrow and as it applies to conventional wisdom peddled around the Bay Area or the blogs. I have done in the past in analyzing Snapchat and Whatsapp through this lens of challenging conventional wisdom with cold, hard facts. Dollar Shave Club presents me with another opportunity, so here goes:
1/ “Big outcomes are more likely to originate in the Bay Area.” This is an old one, and it’s directionally true, but they have been happening outside the Bay Area more over the last five years — Oculus was also in LA (as Snapchat waits in the wings), Minecraft and Spotify are in Sweden (among others). New York has had a few and will have more.
2/ “We solve big, technical problems.” You hear this a bunch, like a badge of honor, or the old skit, “How much do you bench?” Dollar Shave tackled lots of different technical (and operational) problems, but most traditional investors didn’t perceive it that way (more on that below). Dollar Shave also rolled out their own branded butt wipes as a product alongside shaving accessories. Butt wipes.
3/ “There are too many incubators and accelerators.” Sure there are, but that doesn’t mean new “co-creation” models shouldn’t be tried. Credit to the team at Science for incubating the idea and helping the company grow from the early stages. The co-creation model in venture (like Science) gives the investors (potentially) better economics in originating ideas and helping them get off the ground, not to dissimilar from how some (not all) firms treat EIRs with GPs helping. It is an antidote to the increasing competition among venture firms and LP dollars which have rushed in and spread out across the VC industry — a way to co-create ownership thresholds.
4/ “Consumer is closed-off.” It is getting harder to find consumer breakouts. I hear this from many of the top firms, and it is probably true. I touched on this in my Feb 2, 2016 guest post on Stratechery. But, channels exist, they just need to be discovered or dug — like the channel Dollar Shave created to a young, male demographic.
5/ “Bay Area VCs usually catch the big out-of-market companies.” Now that large companies can start anywhere (right?), there’s so much VC in the Bay Area, the VCs there will be able to catch the inflection points of those who are growing — especially if it’s just an hour flight south to L.A. Dollar Shave, by contrast, was likely turned down not once but twice by its blue chip VCs who participated in the seed round, but scooped up by Venrock’s David Pakman out of NYC — he not only led their A, but also did their B. There’s a lot of conventional wisdom around thinking every good deal has to, by law, have competition around it — but then we see examples where everyone had a crack at the A and B, and the lack of competition created the opportunity for an inside round and more kwan for Pakman. Well-played, sir.
6/ “Worry about marketing after product-market fit.” I have lived it, it’s true — most of the Bay Area startup scene either pushes off traditional marketing to the point where it’s too late, doesn’t take it seriously at the outset, or invests in it too much before the time is right. Dollar Shave, on the other hand, leveraged changes in social media to market itself at a lower cost and invested the resources in building up its brand. As we see with the Pokemon Go craze of late, a recognizable brand can soar and effortlessly reduce customer acquisition costs in its wake.
7/ “E-commerce is dead, with Amazon as the Grim Reaper for those startups.” After what happened to Fab, Gilt, One Kings Lane, among others, investors in the public and private markets got real skittish about e-commerce. Another reason this deal was passed over at A and B is because of a fear of going up against incumbents like Amazon, or in this case, the big CPG companies. There are, however, things that Amazon can’t do, and while it is one of the best companies in the world (and will still grow like crazy), we will see more of this trend play out in the headlines with startups over the next few years. (As an aside, larger VC fund sizes come into play here — it used to be that having one billion dollar exit would make a fund, but now some funds need a few of them, hence rendering a company like Dollar Shave, in their eyes, not big enough.)
It’s an uncertain world, and especially true for the startup world. We mostly don’t know what we’re doing, so conventional wisdom is attractive — it is the institutional memory of lessons passed down so that we can make better choices or preserve order. But, conventions don’t necessarily last forever, and they certainly don’t apply to everyone. Congrats to the Dollar Shave team and their investors for writing and acting out their own conventions.