Startups Venture

Venture Funding Into Subscription Startups Tapers Off

Subscription boxes were all the craze when they first came out some eight years ago. People loved the idea of getting a box curated with items they might or might not have otherwise purchased on their own.

But today, some argue that the novelty of the subscription box is gone as the space has gotten more crowded and consumers are losing interest. So is the boom over, or is it just getting underway?

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If venture funding in the sector is any indication, then the sector’s naysayers just may be right.

In 2017, venture funding in subscription companies slid to its lowest total since 2010. Specifically, subscription startups raised a mere $39.7 million across 20 deals last year. That’s down 343 percent from the peak year of 2014, when 30 subscription companies brought in $175.8 million. It’s also down 254 percent compared with the $140.4 million raised in the space across 26 deals in 2016.

So what’s happened?

Opening Up

Founded in 2010, beauty sample subscription service Birchbox was the first of the e-commerce subscription service to launch. Other companies following similar models soon followed including Stitch Fix, Dollar Shave Club, and Ipsy.

2014 was a hot year for the sector. During that 12-month period, Birchbox raised a $60M round; Stitch Fix raised $25 million; NatureBox brought in $18 million. Frank & Oak and BarbBox each also raised $15 million in 2014.

The subscription space has seen a couple of high-profile exits with data-driven subscription clothing service Stitch Fix going public in the first tech IPO led by a woman last year, and Dollar Shave Club being acquired for $1 billion by Unilever in 2016.

But it’s clear that not every subscription company is destined for success. Fickle consumers who get bored easily make it a challenging space. And last year’s numbers were disappointing, to say the least.

“To stay the distance, brands using a subscription model need a very strong point of difference and superior customer service,” Sarah Boumphrey, global lead of economies and consumers at Euromonitor International, was quoted by eMarketer as saying.

VCs Speak

Art Berliner, managing director of Walden Venture Capital, has invested in two subscription companies: New York-based Bespoke Post and Culver City, Calif.-based MeUndies.

In his opinion, only companies that created a strong brand with good product margins will succeed.

“Many companies that failed had unattractive product margins and customer acquisition costs were too high,” he told Crunchbase News via email.

Todd Breeden, a principal at New York-based KiwiVenture Partners, also invested in Bespoke Post.

In general, he said his firm is bullish on e-commerce as a whole but believes subscription “has its place within e-commerce,” proven by successful exits like Dollar Shave Club.

“While subscriptions can offer great value for consumers and economic stability for businesses, ultimately they’re a feature of a great e-commerce business centered around talented management and a strong brand,” Breeden said. “I’d say the reason a lot of subscription companies have struggled is not because the model is broken, but that they lacked either talent, margins, supply chain or a definitive brand that ultimately drives the success of an online business.”

Keeping Subscriptions Fresh

Daniel Broukhim, co-founder and co-CEO of Los Angeles-based FabFitFun, believes his company has continued to grow because of its emphasis on customization and personalization for each customer.

Founded in 2010 initially as a newsletter and blog focused on women’s lifestyle content, FabFitFun launched its subscription membership service in 2013. It raised $3.5 million in 2015 from investors such as 500 Startups, New Enterprise Associates, Upfront Ventures, Simon Ventures and Thrive Capital. The way it works is that members get a seasonal box four times a year with items valued at more than $200, according to the company. Customers pay $49 a quarter (or $180 a year) and also get access to specialized original online content and member-only exclusive sales, according to Broukhim.

The company works to find the “best new” beauty, wellness, fashion, and fitness products and include full-size versions of them in their boxes. An example of items found in a given box includes candles, an eye mask, earrings or a bracelet (customers can sometimes choose what they prefer), and a massage roller.

Revenue growth has been “substantial” for the 220-person company, Broukhim said. He wouldn’t disclose exact numbers but said the company has grown three times over the last few years both in terms of revenue and members with members numbering in the “hundreds of thousands.” FabFitFun is not yet profitable, he added, but it has been cash flow positive for over two years.

Members range in age but Broukhim said the “sweet spot” is women in their 30s.

Daniel Broukhim, Courtesy of FabFitFun

To customize the products, FabFitFun conducts onboarding surveys for each customer and is starting to use a combination of machine learning and data science to pick out products. It also gives members the element of choice in some cases.

“We aim to be someone’s best friend curating their entire lifestyle,” Broukhim said.

“It’s this really deep focus on the notion of membership that has driven things for us,” he added, with a comparison to Netflix’s model. “As we continue to add more things that benefit our members and also focus on customization and personalization, we find that customers love what we do and stick around for longer.”

A Tailored Subscription

In October 2017,  Bespoke Post—a New York-based startup delivering “goods and guidance for the modern man”—raised $8 million in a Series A round that included participation from Walden Venture Capital, Scout Ventures, and Kiwi Venture Partners. The company has more than 100,000 paying subscribers, growing more than 50 percent year-over-year. It has also launched an ecommerce component to its site, outside of the boxes.

Bespoke Post Co-founder and CEO Rishi Prabhu started the company in 2012 on the premise that the men’s market “was underserved in a retail space.”

The startup launches lifestyle boxes each month across a variety of categories with an emphasis on finding artisanal, not-found-everywhere brands. Each box contains products such as cocktail wares or a weekend bag at the cost of $45. Subscribers are notified of the options for the boxes and can opt out of any given month with no penalty, according to Prabhu.

“We have always thought that was important,” he said. “And now you’re seeing more companies offering the opt-out option.”

Bespoke Post has 40 employees and has made an effort to grow “without taking a ton of funding.”

“We’ve consciously been very lean for the size of the company,” Prabhu said. “One of our company values is to be scrappy.”

Walton Venture Fund’s Berliner said his firm was drawn to investing in the startup mainly due to “a great founding team who have successfully worked together, attractive customer demographic, and a strong business model.”

Meanwhile, Breeden said KiwiVenture Partners doesn’t look at the subscription as being a defining characteristic of Bespoke Post’s business or the brand.

“The team’s ability to deliver a high-end brand experience through an affordable price-point and consumer-friendly offering via subscription have been tremendous drivers of growth to date and continue to create success going forward,” he told Crunchbase News.

Prabhu attributes Bespoke Post’s success so far to the company’s “massive thirst for quality.”

“We ask ourselves for any box we launch – ‘would I pay $45 for this?’” Prabhu said. “We study if is it up to par for our customers. If not, we’ll nix the box or modify it. A lot of companies in the space have focused on not sending great stuff, or things that just pile up in a corner. That’s our biggest fear.”

It’s probably safe to say that the number of subscription companies will continue to grow; however, how many will actually raise money and how many will still exist in five years? The space is turning into survival of the fittest, with only the startups with the most compelling models and strongest management teams coming out ahead.

Illustration: Li-Anne Dias