Fintech & e-commerce Retail and Direct To Consumer Startups Venture

Are Startup Investors Weary Of The American Consumer?

Illustration of IP shopping. [Dom Guzman]

American consumers are used to brands catering to our every whim.

From footwear to skincare to pets, stores and warehouses are stuffed with products targeting every conceivable demographic, however bizarre its tastes. Pet ketchup? Snail slime eye masks? Zebra print goldfish platform shoes?

Any of those things are available with a few clicks. And if current selections aren’t enough, rest assured founders and product designers will continue to churn out new seasonal offerings at a dizzying pace.

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But lately, startup investors don’t seem to be biting. Per an analysis of Crunchbase data, investment in U.S. nonfood consumer products startups has fallen off a cliff. So far this year, they’ve pulled in barely over $150 million across surveyed categories — on track for the lowest quarterly total in years.

For an idea of how far things have fallen, we chart our quarterly funding below to a selection of consumer products categories 1 (not including food and beverage).

Funding dries up for aggregators, D2C

The drop-off in funding is particularly pronounced for direct-to-consumer brands and e-commerce aggregators, two areas that were red-hot a little over a year ago.

As the chart above illustrates, the peak for consumer products funding was the latter half of 2021. That’s when we saw some truly ginormous rounds for aggregators focused on acquiring smaller consumer brands and scaling their presence on Amazon and other outlets.

The largest investment recipient, Thrasio, raised $1.85 billion in equity funding in 2021 to pursue its roll-up strategy, followed by Heyday, with $625 million. Benitago Group, which acquires Amazon brands in the consumer packaged goods space, also picked up $380 million that year, while aggregator Elevate Brands secured $372 million.

But investor enthusiasm around the space has since soured, and aggregators are scaling back. Thrasio laid off staff and announced plans to replace its CEO last year. Benitago cut staff a few months ago and has been tapping the brakes on acquisitions.

Upstart brands, many of which have touted themselves as direct-to-consumer models, are also not seeing so much investor love lately. That’s a sharp shift from the first quarter of last year, when Kim Kardashian co-founded shapewear brand Skims raised $240 million, and shaving goods supplier Harry’s raised $140 million.

So far this year, the only U.S. deal north of $20 million in Crunchbase’s beauty, fashion or consumer goods categories was a $40 million round for Makeup By Mario, a cosmetics brand founded by celebrity makeup artist Mario Dedivanovic.

It hasn’t helped that venture-funded fashion plays that went public under frothier market conditions in 2021 saw their valuations slashed the following year. So far in 2023, performance has been mixed.

A spring rebound?

Expectations for the broad U.S. retail sector this year, meanwhile, look neither great nor catastrophic.

Economists at S&P Global Market Intelligence forecast retail sales growth of 0.5% in 2023 (or a 0.1% decline when accounting for inflation). Analysts predict that “belt-tightening consumers will hinder sales in 2023” compared with previous years.

On the bright side, U.S. unemployment remains low. However, higher interest rates mean consumers are wary about making purchases on credit.

Of course, for an individual retailer, it doesn’t matter so much if consumers are more profligate or thrifty. What matters is if the thing they are spending on is your product.

Looking at venture funding tallies, it looks like investors are less confident about startups’ abilities to convince consumers to try out a new brand or product. Or perhaps they’re simply pulling back after capitalizing companies so heavily a year or two ago.

Either way, this is likely a temporary state of affairs. Betting against American shoppers’ willingness to spend big on the next hot shiny object has never been a long-term winning wager.

Illustration: Dom Guzman

  1. Methodology: The investment query is based on U.S. funding rounds of $100,000 and more to a selection of Crunchbase industry categories, including consumer goods, clothing and apparel, footwear, beauty and consumer electronics. Food and beverages were excluded. The results were further curated to exclude some startups developing components for consumer electronics rather than finished devices, metaverse products, B2B businesses, and software companies with no physical product. Year-to-date- data for 2023 is based on totals as of Feb.ruary 15, 2023.

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