House of Brands - Is it collapsing?
House of Brands – Is it collapsing?
Read an interesting article in ET last week titled “House in Disorder” on India D2C space (one company reported 130 crs loss on 310 crs Revenue). There was a pandemonium in the last 2 years over House of Brands strategy. Top Dollars kept flowing into the segment. Without any base, people created Unicorns out of thin air. Fast forward to 2023 – Funding Winter, Goodglam pulling back on IPO, Rollup firms giving back brands to founders etc., are being reported.
What could really be the reason for well-funded rollup companies like Mensa Brands, GlobalBees, 10Club etc., to have gone wrong in few (presume it’s not all) of their D2C brand acquisitions? I see 5 strong reasons for these debacles as below:
1.?????Founder’s Passion Transfer Loss
No one knows a brand and its business like it founder and founding team. Some might have started with a clear strategy, some might have copied a popular business model from West, some might have created an online replica of an Offline success and some might have gotten just lucky! Path that they have travelled would have given them certain guidelines on how to steer the ship and especially not making certain mistakes. A brand’s vision as seen thru its consumers can only be comprehended by its founders. I am not even questioning the capability of a professional team to run a business to the next level. But too often the Founder’s passion may not get transferred to the executive team. Remember Founder worked for an equity pay-out thru business survival while an executive team works for a salary and temporary career growth. There’s an astronomical difference here.
2.?????More money, bigger problems
D2C business is not a simple template driven one. Rollup firms could have thought of following a simple process:
·???????Acquire the brand
·???????Deploy a professional team
·???????Hire a top-notch digital marketing company
·???????Flex your PR network power
·???????Onboard a TV/ Cine celebrity
·???????Keep adding products (relevant/ irrelevant)
Put in a simple excel sheet, 3 year projections would have all sounded rosy. Is it that straightforward?
When put in a corner or a disadvantageous financial position, a business will find optimal ways to streamline on profitability. With flush funds in bank account and an over exaggerated projections in excel sheet, this situation begets a bigger problem.
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3.?????Linear growth to spends
Popular jargons echoed in D2C business circle are RoAS, ACoS, CAC, CTR. In racy growth situation, one tends to get relaxed on above parameters. In every monthly review meetings, Professionals will present poor numbers on above only to say these will improve in next month (A Bar poster read “Free Beer tomorrow”). That never happens.
This is not a Primary class Maths problem: If 5 workers took 100 days to build a house, how many days will 50 workers take to build it? In business, this is not a simple linear situation. Typically more spends may reach irrelevant audiences thereby wasting a whole lot of monies. You know who wins in this exponential spending without seeing linear growth – Facebook, Google, Amazon!
4.?????Financial Cook-ups
Balance sheet can be a bogus statement. This may sound like an outrageous claim. Unknowingly there are a whole lot of play between actual datapoints and reported ones. Few businesses may do it knowingly to support key milestone achievements.
Most Founders might be relying on tech solutions to map actual data to Accounting software. Intricacies of data accuracy often gets missed out.
Even if there is one business which had missed out these fundamental numbers, this could spoil all the group’s numbers. Extraordinary spends on Talent & Marketing (post fund infusion) just doesn’t commensurate with profits on revenue. Not even enough to plough back on Inventory refills to sustain same business levels. This strains the cashflows and it is truly a Black Hole.
5.?????Too fast too soon
Some of these Brand Houses acquired a truckload of brands in no time. If the target was aimed at number of brands and revenue topline, there could have been a mad rush. PE fund raise generally takes a leadtime of 6-9 months for a smaller company. This is because of the various due diligence measures taken for this whole process.
This is not an Express Takeaway section wherein one orders off a Menu card. In the nerve recking pace of Brand acquisition, few rotten apples could have been acquired. This could have spoiled the whole basket of good fruits.
There could have competition among Houses to chase good brands. Offline biggies could have been eyeing potential buys. All these could have led to few rotten apples to have taken its position in the cart.
To conclude, many Founders saw a lucrative exit but House of Brands is seemingly in a disarray. I am sure that there will be a slowdown in this space for time being. Investors might be taking a cut on their investments.
But I only hope that few Houses could have put together a stronger process of selection/ evaluation and perfect system of Management after buying out, learning from these mistakes. If that happens, then there must be some traction again in this space. Else, it is going to be a long lull season of Funding Winter and am sure that many brands (waiting for a buyout) will have to wind up and pack their bags off!
Co Founder at GEEK Technology India
1 年https://entrackr.com/2023/07/e-commerce-roll-up-startups-evenflow-and-upscalio-lose-sheen-as-funding-dries-up/
Associate Director for education programs on Maths and Sanskrit .
1 年Interesting read Prathap A . Marwari system of calculating daily profit / loss is the only fundamental way of keeping a business afloat .