A Valuation of the Dims. Business

Introduction

Back in 2016, Regulation Crowdfunding became legal, which means that companies can raise early stage money before going public from everyday investors like you and me. For fun, I troll around on two of the bigger platforms—StartEngine and Republic—every so often, and I was intrigued to see that Dims., a DTC furniture brand that I’ve been following for some time, had found its way onto Republic looking to raise ~$1 million.

Dims. is around halfway to their maximum goal, and I’m not at all surprised. I think it’s the exact kind of company that inspires zeal from customers. Given my interest in equity crowdfunding, I decided to take a crack at actually valuing the Dims. business. In creating this analysis, I attempt below to delve into the value of Dims. by looking at three core drivers of value: growth, cash flow, and risk.

The goal is to answer the question: should you invest in Dims.?

I should note that I rushed this post out today because of an announcement yesterday that the Dims.’ crowdfunding will be cut short by nearly three months. It will close within 72 hours—crazy!

Company and Business

Let’s first look at Dims. product, how it makes money, and who owns it.

Dims. (the dba name of Passu, Inc.) was launched in 2017, and it has a very straightforward goal: to produce design-forward furniture pieces with lean, sustainable operations. The idea is that you can already:

1. get cheap, particle board furniture from Wayfair, IKEA, and Amazon;
2. upgrade on materials (and price) with West Elm or Pottery Barn but still end up with something that looks kind of like everything else; or
3. browse around on Financial Times How To Spend It and get furniture so expensive that prices aren’t even listed.

However, it’s damn near impossible to find a mix of good quality, mid-tier price, and edgy design that turns heads or just makes you smile when you see it inside your home. Furthermore, Dims. is creator-centric, looking to partner with up-and-coming designers and offering them a revenue share of 10% for the sale of their designs. This is what Dims. does.

Ultimately, the vision of the company is to certify as a B Corporation within the next 5-6 years with commitments to diversity and sustainability. They currently have 7 employees.

Looking at Dims.’s business model, revenue is generated through two sources:

1. DTC: Revenue earned through Dims. created furniture sold through the dims.world direct to customer website.
2. Resimercial: Interestingly, there is mention in the Republic listing as follows: “Unlike pure-play DTC, Dims. is also penetrating a ‘resimercial’ market driven by architects and interior designers. As the pandemic ebbs and public spaces reopen, our B2B sales are set to accelerate.”

There isn’t any revenue breakdown for DTC vs. Resimercial sales in the Form C documents provided with the Republic listing. If this is indeed a growth lever, it would be great to get a better picture of this from Dims. in the future. Additionally, the CEO, Eugene Kim, suggests that they are evaluating some wholesale channels through which to sell Dims. products, which could have major implications (good or bad) for revenue and operating margin.

Revenue-generating operations began in November 2018, so we only have two full years of the revenue picture—one of which took place during the COVID-19 pandemic. While revenue has grown quickly and was up 1450.96% in 2020 over 2019, the base was quite small at $141,221 (and no, that’s not in millions or anything - remember, it’s a small, budding company!). Meanwhile, the pace of revenue acceleration is effectively aligned with the acceleration of lock downs imposed by the pandemic.

Because of the nature and timing of the growth, it is near impossible to predict where things might go from here. I could see arguments from many different perspectives:

• The good. The pandemic just accelerated Dims. discovery and the revenue is here to stay with still more revenue acceleration forthcoming. Particularly as people furnish their homes in one of the hottest housing markets years.
• The bad. Sure, revenue has grown, but Dims. is just one fish in a huge sea of many other DTC brands. How can we know that its revenue growth paced competitively for a company of its size, given the circumstances? Isn’t it possible that there is another hot furniture brand that picked up just as much? With this story, Dims. may even be an okay business for many years. However, you wouldn't be better off in terms of economic profit compared to investing in, say, VTI, VOO, or SPY. Also, strong margins would be hard to come by in a world where you have to scratch and claw for every single website visitor. If you've worked in eCommerce, you know the famous Field of Dreams line "If you build it, they will come" is a lie!
• The ugly. The growth is unsustainable and will cause the company to flame out. In fact, this public funding injection is a way to stave off an early demise because private investors wouldn’t touch it with a ten foot pole. Also, giving away 10% of revenue to designers is nuts. Operating margins on the best furniture companies are already single digits!

All of this is to say that even if I feel that “the good” scenario above applies, we have to acknowledge there is a huge amount of risk and a huge amount of research to be done. This would be true for any company in its infancy, but particularly one where behavioral change brought on by COVID-19 has impacted revenue and may (or may not) do so for the foreseeable future.

Lastly, looking at ownership, a few questions came up. For one, there are SAFEs (which are agreements to exchange cash for future equity/stock) granted in 2019 and 2020 worth $100k and $340k respectively. I’m assuming that these are angel investors. However, Dims. crowd equity filing notes that Upfront Ventures invested in them at an early stage, but in the Form C, there is no acknowledgement of a large shareholder. This could mean that Upfront Ventures invested through a SAFE as well. I’m not 100% sure.

Speaking of 100%, here is a pie graph breakdown of the ownership:

Another observation: when you compare the equity percentage sizes above, the current offering is giving away 8.2% of the company (calculated as $1.07M/[$12M + $1.07M] at a pre-money valuation of $12M). The reported SAFEs in the Form C received 6.03% of the company in exchange for $340k. Just taking that at face value, the investment from the original SAFE holders has increased nearly 2.32 times in 1-2 years. Not a bad investment for them!

The Market

Now that we’ve covered the company a bit, let’s start to dig into the market. After all, the prospects of the company are generally tied to the larger industry in which it competes. Dims. isn’t creating some new technology and the business model is fairly straightforward, so you might assume that defining and quantifying the market is straightforward as well. (Kind of, but not really.) I’ll start by looking at Dims. assessment of the market, and then I’ll make my own assessment independently.

Dims. provides their take on the market in the following ways:

1. “The global online home decor market is projected to grow by $83 billion during 2020-2024, at a 13% CAGR.”
2. Millennial residential household furnishings = $60 billion.
3. BIFMA office furniture (excludes hospitality) = $16 billion.
4. Also:

So. I’ve got some problems with these.

For the first fact (1) listed, it’s annoying that they actually don’t state the size of the market—only the growth. With some back of the envelope math and the CAGR formula, we can use this information to back into the market size for global online home decor being $131 billion in 2020 and ending at a value of $214 billion in 2024 (at a CAGR of 13.05%). Okay, now that’s more useful.

However, when you actually look up this quote online, you find this report which has a snippet that states: “The online home decor market size has the potential to grow by USD 52.95 billion during 2021-2025, and the market’s growth momentum will accelerate at a CAGR of 8.71%.” This would give us a market size of $134 billion (pretty close to the other figure) in 2021 and $187 billion in 2025 (pretty far from the other figure).

The inconsistency of the information is weird, but let’s just chalk that up to the nature of the Internet and an information cycle that updates at a continuous rate.

Moving on fact two (2) above, the Millennial market is listed with no figures for growth prospects. I’m guessing Dims. considers Millennials as their SOM (serviceable obtainable market). It’s a bit unhelpful of Dims. to not present a stance on if this segment will grow more rapidly than global online home decor as a whole. I get the overall idea of the story when combined with fact four (4) (Millennials are big spenders, their spending will grow, and we appeal to them), but I don’t think it’s easy to quantify.?

Lastly, and least helpful, is fact three (3) above. I have (and I imagine this would apply to most people) zero idea what BIFMA means. After looking it up on Google, I understand it to mean Business + Institutional Furniture Manufacturers Association. So does this mean that sales to companies within BIFMA is $16 billion? Or is it something else? In all, I find this point to be confusing.

Building my own perspective on the furniture market, I decided to utilize Statista data to more narrowly look at Dims.’s market.

Looking specifically at the United States (because Dims. only ships in the US) and e-commerce household furnishings, Statista notes a market size of $55.2 billion in 2021 and $61.2 billion in 2025, which is a 2.59% CAGR.

As I noted above, Dims. appears to be shooting for two markets: residential and resimercial aka. commercial furniture. In my research, I’ve found it is very difficult to pin down the size of the commercial market because industries have such massive variation between hospital furniture, hotel furniture, and retail storefront furniture. I tried to at least give some estimation of this by pulling numbers for US office furniture (which appeared by far to be the largest anyway).

Here we find a total market of $14.5 billion in 2021 and ending with a revenue of $15.4 billion in 2025 for a 1.53% CAGR.

All combined, Dims.’s market size is currently $69.7 billion in 2021, and it is expected to grow at a CAGR of 2.39% to $76.6 billion. Two things could seriously change this:

1. The CEO notes that they have a goal to ship internationally in 10 years: “By then, China, India and/or Africa will be key regions of focus for Dims. as the global economy transitions into the 2030s.” This could drastically open up the size of their total addressable market.
2. Growing a wholesale revenue stream could also enable Dims. to tap into a larger market - namely via physical stores - or to more quickly grab online market share. From the CEO again: “As we explore wholesale channels, we will have to aim a bit lower for [gross margin] in return for the benefits of exposure and scale.”

I could dive more deeply into these market size assumptions, but I will leave that for any further refinements of this valuation in the future.

For now, I’ll stick with the $69.7 billion market size that I’ve calculated. Rather than a quickly-growing market with a double-digit CAGR, I find one that is mature and will grow slowly and steadily in the single digits.

Getting Into the Numbers

Now we get to the even more interesting stuff, which is to say: how has Dims. been doing so far?

Revenue growth trends & profit

So (and we’ve said this already) Dims. grew like crazy +1,450% from $141,221 to $2.2 million in 2020. It also lost a bunch of money, but operating margins actually improved from -305.2% to -31.8%. The margin point, as we’ll see later, is an important one.

On margins, the CEO states the following: “Net profit is projected to be consistently positive on a month-to-month basis by the end of 2021.”

To be honest, I’m not 100% sure what this means. Does this mean that profit will stop getting more negative and will start increasing (but could still be negative) from one month to the next, or does it mean that profit will turn positive by the end of 2021??

I also like looking at the Sales & Marketing expenses and Total Operating Expenses and their YoY change compared to revenues. In all, it doesn’t seem like a bad trade to increase operating expenses by 4x to grow revenue by 15x.

However, the CEO states: “[W]e are targeting a 65% GM (at scale). This is doable once we hit certain volume milestones and optimize our supply chain costs, for which we have a reasoned roadmap.”

If, say, we gave Dims. a 65% gross margin in 2020 and kept all other numbers the same, the Net Operating Income would still be -8.5%. So it looks like there is work that needs to be done both from a gross margin perspective and in terms of operating expenses. I know this isn’t a totally fair numbers experiment to run, but I did it anyway. Deal with it.

In summary, it’s really hard to know how these trends will stick over time with such a young company in such an unequivocally unique business environment.

Unit economics

Going further into profit, there is a little bit of information (caveated with a bunch of footnotes) presented in the Republic listing:

The outlook here is positive, but it’s difficult to know how helpful these figures are in evaluating the larger business given that it captures data for only a subset of SKUs. After all, the gross margin listed here in 2020 of 49% is already different from the gross margin in the Statement of Operations for 2020, which is 41.9%. Moreover, it states that high repeat B2B customers factor into these figures, which speaks to my earlier point about getting a better line of sight on their resimercial business.

Taking the numbers at face value, if the full business hits 53% gross margin for 2021 and operating expenses are kept relatively stable, then operating profit would be at about -20.8% for full year 2021.

Competitive Advantages

Here’s a riddle for you: what moat does an online DTC furniture company have in a world where: 1) anyone can build a website and 2) anyone can create a checkout process through Shopify? Maybe it’s partnerships with suppliers, but you could argue that anyone could set those up too. It’s a hard question to answer, but in the end it might all come down to one thing: brand.

My favorite part of the entire Form C is the “Intangible Assets” line of the Balance sheet:

Intangible assets grew almost 5x YoY and went from ~20% of total assets to around ~29% of total assets. It’s hard to argue this given that Dims. has obtained a lot of press and definitely has a cult-like following amongst customers. Building a brand from the ground up is ridiculously hard, especially in a world with endless DTC companies, so you have to applaud them for this.

Proceeds

Here is what they say they will use the funds for:

No huge surprises, but I personally would rather a larger percentage be allocated to R&D.

Putting It All Together: The Story and Valuation

Now the stage is set to build a story around the business and to create a valuation of the shares.

Total Market. $69.7 billion in 2021, and growing annually at a CAGR of 2.39%, as I noted earlier.

Revenue growth. The CEO states, “We conservatively expect 2021 revenue to double 2020 revenue, and 2025 revenue to top $80M.” He goes on to write:

“Regarding projected growth over the next five years, we are basing our projections on the fact that this has been done before in circumstances very similar to our own. In 1998, Design Within Reach was founded. In 2004, DWR was listed on NASDAQ with an opening-day valuation of $211 million. Revenue scaled rapidly during those intervening six years (reportedly even faster than projected for Dims.), which analysts have attributed to economic prosperity and respect for design flourishing in the United States. Those cyclical conditions are present again today, and we have an analogous opportunity in front of us.”

Put bluntly, revenue growth would need to double every year to hit $80 million by 2025. In fact, if sales only double in 2021, revenue growth will need to be ~107% in subsequent years.

I decided to see if there was a comparison company to which I could link this revenue story from the CEO. I did some research on young furniture companies, and put together the following overview using four different companies: Dims., Article, Burrow, and DWR.

Cells in yellow indicate 2020 (the year of the COVID-19 pandemic) and cells in orange indicate 2008 (the start of the financial crisis).

Well well well! There is indeed a precedent for a young furniture company growing to $80 million within its first five years. DWR did it, and so did Article (although Article’s numbers are highly speculative from sources and they ship to the US + Canada rather than just the US). Notably, both companies had a year when revenue went absolutely bananas, so maybe 2020 was just Dims. bananas year. However, consider also that Dims.:

1. CAGR in years 1-5 would mirror the growth rate of Article (239% for Dims. vs. 263% for Article). Great!
2. CAGR in years 1-7 at 188% would be higher than every comparison company. Ugh.
3. CAGR in years 3-7 at 108% would be about 2500bps higher than every comparison company. Just, why?

With these facts in mind, I will take the CEO story but I think it will take another year or two for Dims. to get to $80 million. In all, Dims. strong brand, growth in SKUs, and other TBD factors will drive revenue to $80 million six years from now and $150 million in ten years. For those of you keeping score, that would make its market share of the US eCommerce furniture and resimercial market about ~0.18%. Given that West Elm (owned by Williams-Sonoma, Inc.) is about 2% of the US online furniture market, I think this is fair.

Profitability. We already know the profit picture might not look so great for Dims. this year at about -21% (unless their profit is turning positive as might be the case in the vague CEO note above). The two key questions then become: 1) what will the terminal profitability be, and 2) when will margins actually converge to that profitability?

US Furniture companies have average operating margins of about 8%. For various reasons, I think this margin is overstated due to the makeup of the companies considered a home furnishing business within the data. Looking at operating margins for DWR, we see that margins topped out at 4.8% for a full fiscal year. I foresee that it will take some time to get there because of investments in expanding the business, R&D, and marketing. As a result, operating margins will slowly converge to this value over time.

The most troubling qualitative note on margin is that if Dims. remains a DTC company, it will have to pour large amounts of money into marketing in order to drive customers to the website. This will be the case unless the value of the brand somehow grows quickly enough to offset some of that investment, but this is extremely challenging to pull off.

Risk. Dims. is in great position with its brand, and its recent announcement to close its Republic listing is apparently tied to interest from institutional investors per an email from Dims.

I would normally consider probability of failure to be 80-90% for a company at such an early stage, but its growth coupled with apparent interest from institutional investors makes me believe that probability of failure can be lowered to 65%. Unfortunately, I don’t have a very scientific or analytical basis for this, but this is why I will treat this as a sensitivity variable later.

All combined, these piece of the story (and some guesswork on the option strike price) produce the following valuation output:

In essence, I find that Dims. shares are worth $1.57, which is a 57% premium over the price of the current offering on Republic.

Decision-making

Of course, not everything is cut and dry. It would be a gross miscalculation to assert that an outcome is likely—let alone that it’s certain. To this end, looking at sensitivity tables can give us a sense for what variables matter most in our assumption-making, and—using probability—also enable us to build decision trees to calculate expected values of multiple different versions of the same scenario.

Below are two such decision sensitivity scenarios. I’ve input my own probability values for each scenario, but feel free to copy the spreadsheet and test your own. In my case, I find that:?

1. Operating profit in the terminal year is far and away the more important driver of the total valuation.
2. With a 3% operating margin in years 6-10, the expected value per share for a range of terminal year margins and a probability of failure below 90% is over $2.30.
3. A 4%+ operating profit in years 6+ from now for Dims. means that it is at least fairly valued in this Republic listing.
4. There are scenarios where expected share value is both above the current price and below the current price. If anything, this just communicates the wide variability in the potential outcomes for Dims.

Conclusion

So now we come to the final call: should you invest in Dims.? Well, if you’ve read this far, you should know that the answer isn’t so straightforward.

I mean, geez, I’ve created a huge number of assumptions about this small business. If you trust every decision that I’ve made, then something is probably very wrong. The point is that there isn’t any right answer to should you invest because it’s a balance between your current situation, your feelings about the world, and your own assumptions about the elements that go into valuing a business like Dims.

So, to put a bow on things, figure it out for yourself.

Regardless of anything written here, I’m cheering for Dims. as a person who likes nice things and cool designs. I wish it all the best!

Questions for Dims.

I didn’t get a chance to, but here are some questions I would ask Dims. management for further clarification. These questions would all serve to further refine the valuation.

1. Are you able to share the average strike price of the employee stock options that are currently outstanding?
2. Are you able to share the average maturity (years until fully vested) of the employee stock options?
3. You note that you expect revenue to double in 2021 (so about $4-5 million) and to reach $80 million in 2025. If my math is right, that would mean that your growth rate for each year from 2022 to 2025 would actually need to average to be slightly greater than your growth rate for 2021 (which would be ~100%). Is there some other expectation or assumption that you are considering that will cause that degree of accelerated growth in those years 2-5?
4. You mention the Resimercial market in your listing. Would you be able to provide a sense of the percentage of revenue that you see from this market? If not, do you have any plans to do so in the future?
5. You note that: “Net profit is projected to be consistently positive on a month-to-month basis by the end of 2021.” Can you clarify if this means that profit will be positive each month or if you expect profit to grow (ie. profit could still be negative, but one month is less negative than the prior month)?
6. Do you have a target operating margin that you are attempting to reach or that you’ve seen modeled in other similar companies? Are you able to share (and can you share) the timeline in years at which you expect to be making this margin?

My Data

1. Dims. Valuation worksheet: https://docs.google.com/spreadsheets/d/1qZY9bigrpAznZhc6JMF2nBKG8HgpJVmE3BJqBYeluic/edit?usp=sharing.
2. Review of Young Furniture Companies: https://docs.google.com/spreadsheets/d/1CO_TIvfKCHPqALbQBTd4ANF0DvsyRTta/edit?usp=sharing&ouid=104945758629234425347&rtpof=true&sd=true.
3. Dims. Financials: https://docs.google.com/spreadsheets/d/1sQkws8sp_gwlcmQKhwxM8Wqz4UtOq2mas-xP1UChq94/edit?usp=sharing.?

Sources

1. Photo credit: https://www.dims.world/products/caldera-l-coffee-table?
2. https://republic.co/dims?
3. https://republic.co/documents/722?
4. https://www-statista-com.proxy2.library.illinois.edu/outlook/cmo/furniture/office-furniture/united-states?
5. https://www-statista-com.proxy2.library.illinois.edu/statistics/257524/us-furniture-and-home-furnishings-e-commerce-revenue/?
6. https://www.forbes.com/sites/amyfeldman/2018/02/05/modern-design-no-retail-markup-furniture-maker-article-forecasts-200-million-in-2018-sales/?sh=1ac1642e2b38?
7. https://www.newswire.ca/news-releases/article-ranks-no-1-on-the-2019-growth-500-for-second-consecutive-year-835237601.html?
8. https://www.canadianbusiness.com/lists-and-rankings/growth-500/how-article-shook-up-a-staid-industry-to-become-canadas-fastest-growing-company/?
9. https://www.modernretail.co/startups/dtc-furniture-brand-article-sees-the-outdoors-as-its-ticket-to-growth/?
10. https://www.cnbc.com/2018/01/09/how-2-students-built-multimillion-dollar-couch-in-a-box-company-burrow.html?
11. https://www.sec.gov/Archives/edgar/data/0001116755/000119312504111647/d424b4.htm?
12. https://www.sec.gov/Archives/edgar/data/0001116755/000119312509070497/d10k.htm#tx62234_24?
13. https://www.statista.com/statistics/1136122/market-share-of-online-furniture-retailers-us/?

Acknowledgements

I’d like to acknowledge Professor Aswath Damodaran, whose excel templates and some partial industry/country data I’ve adapted. In general, I’ve attempted here to apply his valuation process.