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July 11, 2019

DTC Models

MHT Partners  | Consumer Investment Bank

It seems everyone wants to be viewed as a premium direct-to-consumer (“DTC”) model these days. But what exactly does that mean in today’s rapidly evolving landscape.

What passed for “premium” DTC in the past doesn’t necessarily hold up today, as sophisticated investors have refined the lens through which they view opportunities. With the passage of time, investors have come to appreciate what works (and what commands a higher price) and what doesn’t work.

In a nutshell, companies that can demonstrate strong repeat purchase behavior, on a cohort-by-cohort basis, are highly prized….and highly valued. LTV/CAC (“lifetime value/customer acquisition cost”) ratio is the KPI (“key performance indicator”) that, in my opinion, most accurately and comprehensively captures “value creation” by a given company. Specifically, it captures the initial purchase and stream of recurring future orders, as well as CAC (“customer acquisition cost”) that drove the purchases. Of note, while we do see revenue as an input in the numerator, sophisticated investors will analyze gross profit (a distinction that we, a leading consumer growth investment bank, agree with). Repeat purchasers (or purchases) in addition to their positive contribution through time, reduce or eliminate customer acquisition costs (which in general are assumed to increase in time from competition and from “supplier” power in the form of Google, Facebook, Amazon, etc.) and speak to strong customer engagement and affinity that are sustainable competitive advantages. Obviously, the inputs, and timing thereof, of LTV/CAC will vary by company, product and customer, but anything in excess of 3-4x multiples are the sign of “a lot going right” and multiples in excess of 8x, “nothing going wrong!”

We’ve had the good fortune to work with several attractive DTC (or largely DTC) companies in the outdoor products, pet and food & beverage spaces, and while the industries themselves may differ, the attributes that make them successful do not. We welcome the opportunity to learn more about your company and to share investor views of this ever-evolving business strategy!

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