Originally published in The Lead Quarterly in July of 2018.

There’s a new world in retail unfolding before our eyes. Today’s newest brands born online that sell their products directly to consumers — dubbed digitally-native vertical brands, or DNVBs — have upended the old rules of e-commerce.

This new crop of household names — Away in luggage, Casper in mattresses, Primary in kids clothes, to name a few — bypass traditional retail channels, speak directly to consumers, enjoy fat margins and have unlimited growth potential.

Or so the increasingly conventional wisdom goes.

Driven by the successes of millennial-friendly digital-first brands such as Dollar Shave Club, venture capitalists have ploughed money into this so-called new generation of consumer product companies. Between 2012 and 2016, for example, direct-to-consumer (DTC) brands alone raised $2.5 billion.

The truth is, however, that many of today’s newest DTC brands face familiar challenges not unlike the last generation of consumer-focused product companies. And the success of this new generation is no more predictable than that of brands born fifteen, twenty or even thirty years ago.

Predicting Success — Or Not

Over ten years ago, not long after I joined Bain Capital Ventures, we wanted to understand if there was a pattern that could explain the successes of vertical brands. Could we learn to identify the winners early?

We looked at as many prosperous brands for which public data existed — think Lulu Lemon, Burt’s Bees and Fresh Samantha — and found some interesting common themes.

In each and every case, generally for about a decade, these companies had small followings and almost no serious growth. Their revenues bounced around between $5 to $10 million but never took off. But then, in the case of each and every success, something miraculous seemed to happen that caused an inflection, spiking revenues to $100 million and beyond in only a few short years. In peeling back the onion on the “miracle,” we found a variety of causes — sometimes it was tied to the launch of a new product, sometimes a new channel partner, sometimes a new marketing campaign.

Our not-so-brilliant insight was that if we simply invested in these companies right before the inflection point, we could do great. The problem, of course, is that the inflection point was unknown a priori, and in fact, each type of stimulant — a new product, new channel, new campaign — didn’t always lead to growth rapid growth. It was just that in the rear-view mirror we could see that when exponential growth happened, these were some of the reasons why.

In other words, predicting the success of a vertical brand early on just wasn’t possible.

What’s Changed, And What Hasn’t

In the decade since Bain Capital Ventures’ study, a lot has changed. Millennials, mobile phones and social media have flexed their muscles. And digital commerce overall has grown exponentially.

One significant factor behind this trend is the increasing ease of launching an online brand. Historically, you needed a distribution partner — a retailer. Now, if you have a new product idea and access to the internet, you’re pretty much there. Companies like Shopify for e-commerce, ShipBob for fulfillment and Flow.io for cross-border transactions have made setting up shop and selling your goods around the globe to digitally-savvy, mobile-first consumers easier, and more cost-effective, than ever.

Nonetheless, I believe it’s a mistake to assume that this new generation’s brands face substantially different fundamentals than those of prior generations.

Why? Because unlike businesses with unique intellectual property, exclusive access to supply, or a captive market, most brands have little, or no, true defensibility. There are myriad substitutes for most consumer products and few barriers to entry for aspiring entrepreneurs who want to copy an early brand’s success. There’s a reason there are hundreds of varieties of snack bars, flavored beverages, toothbrushes, dog food, kids clothes and even mattresses: the cost to launch is low, and so is the level of defensibility.

What we often see as a result is a super interesting, sexy, cool brand being born and achieving some early scale through clever digital customer acquisition spending (often these days via Facebook’s powerful audience targeting ad platform). But then this brand hits a ceiling as competition from substitutes — if not direct competitors — increases, and acquisition cost skyrockets.

It’s not due to lack of product-market fit. It’s because it’s very hard, and unusual, for a vertical brand to stake a unique claim to a market and protect it from competitors. It may have zealot-like fans, a massive Instagram audience and tons of hype, but that doesn’t mean it automatically gets to capture more than its fair share of the market.

Mattresses are a great example. The market is large, and until the likes of Casper and other terrific new DTC brands, it was served only by sleepy legacy retail chains. The improved customer experience and consumer value-prop from startups in the space has been compelling.

But in an industry where the same handful of manufacturers essentially supply all the vendors and little technical innovation is required to create real differentiation, we’ve unsurprisingly seen Casper’s early success lead to the rise of several copycat competitors. A great team (which Casper has) and terrific unit economics may yet result in not just a winning company but also a winning investment here — I’m certainly rooting for them. But in my opinion, inexorable growth is just not an option with market dynamics of this type.

Why Defensibility Matters, And Why It Doesn’t Exist For Most Brands

As a venture capitalist, I want to invest in early-stage companies that have, or can have, an overwhelming edge over their competition. I need a reason to believe that as they grow they’ll command an unfair advantage in the market.

That advantage can come from one of three places:

· First, proprietary intellectual property. Jet.com was able to enter a market that many thought Amazon had already conquered because it built a platform that priced dynamically and routed orders intelligently. This unique and defensible approach to an established and large market, in combination with the network effects that benefit marketplace models of this type, created economic value far above and beyond what we generally see with simple DTC brands. The result was a $3.3 billion acquisition by Walmart only two years after launch.

· Second, unique access to supply. At Rent the Runway, access to the best designer brands is fundamental to the consumer value proposition. But anyone who knows the designer fashion market is aware that those brands won’t sell just any retailer their goods. You have to earn their business, prove you will merchandise their brand in a way they find appropriate and do so in the company of other brands they feel are peers. No small feat for a startup. But Rent the Runway’s brilliant founding team found a way to get top designers on the platform early and as the business grew were able to attract the best of the best. Nine years into the life of that company there are few, if any, substitutes in the market for Rent the Runway’s disruptive consumer value prop.

· Third, advantaged customer acquisition. Companies growing through network effects have overwhelming advantages in acquiring new customers. Ring, for example, has an app that allows anyone in a neighborhood to benefit from their neighbors’ smart security cameras. That leads to interest and often purchase by consumers who discover the capabilities from their friends and neighbors. That phenomenon allows for capital efficient scaling of the business.

Unfortunately, though, these great examples are the exceptions in the world of next-gen consumer businesses, not the norm.

Too many digitally native brands believe their brand itself creates a wide enough moat to protect against competition. At a certain scale, I think that can be true: Canada Goose can be copied, and there are certainly myriad substitutes in the outerwear category.

But at some point consumers decide they don’t just need a warm coat, they need a Canada Goose coat. However, in the early innings of building a brand, the brand itself doesn’t yet have broad enough awareness or appeal to protect against alternatives. That’s where true sources of defensibility of the type I’ve described — unique IP, exclusive access to supply or network effects — can have a big impact.

The Takeaway

What does all this mean for entrepreneurs? Am I saying that starting a next-gen consumer business is a bad idea? Not at all. In fact, our experience with amazing entrepreneurs and leaders creating innovation for consumers like Jenn Hyman at Rent the Runway, Marc Lore at Jet.com and Dan Roth at Semantic Machines have helped us refine our lens and become even more aggressive in pursuing truly disruptive new consumer ideas.

But not every consumer idea meets these stringent criteria. My point isn’t, however, that I think those businesses that lack defensibility shouldn’t be built. To the contrary, the world is a better place with the tremendous variety of exciting new products being offered to consumers directly at prices far better than their legacy alternatives. I’m a happy customer of many of them. It’s just that those companies shouldn’t necessarily raise a lot of venture capital to get there.

Recently I met an entrepreneur that raised only $2 million to build what is now a $30-million brand. She owns more than half the company and has offers to sell it to a large conglomerate for $50 million. Not a bad payday for a few years of work, and a great return for her early investors.

But what if instead of building in such a capital efficient way, she had succumbed to the siren song of VCs a few years ago who were willing to invest $20 million in her then-$5-million run- rate company at a $60-million valuation? She would have diluted her ownership by a third and ceded her ability to sell her company for many years.

And you can bet that when she got to $30 million in sales (which, I grant you, she may have gotten to faster with more aggressive spending) her investors certainly wouldn’t have been excited about a $50-million acquisition offer — a price below the value at which they first invested. Now in some cases, that same $5-million revenue business has enough defensibility and is going after a big enough market that it would be reasonable to believe it could achieve hundreds of millions in revenue. In that case, the venture investment could make a lot of sense.

But if the true upside of that business, given the many substitutes in its market, was $30 million to $50 million in revenue, not $300 million to $500 million in revenue, then would the investment at such a high price really make sense for the either the entrepreneur or her investors? I don’t think so.

Companies like Jet.com and Rent the Runway that have the potential to be large, standalone operations with little direct competition in massive markets can justify large venture investments along the path to success because the potential outcome is so big. But in a world where historic valuations for consumer product businesses at exit are in the two to three times revenue range, can an investor enter at ten times revenue with constrained market potential and expect to make venture-like returns at exit? That math seems hard to me in most cases.

So if you’re an entrepreneur with a passion for creating brands, don’t get caught up in the hype cycle.

Consider growing your business the old-fashioned way and preserving the right to run it profitably and sell it effectively at any point along the way.

“Go big or go home” sounds exciting, but if I were building a new brand, “go slow and make money” sounds better to me.