Direct-To-Consumer Investing: The Three Questions I Ask Before Writing a Check

Josh Zhang
April 20, 2022

People often ask, “What do you look for when you invest in an eCommerce company?” It seems like a weighty question, but it’s really not. Most investors have a playbook or set criteria they use to immediately qualify or disqualify a potential investment. I do too.

It doesn't matter if its household brands Allbirds, Casper, Warby Parker, Dollar Shave Club, Bonobos, or Everlane. Despite there being so many different metrics and business models to review, the way in which I evaluate D2C companies remains the same.

I am an investor in DTC brands that sell all types of new products—apéritifs, olive oil, Japanese green tea powder, cereal, disaster kits, and dozens more. These products might seem strikingly different from one another, but each consumer brand is more similar than you’d think.

Most of their shared similarities revolve around the business model and the entrepreneurs who have built it. In fact, each company I’ve invested in has passed a three-question test that frames the opportunity in my mind. Those questions include:

  • Are the founders hustlers?
  • Does the company have a moat?
  • Is there a potential synergy with my network?

If the answers to those questions are “yes,” there is a high chance I will write a check. The investment landscape is changing. No longer do you have to fly around the United States or travel to New York for stuffy fundraising and venture capital meetings. You can connect with angel investors and venture capitalists all around the world with a compelling early-stage business opportunity.

Let’s take at each question individually, so you can understand why I place so much emphasis on them.

1. Are the founders hustlers?

From unloading trucks of new shipments to gathering customer feedback on the frontlines, I want to work with founders or co-founders who are willing to do it all. They need to obsess over their product, brand, and mission.

I’m not looking for paper-pushing executives that watch others do the work. I’m looking for gritty founders who take control of their business. That’s what I know best. I expect the founders I invest in to know it well too.

Look at David Greenburg, the founder of Dream Pops. For years, David had an idea for plant-based ice cream that was inspired after seeing paletas shops in Cartagena, Colombia. While he was working in Milan, he stumbled upon a food blog covering the future of ice cream in Europe. Greenburg reached out to the creator, calling frequently despite not getting through. He kept at it, and his persistence paid off. The blog owner called back, invited him to his factory in Berlin, and eventually became his partner in the business. Greenburg hustled and used the resources he had to get the tools he needed and transform his idea into a business.

Ben Zises, a lead investor in brands like Quip and Caraway that I often invest alongside, looks for “unwavering ambition, discipline and drive to build a multi-generational $1B+ company” in the founders he invests in. He says, “Given the nature of angel investing, you've got to invest in ones with massive upside potential led by founders that embody the character traits necessary to achieve that potential. Otherwise, your risk/reward profile is not properly calibrated.”

Without a hustler as a founder, a company could have a phenomenal product that no one ever knows about. With one, though, there is a high chance their products will be available on a mass scale. That’s why a moat is necessary.

2. Does the company have a moat?

Next, I look at the product. I evaluate whether or not the company has a moat—a built-in competitive advantage that acts as a barrier to entry and makes it more difficult for competitors to achieve the same level of success.

There are two main types of moats that I look for: distribution network moats and supply chain moats. There are numerous ways that a company can have a moat on the distribution or supply side, making it more difficult for competitors to enter the market.

Distribution Network Moats

Companies with a unique distribution network moat set themselves apart from their competition. With rising Facebook customer acquisition costs, alternate distribution channels are becoming valuable—and necessary—moats that competitors wish they had.

Distribution moats that pique my interest and have proved effective include celebrity founders, owned media companies, and a weaponized skill.

Celebrity Founders

Due to their large social followings and engaged audiences, companies with celebrity founders have a competitive edge that other companies can’t easily replicate. Years ago, it was common for celebrities to simply act as silent investors, endorsing the brand, and promoting it to their followers. Now, more celebrities are launching their own product lines that are flipping their industries upside down.

Two examples include Kylie Jenner’s beauty line (now worth $1.2 billion) and The Honest Company founded by Jessica Alba (worth just shy of $1 billion). Endorsements from either of those two celebrities would cost in the upper six-figures per post. However, consumer behavior data shows that Gen Z and millennials will flock to whatever brand influencers are courting on social media. With a celebrity as a founding partner, they are already incentivized to promote their product to their engaged audience who will be ready to buy anything that a person recommends.

Owning a Media Company

DTC brands are realizing that dumping all their digital marketing budget into Facebook is no longer a cost-effective form of customer acquisition. Facebook’s customer acquisition costs are rising, leaving brands to wonder: what other channels can they leverage to reach new customers in a low-cost way?

DTC brands of the future will produce content in order to build owned media channels for distribution. Building an audience is no longer about gaining followers or acquiring an email; it’s about producing consistent sharable content that delights, attracts, and resonates with your customers every single day.

Glossier, the skincare and beauty DTC giant, began as the blog “Into the Gloss” with tens of millions of followers that evolved into a unicorn. The blog features stories from famous stylists and offers skin care and beauty regiments and tips for their customers to try.

In a recent interview about the future of her company, Glossier CEO Emily Weiss shared, "We are building an entirely new kind of beauty company: one that owns the distribution channel and makes customers our stakeholders." She understands the benefits of owning your own distribution channel and leveraging content that attracts and converts new audiences.

Weaponized Skill

Some call it “core competency”, but I call it a weaponized skill. What can the founder do better than anyone else? If the founder is amazing at generating press, the best at connecting with customers, or a content creator that can engage passionate fans, that’s someone I want to be in business with.

Helena Price Hambrecht, the founder of Haus, is an absolute PR wiz. She commanded the attention of numerous global publications through diligent outreach, relationship building, and by creating unique, meaningful brand stories that weave natively into the public narrative. One of my favorites includes Haus’ restaurant program that launched in response to COVID-19. Haus partnered up with bars and restaurants to create locally-inspired apéritifs that they sold through their website. Not only did the program help bars and restaurants generate revenue during the coronavirus pandemic, but it also was featured in TechCrunch, Morning Brew, and numerous local publications.

Supply Chain Moats

I also look at the company’s supply chain to understand how they are creating and sourcing products. Sometimes, there can be moats on the supply side like low MOQs and vertically integrated manufacturing.

Low MOQs

Low minimum order quantities (MOQs) can be a gateway for DTC companies with scarce capital to enter a new market to develop and sell products with limited to no resources. However, low MOQs can also be a moat for a new business once they secure a lucrative contract with their supplier.

If you have a positive relationship with your supplier and can negotiate lower-than-normal MOQs, it can be difficult for other consumer companies to source a similar product at the same price. Better yet, if your product is unique and you’ve secured an exclusive with your manufacturer, it might negate any competitor from entering your market in the near-term and buy you more time to get ahead.

Vertically Integrated Manufacturing

Digitally native vertical brands (DNVB) are able to be more nimble and take control of their future. By owning the supply chain, they can control every aspect of their production. The in-house handling of product design, manufacturing and the supply chain can make it challenging for competitors to enter the market and actively compete in their industry.

We’ve seen in the last year how important it is to have control over your raw materials and manufacturing to ensure that there are no disruptions in your business. By building your own DNVB, you have the chance to control all aspects of your business and navigate the market as you grow into a giant in your vertical.

3. Is there a potential synergy with my network?

After evaluating the founder and product, I see how they would fit into my network. I look at my existing portfolio companies. I talk to those in my network. I look for synergy between this new brand and some of my existing investments and network connections.

If there’s someone in my network who I think has a complementary skill set to mine, I’d try to bring them in as a co-investor or advisor to the company. It’s all about tying loose threads through everything—connecting those in my network to the project so we can optimize, share marketing strategies, and exponentially grow this new company. This can be a huge benefit to the company, but only if the founder takes advantage of it.

Ben Zises shared, “The onus is on the founder to respectfully exploit their investor base to capture as much of these resources as possible. A single piece of advice from an often well-experienced investor can save a startup from overspending both money and time in the wrong direction, ultimately keeping the company alive to see another day.”

The value I add to the company as an investor can be multiplied if I bring in another investor or advisor who is a complement to my skill set. This positions the brand for accelerated growth once the deal is closed as long as the founder capitalizes on it.

Sharma Brands Investing Philosophy

There are so many factors to take into consideration before you write a check. For me, I focus on the founder, the moat, and the synergy with my network to serve as a starting point. Of course, there are a handful of other factors — profitability, customer experience, traditional retail partners, and more — that I consider. But there are immediate qualifiers that signal if I should move forward with an offer.

For you, your list might be different. However, regardless of what you add or subtract, I’m a believer that DTC brands that have hustlers as founders, a signature moat, and an interwoven synergy with your network deserve a closer look like a potential investment opportunity.