Digital Brands Group (Jan 2019)

Deal Abstract

https://www.seedinvest.com/dbg/series.a3

Late stage e-commerce company aims to raise money before going public. This is a retroactive deal memo. Sought to raise $10MM, minimum $450k, at a $35MM valuation. Raised $3.2MM in the end. Very large round for a company that was talking about going public on the London Exchange.

Decision

No.

Why Investing/Passing

  1. Why raise capital if the company is about to go public? What are the competitive advantages between going public on the NYSE versus the London exchange?
  2. This is an apparel e-commerce company. Very well may be a good business, with the “shared resource” model pooling together digital and inventory spend. But this doesn’t hit me as a tenbagger.
  3. Fundamentally, a convergence of a) I don’t get it, b) seems like marginal returns, and c) behavior that seems technically fine but in spirit dodgy has me out of the deal.

The 11 Calacanis Characteristics

Passed on 5/11.

CheckPass/Fail
1. Syndicate lead has >5 years investing and >1 unicorn investmentFail
2. A startup that is based in SVFail: (Los Angeles, CA)
3. Has at least 2 founders Pass
4. Has product in the market Pass
5. 6 months of continuous user growth or 6 months of revenue.Pass
6. Notable investors?Fail
7. Post-funding, will have 18 months of runway Unknown: burn rate is no longer public at time of writing, but $3MM should be plenty.
8. Proprietary technology?Fail
9. Network effects?
Fail
10. Economies of scale?
Pass
11. Great branding?
Pass: sure

The 7 Thiel Questions

  1. The Engineering question:
    • Bad: this company is not 10x-ing anything. That said, they never purported to be.
  2. The Timing question
    • Bad: though it’s a good time to be starting online e-commerce business, there’s no reason to ask why this business is positioned for exponential growth at this moment.
  3. The monopoly question
    • Bad: what is so proprietary about the shared resource model? Couldn’t a high end Walmart/Target do the same thing? Nordstrom?
  4. The people question: 
    • Good: the founders seem well positioned to execute on this.
  5. The distribution question
    • Good: got to love direct to consumer.
  6. The durability question
    • Bad: although DBG is trying to hedge against the trends of fashion, the reality is that retail is brutal and that’s their bread and butter.
  7. The secret question: 
    • Bad: the shared resource model is unique, hard to copy, and very effective on saying costs.

What has to go right for the startup to return money on investment:

  1. Continued growth and liquidity soon.
  2. The portfolio model of shared resources for creating and maintaining brands is a good way of lowering costs.
  3. DBG finds a way to distinguish all its brands in a way where they have something unique and hard to replicate.

What the Risks Are

  1. Timing on liquidity
  2. Generally low barrier to entry for retail (see all the direct to consumer brands that have been springing up.)
  3. For better and for worse, still a very “slash and sale” model around the clothing market.

Updates

Review these deal memos every time the startup raises a new round

Test if original thesis still applies

Notice trends in how you think

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