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Startups Direct-to-consumer brands are becoming massive - but Canada is falling behind

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Jane Lee is the co-founder of Launch Pop, a launch studio for direct-to-consumer brands

Direct to consumer (DTC) is the hot new category for investors in the United States. With rising brands such as makeup company Glossier and luggage company Away, it’s no secret that such large conglomerates as Procter & Gamble Co. and General Mills, Inc. are feeling threatened. This huge shift from large-scale consumer packaged goods (CPG) to indie brands is obvious to everyone – consumers, founders, retailers, investors – but Canada risks being left behind.

In the past four years, large CPG companies lost US$40-billion to smaller independent players. Large CPG corporations have since tried to launch DTC brands but fail to move fast and, frankly, the DNA of these brands is corporate, which consumers can smell from a mile away. After many failed attempts, CPGs have instead resorted to acquiring these DTC brands. Some notable acquisitions in the past three years include Native Deodorant (by Procter & Gamble for US$100-Million), RXBAR (by Kellogg Co. for US$600-Million) and SkinnyPop (by Hershey Foods Corp. for US$1.6-billion). Retailers have also attempted to acquire DTC brands and start in-house incubators to launch their own.

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The growth of the DTC trend is fuelled by consumers who care about the people behind the brand, where the products are coming from and how they are delivered to them. People want to buy from brands they wholeheartedly believe in. They believe that every product they purchase represents a little bit of who they are. This shift also has to do with the fact that it’s actually a lot easier for people to start DTC companies. There are companies such as Shopify Inc. and Alibaba Group Holding Ltd., whose whole mission is to democratize the ability to start companies.

Also, there’s been a shift in thinking among investors. Many investors who traditionally focused on tech, AI and machine learning are starting to put dollars into DTC brands. The startup incubator Y Combinator has historically only allowed tech startups and now boasts 30-per-cent to 40-per-cent DTC brands. SoftBank Group Corp., which is known to only invest in tech, has invested in DTC brands, most notably US$240-million into Brandless Inc., an online dollar store. In 2018 alone, U.S. venture capitalists invested US$1.5-billion in DTC.

What about Canada? DTC brands were not even in the top five sectors for investments. I felt the lack of interest firsthand, which is why I decided to move my DTC studio Launch Pop to L.A. instead of keeping it in Toronto. L.A. had a better DTC ecosystem with more founders, investors and collaborators.

Canadians invest less in DTC brands as a percentage and in absolute dollars. From many conversations with Canadian VCs, it seems like it boils down to the fact that they see potential for higher returns in tech. DTC is seen as riskier and investors recognize that the ecosystem in Canada is not built to support these brands.

As a result, some Canadian DTC founders have ended up going to the U.S. to raise money, but they face many hurdles. Firstly, they don’t know the landscape, so it takes longer for them to get to know investors. Secondly, some investors are hesitant when they learn the founder is based in Canada. This is especially true for early-stage startups, since investors typically want to be able to mentor and guide new founders. Lastly, it takes Canadian entrepreneurs more effort to figure out administrative things such as cross-border taxes, lawyers, HR and visas. This ultimately slows down the growth of the company.

Some Canadian DTC founders who receive funding from American investors end up moving to the United States. For example, Sisun Lee from supplement company More Labs is a fellow Canadian founder who chose to build his company in L.A. due to the supportive ecosystem there. Hello.me is a startup run by Julie McClure, and she now spends half her time in L.A.

I want to see more DTC brands come from Canada, and it starts with investors because, let’s be real, in order to scale a company, you need cash. Once investors start investing, we’ll see a ripple effect. We’ll start retaining talent in Canada. Other ancillary startups will appear such as ecommerce apps, manufacturing, supply-chain and shipping companies. This in turn creates jobs, retains talent and builds a strong culture that can be the foundation for Canada’s strength in this increasingly important sector.

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