A once-bustling group of companies, backed by billions in venture capital funding, saw a record year for IPOs in 2021. Now, three years later, most of those direct-to-consumer, or DTC, companies still struggle with profitability.
“It’s that profitability angle now that demarcates the winners in DTC from the losers,” said GlobalData Retail’s managing director, Neil Saunders. “One of the problems with a lot of direct-to-consumer companies is they’re not profitable and a number of them don’t really have a convincing pathway to profitability. And that’s when investors get very nervous, especially in the current market where capital is expensive.”
Allbirds, Warby Parker, Rent the Runway, ThredUp and others once represented a new era of retail. These digital-first, ultra-modern companies rose to prominence in the 2010s, boosted by the rising tide of social media ads and online shopping. With the cohort came a huge wave of venture capital funding, propped up by low interest rates.
In just under a decade, venture capital funding exploded, from $60 billion in 2012 to an eye-watering $643 billion in 2021. Thirty percent of that funding was funneled into retail brands, and more than $5 billion went specifically to companies that intersected e-commerce and consumer products. As the Covid-19 pandemic moved most shopping online, venture capital funds were all-in on digital native direct-to-consumer companies.
According to a CNBC analysis of 22 publicly traded DTC companies, more than half have seen a decline of 50% or more in their stock price since they went public. Notable companies in the space, such as SmileDirectClub, which went public in 2019, and Winc, a wine subscription box, have declared bankruptcy. Casper, a direct-to-consumer mattress company, announced it was going private in late 2021 after a lackluster year-and-a-half of trading. Most recently meal kit subscription service Blue Apron exited the U.S. stock market after being acquired by Wonder Group.
Now many of these so-called DTC darlings are being forced to reevaluate their business model to survive a shifting consumer landscape.
Watch the video above to find out what happened to the DTC darlings of the 2010s and how the direct-to-consumer cohort is pivoting in the new decade.
When Microsoft first invested $1 billion in OpenAI in 2019, the deal received no more attention than your average corporate venture round. The startup market was blazing hot, and artificial intelligence was one of many areas attracting mega-valuations, alongside electric vehicles, advanced logistics and aerospace.
Three years later, the market looks very different.
Startup funding has cratered following the collapse of public market multiples for high-growth, money-losing tech companies. The exception is artificial intelligence, specifically generative AI, which refers to technologies focused on producing automated text, visual and audio responses.
No private company is hotter than OpenAI. In November, the San Francisco-based startup introduced ChatGPT, a chatbot that went viral thanks to its ability to craft human-like replies to users’ queries about nearly any topic.
Microsoft’s once under-the-radar investment is now a major topic of discussion, both in venture circles and among public shareholders, who are trying to figure out what it means to the potential value of their stock. Microsoft’s cumulative investment in OpenAI has reportedly swelled to $13 billion and the startup’s valuation has hit roughly $29 billion.
That’s because Microsoft isn’t just opening up its fat wallet for OpenAI. It’s also the arms dealer, as the exclusive provider of computing power for OpenAI’s research, products and programming interfaces for developers. Startups and multinational companies, including Microsoft, are rushing to integrate their products with OpenAI, which means massive workloads running on Microsoft’s cloud servers.
Microsoft is integrating the technology into its Bing search engine, sales and marketing software, GitHub coding tools, Microsoft 365 productivity bundle and Azure cloud. Michael Turrin, an analyst at Wells Fargo, says it could all add up to over $30 billion in new annual revenue for Microsoft, with roughly half coming from Azure.
What does that mean for Microsoft’s investment and broader arrangement?
“It’s so good that I have investors asking me how they pulled it off, or why OpenAI would even do this,” Turrin said in an interview.
However, the financial implications are anything but straightforward.
OpenAI was founded in 2015 as a nonprofit. The structure changed in 2019, when two top executives published a blog post announcing the formation of a “capped-profit” entity called OpenAI LP. The current setup restricts the startup’s first investors from making more than 100 times their money, with lower returns for later investors, such as Microsoft.
After Microsoft’s investment is paid back, it will receive a percentage of OpenAI LP’s profits up to the agreed-upon cap, with the rest flowing to the nonprofit body, an OpenAI spokesperson said. A Microsoft spokesperson declined to comment.
Greg Brockman, an OpenAI co-founder and one of the blog post’s authors, wrote in a 2019 Reddit comment that, for investors, the system “feels commensurate with what they could make investing in a pretty successful startup (but less than what they’d get investing in the most successful startups of all time!).”
It’s an unfamiliar model in Silicon Valley, where maximizing returns has long been the priority of the venture community. Nor does it make much sense to Elon Musk, who was one of OpenAI’s founders and early backers. Several times this year, Musk has tweeted his concerns about OpenAI’s unconventional structure and its implications for AI, particularly given Microsoft’s level of ownership.
“OpenAI was created as an open source (which is why I named it ‘Open’ AI), non-profit company to serve as a counterweight to Google, but now it has become a closed source, maximum-profit company effectively controlled by Microsoft,” Musk tweeted in February. “Not what I intended at all.”
Brockman said on Reddit that if OpenAI succeeds, it could “create orders of magnitude more value than any company has to date.” As a major OpenAI investor, Microsoft would benefit.
Aside from its investment, leaning on OpenAI has the potential to help Microsoft dramatically reverse its fortunes in AI, where it’s stumbled publicly and didn’t build a meaningful business on its own. Microsoft pulled the Clippy assistant from Word, Cortana from the Windows taskbar and its Tay chatbot from Twitter.
Unlike areas such as advertising or security, Microsoft hasn’t disclosed the scale of its AI business, though CEO Satya Nadella said in October that revenue from its Azure Machine Learning service had doubled for four consecutive quarters.
If nothing else, the work with OpenAI has given Nadella bragging rights. Here’s what he said at Microsoft’s annual shareholder meeting in December, a month after ChatGPT was launched:
“When I think about Azure, one of the things that we have done, in fact, in the context of even ChatGPT, which today is one of the more popular AI applications out there, guess what? It’s all trained on the Azure supercomputer.”
In February, Microsoft held a press event at its headquarters in Redmond, Washington, to announce new AI-powered updates to its Bing search engine and Edge browser. Altman was one of the featured speakers.
It’s been a bumpy ride since then, as the Bing chatbot has held some highly publicized and creepy conversations with users, and it also served up some incorrect answers at the launch. Somewhat fortunately for Microsoft, Google’s rollout of its rival Bard AI service was underwhelming, leading employees to describe it as “rushed” and “botched.”
Despite the early hiccups, the enthusiasm for new technologies based on large language models, or LLMs, is palpable across the tech industry.
At the core of OpenAI’s bot is an LLM called GPT-4 that’s learned to compose natural-sounding text after being trained on extensive online information sources. Microsoft has an exclusive license on GPT-4 and all other OpenAI models, the OpenAI spokesperson said.
There are plenty other LLMs available.
Last month, Google said it had given some developers early access to an LLM called PaLM.
Startups AI21 Labs, Aleph Alpha and Cohere offer their own LLMs, as does Google-backed Anthropic, which has picked Google as its “preferred” cloud provider. Like Altman and Musk, Anthropic cofounder Dario Amodei, who was previously vice president of research at OpenAI, has expressed concerns about the unbridled power of AI.
In 2021, Anthropic registered in Delaware as a public-benefit corporation, signifying an intention to have a positive impact on society even as it pursues profits.
“We were and are focused on developing innovative structures to provide incentives for safe development and deployment of AI systems and will have more to share on this in the future,” an Anthropic spokesperson told CNBC in an email.
Across the industry, one thing is clear: it’s early days.
Quinn Slack, CEO of code-search startup Sourcegraph, said he hasn’t seen proof that the OpenAI partnership has given Microsoft a notable advantage, even though he called OpenAI the top LLM provider.
“I don’t think people should look at Microsoft and say they’ve totally locked up OpenAI and OpenAI is doing their bidding,” Slack said. “I truly believe people there are motivated to build amazing technology and make it as widely used as possible. They view Microsoft as a great customer but not someone that’s controlling. That’s good, and I hope it stays that way.”
OpenAI has plenty of skeptics. Late last month the nonprofit Center for Artificial Intelligence and Digital Policy called on the Federal Trade Commission to stop OpenAI from releasing new commercial releases of GPT-4, describing the technology as “biased, deceptive, and a risk to privacy and public safety.”
When considering potential exits for OpenAI, Microsoft — which does not hold an OpenAI board seat — would be the natural acquirer given its close entanglement. But that sort of deal would likely attract regulatory scrutiny, because of concerns about AI and about Microsoft stifling competition. By remaining an investor and not becoming OpenAI’s owner, Microsoft could avoid Hart-Scott-Rodino reviews from U.S. competition regulators.
“I’ve gone through it. It’s painful,” said David Zilberman, a partner at Norwest Venture Partners.
Based on its existing valuation, the more probable path for OpenAI is an eventual IPO, said Scott Raney, a managing director at Redpoint Ventures.
According to PitchBook data, OpenAI is on pace to generate $200 million in revenue this year, up 150% from 2022, and then $1 billion in 2024, which would imply 400% growth.
“When you raise at a $30 billion valuation, it’s kind of like, there’s no turning back at that point,” Raney said. You’re saying, “Our plan is to be a big independent standalone company.”
OpenAI’s spokesperson said there are no plans to go public or get acquired.
For nearly two decades, Vita Coco has sold its coconut water to health-conscious consumers as a fresh way to hydrate. This year, it’s changing the pitch.
The beverage company is pushing its namesake brand into new use cases and occasions, partnering with Diageo on a canned cocktail and marketing the drink as a hangover aid.
Co-founder Mike Kirban compared Vita Coco’s transformation to that of Ocean Spray, the agricultural cooperative that sells cranberry products.
“Ocean Spray is a brand that’s four times our size, that’s all based on one ingredient,” the company’s executive chairman told CNBC. “And we should be bigger than Ocean Spray pretty quickly, because I think the coconut is cooler than the cranberry.”
Founded in 2004, Vita Coco started as a coconut water brand but has since expanded into other beverage categories, like energy drinks and water. Its namesake brand still accounts for three-quarters of the company’s revenue, which reached $335.8 million in the first nine months of 2022.
The company went public in October 2021, just before the market for initial public offerings dried up as inflation, the war in Ukraine and economic uncertainty weighed on investors.
Vita Coco’s stock is up less than 1% since its IPO, but it’s fared better than many other consumer companies that went public around the same time, like Sweetgreen and Allbirds.
In May, Kirban transitioned from co-CEO at the company to his current role, leaving Boston Beer veteran Martin Roper as the sole chief executive — another step of Vita Coco’s evolution.
Just months before Vita Coco’s IPO, both Coca-Cola and PepsiCo exited coconut water. Coke sold Zico back to its founder as it slimmed down its portfolio, and Pepsi offloaded O.N.E. as part of the $3.3 billion sale of its juice business.
Despite the beverage giants’ size, they had been unable to compete with Vita Coco, which is credited with bringing coconut water to the U.S. and still holds 50% share of the market, excluding its private-label business.
Their exits from the segment opened a new distribution avenue for Vita Coca. As long as Coke and Pepsi were in the coconut water business, their contracts with venues ranging from stadiums to college campuses shut Vita Coco out.
With the momentum of new growth opportunities, Vita Coco is now pushing into bars and restaurants. Step one of the plan is teaming up with Diageo for three canned cocktails mixing Captain Morgan rum and Vita Coco coconut water: a mojito, a piña colada and a strawberry daiquiri.
“If you go to Brazil or Southeast Asia, coconut water is what you mix with cocktails,” Kirban said. “The idea is to start getting consumers used to drinking coconut water cocktails with the ready to drink with Diageo partnership.”
Kirban said Vita Coco would be partnering with a spirits company for its broader on-premise expansion plans, but declined to name the partner.
Over the last few years, alcohol and nonalcoholic beverage companies have been teaming up, leaning on each others’ brand equity and expertise to gain so-called “share of throat.” For example, Captain Morgan can introduce itself to Vita Coco’s health-conscious, younger consumers, while Vita Coco benefits from the rum’s mass market appeal.
Vita Coco has also been leaning into its reputation as a hangover “cure.”
Since late 2019, the brand has used New Year’s Day as way to pitch hangover recovery kits and subscriptions that feature its products in collaborations with Postmates, Lyft and Reef Kitchens.
This year it’s partnering with DoorDash for a promotion Monday morning following the Super Bowl.
The marketing strategy is something of a reversal, after years of resisting the association.
“With our board, there was always a discussion,” Kirban said. “When you talk marketing, do we want to talk about hangovers? Is that OK for us to talk about?”
And it’s not done there. After the hangover subsides, Vita Coco wants to be the non-dairy milk in your coffee.
In late January, the brand announced it’s partnered with Alfred Coffee, a high-end chain with locations in California and Texas, to create a non-dairy coconut milk for its baristas to use.
Vita Coco plans to expand the product designed specifically for coffee — separate from the coconut milk it sells in supermarkets nationwide — to other coffee shops and eventually to store shelves.
