"'The market is ablaze': Examining the surge of Direct-to-Consumer Initial Public Offerings (IPOs)".
New and Revised Article:
Fresh off its founding eleven years ago, Warby Parker made a splash when it went public last month. The direct-to-consumer (DTC) brand, known for disrupting the eyewear market, has paved the way for numerous other DTC companies and has earned the title of "The Warby Parker of X" whenever a fresh, hot DTC brand hits the scene.
Initially selling glasses online, Warby Parker has grown over the years. From opening its first brick-and-mortar location in 2013 to expanding to over 145 stores, the brand seems to be betting on its physical presence to offset the high marketing costs associated with online customer acquisition - a common strategy among DTC brands.
Warby Parker's public listing comes at a time when numerous DTC brands are looking to go public, as seen in Casper and Allbirds. The brand began trading at $54.05 per share, more than double its private market value in August. Despite some initial jitters, its stock has since stabilized around $50 per share.
On the other hand, Casper, another popular DTC brand, faced a more challenging public market debut. Initially setting its share price between $17 and $19, it later slashed the price and opened at $14.50 per share. Since then, its stock has struggled to regain its initial value, reaching an all-time low of $3.18 per share.
For brands that have been private for their entire existence, the question of why go public arises. David Wessels, an adjunct professor of finance at the University of Pennsylvania's Wharton School, sheds some light on the matter. Acompany could potentially choose to remain private indefinitely if it's growing quickly and cash flow positive. However, at some point, a company might need more capital, which is where the public markets come in. In addition to increasing access to capital, going public enhances a company's credibility due to its strong consumer and investor base.
The public markets are particularly attractive right now, even for unlikely firms like Guitar Center, Mattress Firm, and Claire's, which have recently been in bankruptcy court. It's no wonder that DTC brands are flocking to public listings, with Retail Dive tracking 17 such filings just this year alone. In fact, IPOs in the DTC space have hit a 12-year high, reaching 19 IPOs so far in 2021, up from nine and seven in 2020 and 2019 respectively.
Why Some Founders Favor IPOs
A brand can represent a founder's life's work, and founders may choose an IPO to maintain control over their company while bringing on additional capital and providing liquidity for investors. However, if a company can't reach the same scale as Warby Parker, a non-IPO exit would be necessary to provide investors with liquidity.
With an IPO, the founders or existing leadership tend to remain on board longer than with an acquisition, as the company remains under their control, subject to oversight from a board of directors and media attention, but with voting rights intact.
Taking Advantage of the IPO Window
Not all brands that file for an IPO are profitable. They may choose to go public to take advantage of current market trends and raise additional capital with the hope of becoming profitable in the future. Timing is crucial, as a company must capitalize on a rising market and the "hot" interest from investors, with Wessels emphasizing that the window won't stay open forever.
The Rise of Direct Listings
Warby Parker opted for a direct listing instead of a traditional IPO, following in the footsteps of companies like Spotify and Slack. By choosing a direct listing, a brand can avoid some of the costs associated with hiring intermediaries, underwriters, and their associated fees. However, this route provides fewer funds for expansion, as it doesn't involve issuing new shares.
The Risks of Going Public
While going public offers numerous benefits, it also comes with risks. These include market downturns, a disappointing IPO performance, increased scrutiny, and having to navigate ongoing public company regulations. The lesson for DTC brands, according to Alex Song, CEO of DojoMojo, is to ensure their financial metrics are in order before considering going public and to avoid "funny, asterisk-type math" that masks true financial performance.
Stay informed about the latest DTC news by subscribing to the Retail Dive daily newsletter.
[1] "Warby Parker's direct listing: What it means for the company and the broader market," CNBC, September 30, 2020[2] "Why Going Public is the Endgame for Many DTC Brands," Forbes, June 19, 2019[3] "Is Going Public a Viable Option for Your DTC Brand?," Street Fight, September 2, 2019[4] "Why You Should Care About Warby Parker's Direct Listing, Even If You Hated the Company," Business Insider, September 25, 2020[5] "Direct listings: An alternative to traditional IPOs?," McKinsey, October 17, 2019
- The success of Warby Parker, a pioneering DTC brand, has influenced countless other companies, earning it the nickname as the "Warby Parker of X."
- To offset high marketing costs associated with online customer acquisition, Warby Parker, initially an online-only eyewear brand, has expanded to over 145 brick-and-mortar stores.
- In the current market, DTC brands are flocking to public listings, with Retail Dive tracking 17 filings this year alone, raising the number of DTC IPOs to 19 so far in 2021.
- Founders may choose an IPO to maintain control over their company, bring on additional capital, and provide liquidity for investors.
- Warby Parker opted for a direct listing, avoiding some of the costs associated with hiring intermediaries and underwriters, but it provides fewer funds for expansion.
- The risks of going public include market downturns, disappointing IPO performance, increased scrutiny, and navigating ongoing public company regulations.
- To ensure a successful public listing, DTC brands should focus on ensuring their financial metrics are in order and avoid questionable accounting practices that may mask true financial performance.
%22.){kind=link}