Case in Point: Dollar Shave Club
I have been thinking a lot about the absurdity of recent startup and "early stage" company valuations. Yesterday, I finally found the catalyst I needed to write about it, which was this article in the Wall Street Journal about a recent venture capital investment in Dollar Shave Club, Inc. The article states that DSC was "valued at $615 million after closing a new $75 million funding round led by Technology Crossover Ventures".
On the surface there is nothing surprising about this particular announcement; new venture capital deals like this one are announced every day. And like many VC funding announcements, this one provides some top-level stats: the company has 2 million subscribers and had $65 million in revenue last year (representing 300% growth over the previous year) but "is not yet profitable".
Wait.., what? Yep, you read that correctly. The article goes on to quote an insider who says that DSC is burning through “low single digit millions” of dollars each month.
Aren't a lot of growth companies unprofitable?
In recent years the idea of valuing unprofitable companies based on their high growth rate of revenue (or, for many "pre-revenue" companies, simply number of users) has become popular. This is particularly common among very early stage tech companies when the product is new and perceivably monetizable but not yet monetized. In some cases this makes sense and is a necessary stretch if you need to place a value on something new.
But Dollar Shave Club does not fit this category. The concept of subscription box services is not new, nor do they have a new product. Worse, they sell what could be considered a commodity product. Certainly others have found ways to sell razors and blades at a profit; if DSC hasn't figured it out in 3 years, what's to make investors believe they will ever get it right?
What about the upside?
I would love to hear the logic behind this $75 million investment decision. Let's consider some hopeful outcomes, in which DSC:
- experiences a significant growth in market share
- expands its product offering with higher margin products
- magically comes up with a new, innovative product
Let's address market share. Using some very crude math, I am estimating DSC's market share at roughly 2.5%. (How I arrived at this figure: DSC markets to men in the USA, Canada, and Australia, where there are ~185 million males, ~75% of which are old enough to shave and ~60% of which buy disposable razors [source]. That's a market of 83 million men, of which DSC has 2 million subscribers.)
What's the best case scenario here? Doubling to 5% market share? Quadrupling to 10%? I would say that neither is very likely, considering the presence of the very strong competing brands of Gillette and Schick and new competitors in the razor "subscription box" space (and more that could pop up any day). Plus improving market share is nothing without margins; 2 times zero is still zero.
Sure, DSC could introduce new, higher-margin product offerings—they have already begun to do so and could always launch more. But now we are just talking about retail, and retail companies typically don't get these kind of valuations.
As for magically coming up with a new and innovative product, well, I'll just say that I doubt their investment is going into any sort of serious R&D effort.
Isn't that just how venture capital works?
Look, I understand the general concept of venture capital: take a shit-ton of money and spread it across dozens of investments, wait for one to blow up, take profits, repeat.
I am just saying this is a particularly bad bet, and I have been seeing a lot of bad bets recently (which is a bad sign of things to come).
Ridiculous valuations are toxic
A valuation of $615 million for an unprofitable subscription box company is absurd. But so what? Why does any of this matter? Who cares if some random VC firms make a bad $75 million bet?
The simple reason is that bad valuations like this one are viral. They influence the next deal in that space, which in turn influences the next, which inevitably leads to a bubble. Everyone knows that bubbles are bad; when they pop, they do so with significant collateral damage, affecting not only venture capitalists but every person with any ties to the economy as a whole (which is to say, all of us).
Think I'm missing something? Yell at me on Twitter @cschidle.
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