In theory, the intermediaries are removed
Selling product/service directly to the end consumer rather than through distributors.
Compound portfolio companies Noat, Los Angeles Project, Tia, SuppCo, Talkspace, Livepeer, and PartyDAO
Hims, Ro, Dollar Shave Club, Harry’s, Warby Parker, Skims, David Bar, Rent the Runway, Lululemon, Nike, HelloFresh, Chewy, Tesla, Viagen, Oura, 23andMe, Levels, DJI, Eight Sleep, Apple, iRobot, Matic Robots, Duolingo, Atria, One Medical, Nudge
From Sears catalogue to Red Bull pioneering influencer branding to Hims disrupting big pharma’s distribution, DTC seeks to bypass third-party independent retailers, wholesalers, or other intermediaries and create a direct relationship with the end customer.
However, almost always one intermediary is replaced by another. Companies hoping to free themselves of paying for fixed shelf space at Walmart / SevenEleven with the infinite shelf space of the internet found themselves paying roughly the same ~25% of their margin to Google / Meta / Amazon / TikTok / influencers for access to digital consumers’ fixed attention.
With major platform shifts, a brief window of arbitrage emerges to have lower CAC, faster brand awareness distribution and/or more targeted outreach than competitors.
But that window vanishes quickly and from then on the rent goes to the owners/aggregators of attention.
That now includes the power law of influencers who get paid by the brands and can launch their own brands in the idealized DTC manner with no intermediaries because they already own their own audience (e.g. Skims exploded to $750M in revenue at 25% net profit margin).
As seen below, the most successful public DTC companies’ average gross and operating margins are 54% and 2%, respectively. Indeed, Hims spends nearly 50% of its revenue on marketing alone. We’ve had portfolio companies spend a meaningful chunk of a fundraise on a single celebrity endorsement.
The channels are converging. 10+ years into modern digital DTC startups, pure play DTC brands are launching physical retail, in wholesale, and on marketplaces. Meanwhile, the major brick-and-mortar companies are all going digital.
Rising above these dynamics requires extremely clear and differentiated branding and product positioning. That’s always been the case but is now true more than ever given the crowding of all these product categories and distribution channels.
We at Compound are particularly excited about companies pairing a cultivation of brand/aesthetics/marketing/community building with scientific innovation to bring products to market that couldn’t exist otherwise.
We published our thesis here. Since then, David scaled to $100M revenue and raised at $725M valuation in its first year thanks largely to an ingredient innovation that tastes and acts like fat but with 92% fewer calories. They immediately cornered supply by buying the only supplier of the ingredient. Meanwhile, the most successful beauty startups have focused on active ingredients.
We have further insights that we’d love to share directly. If you’re thinking about this model please reach us at [email protected] or [email protected]!
https://shelbyann.substack.com/p/science-driven-products
https://www.thegorillagame.com/the-beauty-flywheel-is-broken/
https://medium.com/ro-co/dtc-metrics-explained-29ff99ff5657
https://www.lennysnewsletter.com/p/the-subscription-value-loop-a-framework
https://www.thegorillagame.com/the-luxury-flywheel-part-1/
https://newconsumer.com/wp-content/uploads/2025/04/Consumer-Trends-2025-Beauty.pdf beauty trends
https://newconsumer.com/wp-content/uploads/2025/03/Consumer-Trends-2025-Food-Wellness.pdf consumer food & drink trends
https://www.linkedin.com/pulse/blue-aprons-q3-18-results-cac-moves-higher-retention-trends-mccarthy/
https://foundros.substack.com/p/case-study-dollar-shave-clubs-billion
In 2017, Nike had drastically ramped up their investments in their own channels, including launching several web shops (such as Nike.com), mobile apps (like Nike SNKRS), and numerous physical stores. In response, many retailers pulled back from Nike and increasingly relied on other brands to stock their inventories and shelves. The Financial Times reported that the proportion of Foot Locker’s inventory from Nike fell from 75% to 65% in the last three years.
https://hbr.org/2025/03/research-how-retailers-respond-when-brands-start-selling-direct
The category matters: high/low price point, high/low frequency of purchase, high/low consumer loyalty
Of the 360+ brand and marketplaces tracked within the DTC Power List, 35 have exited. Another fifteen companies are on the designated “Exit Watch” category and an additional 10 are on the bubble. And this is where the study of the past comes in handy; it’s a useful reminder of the predictability of human behavior. Consider the shifts in manufacturing practices or sourcing, over the previous one hundred years. An even better exercise is to study the changes in advertising arbitrage over time.
https://qz.com/hims-hers-sigmund-nj-blood-tests-1851765414?utm_source=dlvr.it&utm_medium=twitter
https://newconsumer.com/wp-content/uploads/2025/03/Consumer-Trends-2025-Food-Wellness.pdf consumer food & drink trends
