Like many Americans under lockdown, I’ve been spending a lot more time on the internet. As usual, my screens have been filled with ads for flashy direct-to-consumer brands, targeted precisely to my tastes: an Everlane cashmere sweater, the latest Rothy’s flats, a new Cuyana bag. But not once have I been tempted to click. For one thing, I have nowhere to go in a new outfit. And as I watch the economy crumble and unemployment figures skyrocket, it seems wise to save money.

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I’m not alone. Consumer spending has declined as economies around the world have shut down, and e-retailers look to be among the hardest hit. For an entire generation of digital-first startups, the coronavirus could be an existential threat. Of course, many DTC companies were in trouble before COVID-19. Venture-backed founders pushed for growth at the expense of profit, throwing cash at sales and marketing but leaving little cushion in case of a downturn. In some cases, the tactic seemed to work. In others, it defied logic. Casper revealed it loses hundreds of dollars on every sale. Brandless crumpled under unrealistic financial targets. Outdoor Voices was reported to be hemorrhaging $2 million a month. Exposés about Away, Everlane, and Thirdlove described punishing hours and stressful working conditions as investors chased exponential growth. That was all before the coronavirus ground the economy to a halt. Since then, DTC brands have seen significant declines in sales. Everlane, for instance, reported a 25% decrease in online sales on top of its retail sales evaporating, while Away’s revenue decreased by 90%. The CEOs of Allbirds, Rothy’s, Ministry of Supply, and Cuyana all told me that revenue has dropped, though they declined to specify by how much. The big question now is whether these startups will survive the looming economic recession. The answer is complicated and will depend on the particulars of each company. Brands that have cash on hand, continue to innovate, and stay relevant to customers are more likely to make it to the other side. But if the financial turmoil drags on, even those with strong fundamentals may not last. In the past few weeks, Rothy’s, Away, Everlane, Thirdlove, and Rent the Runway have all announced layoffs and furloughs. More DTC brands will likely follow suit. “We cut costs everywhere else in the business before considering this option, but unfortunately, it was not enough,” wrote Karla Gallardo, CEO of Cuyana, in a Medium post announcing the apparel company’s unspecified staffing cuts. “My goal for Cuyana and hope for the industry is to make it through this crisis and bring back as many jobs as we can as quickly as possible.” Brands need cash on hand Several of the people I spoke to said they expect the DTC industry will go through a cataclysmic transformation as companies navigate the coronavirus crisis. “The entire landscape is going to look different on the other side of this,” says Matt Scanlan, an investor in Buffy and True Botanicals, and CEO of Naadam Cashmere. “Some brands are unfortunately just not going to be able to survive this, but those that do are going to be in a stronger position.”

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The key to surviving the downturn will be cold hard cash, says Daniel Gulati, managing director of Comcast Ventures, which has invested in Away and the cleaning product startup Blueland. But that’s easier said than done, especially with the high burn rates that are common among startups. Many brands have minimal revenue coming in right now, which means they’ll need to tap financial reserves to continue paying workers’ salaries, office and store leases, and marketing expenses. Companies without access to cash may be able to cut expenses to avoid bankruptcy. But some contracts, like leases or existing product orders, are hard to break. Some of the easiest ways to free up cash are to lay off employees and reduce marketing costs, but both of these strategies make it hard to keep the business up and running (and layoffs are of course devastating for workers). “Some companies will not make it without some sort of external lifeline.” Gulati says. “And since the options for getting cash right now are narrowing [amid the economic fallout of COVID-19], that may become increasingly hard.” The wave of layoffs is particularly jarring considering the huge cash infusions that many prominent DTC brands have received within the last year. Away received $100 million in series D funding last May, bringing the total amount of money in its coffers to $156 million. Meanwhile, Cuyana and Thirdlove received $30 million and $55 million, respectively, a year ago, but both brands have made staffing cuts. “A lot of the variation between DTC brands we’re seeing has to do with what their investors expect,” says Scanlan. “Brands that have been backed by venture capital and private equity are expected to reach certain growth milestones on an annual basis. This means ramping up their staff and production months before they’ll reach that target, which means they might be carrying a lot of extra overhead right now.” That’s certainly the case with Away. In a press release about its series D round, the luggage startup said it would use the funding to fuel a massive expansion, including opening 50 new stores in three years, growing its international business tenfold, and creating new lines of travel products. Given that Away just laid off 10% of its staff and furloughed half the team, it’s likely that much of its cash is tied up in these projects. (We reached out to Away for more details about its financial situation, but the company declined to comment.) Companies that were prudent about their burn rate before the crisis, such as Ministry of Supply, are more likely to have flexibility now. The technical clothing brand has been growing at a steady clip since it launched eight years ago, quadrupling sales over the past two years, but has taken a relatively modest $9.2 million in funding since it entered the market. The result, for now, appears to be stronger prospects for the company’s staff.

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Ministry of Supply’s sales have declined over the last month, cofounder Gihan Amarasiriwardena told me, but the company isn’t planning to lay off any of its 80-something employees. Even though its brick-and-mortar stores have been closed for several weeks, the company is keeping retail workers employed, redeploying them to new tasks. Some are contacting existing customers to see if they’d like styling advice, while others are helping to design and manufacture medical grade masks that will be donated to frontline healthcare workers in Boston. “They’re excited about being able to help in the crisis,” says Amarasiriwardena. “They’re staying engaged.” Rethinking social media marketing One reason many DTC brands now find themselves cash-strapped is the exorbitant costs associated with acquiring new customers. It’s not unusual for smaller companies to spend more on marketing to break out of the pack. But as the DTC space has become more competitive, these costs have gone up. Fueled by venture capital, the battle for eyeballs on social media sparked an advertising arms race—further cutting into margins. This was apparent in Casper’s IPO filing, which revealed the company was losing $157 on each mattress, in part because it spent $305 in marketing to make each sale. While Casper’s advertising spend is extreme, it isn’t uncommon. In her 2019 Internet Trends Report, renowned venture capitalist Mary Meeker warned that customer acquisition costs were “rising to unsustainable levels.” While internet advertising might compel a user to buy a product, she noted, it’s less likely to lead to loyal, repeat customers than slower, hard-earned word of mouth. The over-reliance on paid marketing spiraled into an even bigger issue with the current crisis. If that was the primary way brands generated sales, it’s even harder now to decrease that income stream. That has meant it’s easier for some brands to cut employees than cut their marketing budget, which is why you might still be getting ads from the very same companies that are announcing major layoffs. Scanlan explains that it takes a long time to ramp up advertising and calibrate it to reach the right consumers. “You can’t turn off your marketing then expect to turn it back on and have the same effect,” he points out. “Many brands can only scale back so much before risking having to restart their marketing engine from scratch, which will be incredibly expensive.” But some brands have recognized how problematic it is to rely on online advertising for growth, so they’ve come up with creative ways to connect with consumers and create loyal customers. Three-year-old streetwear label Madhappy, for instance, has used activities like block parties and free events about mental health to attract new customers, while investing relatively little in online advertising. AUrate, a fine jewelry brand founded in 2015, has focused on small in-person trunk shows for the demographic most interested in its product. Currently only 30% of its customers are from paid marketing efforts. This painstaking word-of-mouth approach has paid off, helping the brand grow 400% a year; nearly half of customers are repeat purchasers. “From the start, our goal has been to grow organically,” says AUrate cofounder Bouchra Ezzahraoui. “It’s much slower, but we’ve found that it leads to more loyal customers and allows you to be profitable quicker.” Gulati says it was becoming clear that the old model of pay-for-play growth wasn’t working, and the current crisis has made it even more obvious. This may have an impact on how DTC brands think about growth when they eventually come out of this crisis. “For a long time, there’s been this paradigm of ‘growth at all cost,'” Gulati says. “Longer term, we’re hopefully going to see healthier growth, as brands reduce their dependence on paid marketing. I think it might lead to more creative, inventive business models.”

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Focusing on innovation It’s unclear how long this period of financial turmoil will last. Many economists suggest that we’re at the start of a recession that could go on for years and might be on par with the Great Depression. Even brands that have made it through the last month intact may struggle if the downturn deepens. But some CEOs are already looking to the next chapter. Gulati points out that when the DTC sector first emerged, it was enough for a brand to innovate largely on branding and delivery, rather than on the product itself. Casper, Away, and Warby Parker, for instance, didn’t develop radically original mattresses, suitcases, or glasses; they simply made it easier to buy them at home. Over the past few years, many other brands have popped up with similar offerings in each of these categories since the product itself was relatively easy to replicate. On the other side of this crisis, Gulati thinks that consumers will want to buy from companies that solve problems and actually innovate on the products themselves—not just the delivery system. That’s what some startups are trying to do. In the case of Allbirds, the company is still actively working on the same sustainability initiatives that were in its pipeline pre-coronavirus. This week, it’s launching a new system of tracking the carbon footprint of every product, along the lines of a nutritional label. Ministry of Supply, which is known for its futuristic garments, is now working to create moisture-wicking and temperature-regulating fabrics from recycled materials. Brands that have worked to develop more innovative manufacturing systems are also in a good position to pivot in the midst of the crisis. Rothy’s, for instance, which built its own 3D-knitting factory in China, has been able to switch from making shoes and bags to making masks. American Giant, which has built out an entire apparel supply chain in the United States, is currently using its North Carolina factory to make medical grade masks to respond to the global mask shortage. Even if these efforts don’t generate revenue, they may cultivate goodwill among consumers and keep their brands in headlines, which is itself a valuable form of marketing. And they may generate business later on. Amarasiriwardena says Ministry of Supply has had a glimpse of the future, since it partners with factories in China and Taiwan, which were first hit by the coronavirus. He has watched the economy in those countries grind to a halt, then restart after about two months. He’s using this insight to help predict how long his own company is likely to lie fallow. “We’re seeing some light at the end of the tunnel,” he says. To some degree, the product itself may determine whether a company succeeds or fails. Away and Allbirds were on similar growth trajectories before the coronavirus hit. The shoe brand recently landed $75 million in funding, bringing its total to $150 million, and the company was planning to open 20 new stores in 2020. But Allbirds still hasn’t conducted any layoffs and has no plans to do so. Part of the reason it’s been able to avoid retrenching its 400 employees is that it isn’t losing quite as much money as Away, since consumers are still buying sneakers, albeit fewer of them. Compare that to Away, which primarily sells luggage; when the coronavirus ground travel to a halt, Away’s entire customer base evaporated. No one needs new luggage when they’re stuck at home.

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Allbirds’s co-CEO Tim Brown says layoffs would be a last resort, and the company is trying to save money in many other ways, from renegotiating leases with landlords to curbing marketing. This is a strategic decision, Brown says, because he believes employees can be an important asset during this time. “We spent a lot of time building this team, and selfishly we want to hold on to these people because they will help us come out strong on the other side.” If you work, or used to work, at a direct to consumer startup, we would like to hear about your experiences. Please reach out at esegran@fastcompany.com.