East Ventures’ thesis on Direct-to-Consumer (D2C) startups
True to all of our investments at the early stage, East Ventures’ thesis behind our D2C (Direct-to-Customer) bets is its founders. In each of their D2C segments, our founders are passionate about building brands that are customer-focused, innovative, and personal.
On the macro side, as global connectivity soars, generational shifts such as the growing prevalence of digital natives, including Gen-Z and millennials, are shaping consumer behavior significantly. According to a report by McKinsey, Gen Zs are shaped by their search for truth and their desire for individual self-expression. Thus, more than any other generation, the consumer preferences of the digital native generation is to purchase with conviction. It is undeniable that the purchasing power of Gen-Z is on the rise, so businesses must quickly adapt.
In Indonesia alone, millennials and Gen Z segment represent half of its entire population, meaning that there are about 21 million new digital consumers that have emerged in the last two years. Moreover, Gen Z has US$ 360 billion to spend, therefore retailers and brands are figuring out how to court this group. This is why D2C startups with a strong ESG angle and a core message that speaks to the emerging generation tend to have more sticky customers and higher LTV (Lifetime Value).
To zoom out, global consulting firm Capgemini found that more than two-thirds (68%) of Gen Z and over half (58%) of millennials have ordered products directly from brands in the past six months, compared to 41% on average across all age groups. Only 37% of Gen X and 21% of Boomer shoppers have ordered directly from a brand in the last six months. For those who have bought directly from brands, almost two-thirds (60%) cite a better buying experience as a reason for purchasing directly, and 59% cite access to brand loyalty programs. These statistics highlight the changing dynamics of consumer behavior.
These new preferences have given leeway for consumer-oriented startups and brands to leverage their competitive advantage: the ability to leverage intimate customer data to quickly provide customers with what they want.
Big brands lack agility as their operations are accustomed to using third-party distributors and middlemen. Changes in strategy require lengthy approval processes. Meanwhile, Direct-to-Consumer (D2C) startups are highly adaptive as they have the ability to leverage strong relationships with their customers, allowing them to create personalized products and experiences. The rise in digital intimacy will significantly impact the value of packaged goods brands in the region. The region’s population skews young and thus, creates a cohort of digital natives with a higher acceptance of online services, innovation, and potential for D2C.
The underlying advantage of D2C startups lies in their vast opportunity for brand differentiation, full ownership of customer data, and their ability to drive brand leadership. Since East Ventures started investing in D2C companies, we quickly realized that beyond the products they create, the true heart of D2C is the community they build.
Base co-founders, Yaumi Fauziah Sugiharta and Ratih Permata Sari
One of our portfolios, Base, is a D2C skincare company that creates clean, sustainable, and halal beauty products. The company is run by two incredibly creative and passionate women, Yaumi Fauziah Sugiharta and Ratih Permata Sari, who have successfully created a customer base that is intensely loyal to their products and what their products stand for. Their marketing strategy is tailored to their core segment, and they partner with influencers and KOLs that can match the brand identity. This strategy helps them maintain customer loyalty, helping them maintain good unit economics.
Kasual team and Founder, Alam Akbar, and East Ventures’ Operating Partner, David Fernando Audy
Likewise, Kasual, Indonesia’s D2C personalized pants wear for men, has also successfully created a sticky customer base that identifies with efficient, well-groomed, and environmentally conscious young professionals. Kasual has complete control over its supply chain and empowers local sewists to create their products.
Within customer segments in the D2C vertical, there is a tangible sense of pride and belonging that comes with every purchase. Beyond the SKUs that our D2C startups sell, customers can quickly identify with the brand message and vision. In a post-COVID world, this has become more magnified as customers are eager to align with brands they can champion and be in community with.
Knowing your customers and staying innovative is key to maintaining longevity
As digital penetration continues to increase and more new D2C firms are burgeoning in the market, one of the critical levers of success for lasting D2C companies is the ability to know your customers and to grow with them. D2C companies must stay innovative and in touch with what their customer segments are looking for.
While trends change constantly, astute D2C brands can differentiate between noise and substance. The most successful D2C companies worldwide can authentically and intentionally check in with their most sticky and loyal customers, leveraging customer calls, focus groups, and data to help them create product development pipelines and make critical decisions.
From the early days, it is essential to know who your customers are and why they have chosen you. D2C players have an advantage over traditional e-commerce players because they can access personal data and invaluable insights to drive innovation strategy.
All in all, D2C brands must develop and launch innovative, data-driven products that resonate well with their target segments. Paired with a unique and tailored online shopping experience, pioneering D2C companies can develop campaigns, drive digital strategy, and launch products that help create and maintain brand stickiness in the long run. Currently, East Ventures has over eight D2C portfolios in our ecosystem of 200+ portfolios. There is much room for D2C brands to evolve and grow, and we are excited to continue to be the first believers in pioneering companies at the forefront of innovation.
By Stacy Oentoro, VP of Investment at East Ventures