Tripling Down
We’re Investing in DSTLD for the Third Time; So Should You
DEAL DETAILS
Startup: Digital Brands Group (the new DSTLD)
Security type: Preferred equity
Valuation: $35 million
Share price: $0.53
Minimum investment: $1,500
Investment portal: SeedInvest
Raise: Series A
Link to invest: seedinvest.com/dbg/series.a3
I get more than 200 emails a day.
But on a hot and bustling Thursday in late July, one stood out.
It was from Mark Lynn, the co-founder of DSTLD. It’s a familiar name to most of you.
We’ve selected DSTLD for the First Stage Investor portfolio not once but twice.
“Andy, I want to run an idea I have by you. I have to warn you, it’s ahead of its time. I think you’ll find it exciting,” Mark wrote.
Mark and I have kept in touch ever since Adam and I first recommended DSTLD back in mid-2016. It’s the only startup we’ve recommended twice.
“It’s a totally fresh concept,” Mark wrote. “We want to collect lifestyle brands that redefine retail and the customer experience.
The first brand would be a men’s suit company. We’re calling our new company Digital Brands Group, or DBG. Let me know if you want to chat further.”
I did. In fact, I had a series of long – and sometimes hard – conversations with Mark.
He told me he was going to do another raise to fund this more ambitious vision of a company that he said would dominate not just denim jeans but a dozen other verticals too.
I was intrigued. But I warned him:
For me to recommend the company a third time, the bar would be set higher.
“You’re going to have to convince me that your company is doing something much bigger than what other startups aim for,” I told him.
After several conversations taking up about a dozen hours, that’s exactly what Mark did.
A Five-Pronged Battle Plan
I’ve distilled our conversations into five key areas. The most important part is Mark’s plan to buy one to two companies a year. So let’s start there.
1. Acquisition Strategy. The stakes are high. Pick the right companies and you’re on your way. Get stuck with a couple of clunkers – especially in the first few years – and the road ahead becomes very rocky.
There are a plethora of online retail companies on the cusp of scaling. The top 200 digital brands represent around $2 billion worth of sales.
Mark is focusing on companies with annual sales of at least $10 million and the capability of hitting $100 million down the road.
The companies need to be profitable… or on the verge of it. Management, metrics and margins also have to be well above average (for the retail sector).
Mark wants people as committed and capable as he and his co-founder, Corey Epstein, are.
“Going forward, this will be my most important job,” Mark told me. “I need to get this right. I know a lot is riding on it. I’m ready for this.
“The first team we’re bringing in is the men’s suit team we’re calling Ace Studios,” Mark added. “They’ll offer high-quality suits for $300 to $500. Similar quality brands retail for $600 to $1,200.” Launch is set for mid-2019.
The Ace Studios team scaled a men’s clothing company in 2007 from a raw concept to $55 million in annual revenue… in just six years.
“It will set the bar for all the other teams that follow,” Mark said.
Let me be crystal clear about the risk here. Mark’s team has a strong record of “building” revenue and growth. But it doesn’t have a track record of “buying” companies (and growth). This is new territory. As such, I spent a lot of time discussing the company’s “buy” criteria with him.
Notably, past sales growth isn’t one of the team’s primary criteria. It’s looking for quality, value, a minimum revenue base and a really big upside.
Its acquisitions must also contribute to its mission of “luxury performance at exceptional value.”
If a company has the above, Mark said, growth won’t be an issue: “We’ll be able to grow the brand.”
2. Customer Metrics. It’s very simple. A company needs to make more off of a customer than what it pays to acquire that customer. Mark says that, 36 months down the road, the gross profit from those customers acquired in the fourth quarter of this year will be 4.3 times the cost of getting them on board. (This is known as the Customer Acquisition Cost, or CAC, payback multiple.)
That’s pretty good. More critically, it’s greater than the three to four payback multiple I need to see from consumer-facing companies.
Here’s a chart that puts that 4.3 number in context…
Mathematically, the CAC payback multiple is the gross profit divided by the CAC. Gross profit, in turn, is derived from revenues minus costs. You improve the CAC payback multiple by either increasing revenue or reducing costs.
So let’s trace DSTLD’s history of lifetime revenues. When we recommended DSTLD two years ago, lifetime revenue was $100. In early 2017, it was $180. By the fall of 2017, when we issued our second recommendation, it was $360.
Jumping to the present, it’s projected at $369. The biggest difference from 10 months ago isn’t lifetime revenue per customer. It’s costs per customer. While revenue inched up, costs dropped by more than 20%.
3. Sales Growth. Some sales were made in 2014, but revenue didn’t really get going until 2015. It took DSTLD two years to double sales to nearly $4 million last year.
And this year? The company expects $9 million.
Beginning around the middle of next year, sales from Ace Studios will kick in, slowly at first, contributing $2 million, then doubling the following year and doubling again the year after that.
By 2019, DBG (as we’ll now refer to the parent company) should have at least one or two more brands contributing to sales (in addition to Ace Studios and DSTLD).
By 2020, the company expects to break into the black and become self-sustaining with $26 million in revenue.
By 2023, DBG says it will be generating $343 million of revenue. That number is based on having made six acquisitions. It’s doable based on one to two acquisitions per year. Only one per year will bring it to six by 2023.
I consider the $343 million a nice, if overly ambitious, goal to aim for. I don’t expect DBG to hit it, and I won’t hold it against the company if it doesn’t.
But I am looking for rapid growth. Not the 363% growth the company forecasts for next year (based on two acquisitions plus Ace Studios), but somewhere in the 50% to 100% range.
When you buy a company, its sales become your sales… immediately. So a “build and buy” strategy raises growth expectations beyond what would be expected from an organic growth strategy (for which my expectations would be in the 30% to 80% range).
4. The Market Opportunity. In 2015, online retail sales totaled $335 billion. By 2020, they’re expected to reach $523 billion – a 56% increase.
Clearly, the future of retail is online.
Brands that poured resources into online models too late paid for their tardiness.
Venerable retailers, including Macy’s, J.C. Penney, The Limited, Best Buy and Sears, are shutting down stores by the hundreds. And Toys R Us is gone completely.
At least 94 million square feet of retail space will be closed in 2018, according to CoStar Group data.
But here’s the thing…
Retail, overall, is thriving. Americans are spending record amounts. They’re just doing more and more of it online.
DBG has already proven adept at riding this wave of online-savvy shoppers. It was able to establish a growing denim brand in addition to products such as outerwear, T-shirts and accessories.
But in order to take better advantage of the $3 trillion global apparel market, DBG had two choices…
Push organic growth and build slowly… or adopt a more aggressive “build and buy” strategy. It chose to build and buy.
It’s a bold, “all in” move. You have to trust the co-founders and their team to like this move…
And I absolutely love their new direction.
5. The Price Is Right. After seeing its great idea but limited track record, we first recommended DBG at a $22 million valuation in 2016.
And then last year, when it had more of a track record and an aptitude for growing sales while maintaining healthy gross and operating margins, we recommended DBG again – at $30 million.
DBG is raising again, this time at a $35 million valuation. The increase is based in part on continued rapid expansion and growing brand recognition.
As for the bigger market opportunity and more aggressive growth plan, I’m guessing it played a neutral role in determining valuation.
The opportunity is more attractive. But the risks are higher too.
It’s not just the original DBG team that has to execute at a high level now. It’s every team that it brings on board.
While I’m convinced that Mark and Corey are up to the task, they’ll have to prove it. Hence, the very reasonable $35 million valuation. It’s more than fair.
DBG’s eventual valuation? The company is aiming high.
Mark gave me a figure but insisted it remain confidential for now. I look forward to the day I can reveal it. But your potential profit multiple is in the double digits. I have to leave it at that.
We look for at least 10X gains. If things go according to plan, this could be much more. So I’m doing something I thought I’d never do.
I’m recommending a company for the third time. VCs do this all the time. But the opportunity to do it in crowdfunding is rarer. Startups fall by the wayside or graduate to rounds that are too big for crowdfunding.
This is a rare opportunity to invest in this kind of upside.
How to Invest
DBG’s raise will officially begin in mid-September.
Right now, you can reserve your spot to make sure you don’t miss out.
Here’s what you should do. If you’re already registered with SeedInvest…
- Go directly to the DBG listing here, then click on the blue box labeled “Reserve.”
- You will then be asked a series of quick and easy questions to execute your investment.
- The first one is “How much do you wish to invest?” DBG has set the minimum investment at $1,500. You can invest more, but you can’t invest less.
- Follow the instructions and choose your preferred payment method. Complete the process and, if you run into any problems, email SeedInvest at contactus@seedinvest.com.
Note: By clicking on the blue “Reserve” box, you are requesting a spot to invest in DBG’s upcoming offering.
This reservation is nonbinding.
DBG will begin accepting investments beginning in mid-to-late September.
You’ll get a notice from both SeedInvest and us in advance of the exact date, which has not yet been determined.
If you’re not registered with SeedInvest…
- Go to www.seedinvest.com and click “Sign up.”
- Once registered, search for “Digital Brands Group” and follow the directions above.
If you encounter difficulty at any point in the process, all you have to do is click on the “Chat with Us” link on the SeedInvest site. It’s on every page as you go through the application process.
Editor’s Note: If you’re new to First Stage Investor, or if you just need a refresher on how to invest in startups through portals like SeedInvest, check out our video tutorial here.
How You Can Help
One of the most important aspects of being an early-stage investor is adding value where you can. Startups do better when their investors help.
It’s a big part of startup investing.
We asked DBG how you can help. Here’s what marketing director Hannah Laverty had to say…
If you haven’t checked out DSTLD’s website (http://www.dstld.com/) recently, please do so now. We’re very proud of our product and the value we offer.
We’d love for you to become an investor and a customer. We believe that together we can build a world-class brand and return on your investment. Also, please share our story and investment opportunity with your friends.
Risks
As with all early-stage investments, there is significant risk the company could fail.
It could fail to secure further funding, lose important revenue streams or have any number of other things go wrong.
This is the nature of early-stage investments. You should not invest any money you can’t afford to lose.
Note: As always, our research is 100% independent. We don’t accept compensation from the investment portals or the startups we recommend. ■
Cannabis Stock watch
Three Hot Cannabis Stocks to Watch
As many of us forecast years ago, the tide has turned against prohibiting marijuana. And the cannabis industry is poised to expand exponentially.
The sheer number of potential medical applications for cannabis is staggering – and we’ve just begun to study it scientifically. As a result, cannabis fundamentally threatens the pharmaceutical industry (which is why some pharma companies are lobbying hard against legalization).
How big of a threat is pot to Big Pharma?
I like to quote a 2016 study by Ashley and W. David Bradford to explain its scope. The study found that in states that have legalized medical marijuana, doctors end up writing far fewer prescriptions.
Here’s the juicy part of a Washington Post article on the study (emphasis mine):
[The researchers] found that, in the 17 states with a medical marijuana law in place by 2013, prescriptions for painkillers and other classes of drugs fell sharply compared with states that did not have a medical marijuana law.
The drops were quite significant: In medical-marijuana states, the average doctor prescribed 265 fewer doses of antidepressants each year, 486 fewer doses of seizure medication, 541 fewer anti-nausea doses and 562 fewer doses of anti-anxiety medication.
But most strikingly, the typical physician in a medical marijuana state prescribed 1,826 fewer doses of painkillers in a given year.
That’s right. On average, doctors write thousands fewer prescriptions per year when cannabis is available. Fewer opioids on the streets. Fewer highly addictive anti-seizure drugs given to children. Fewer anti-anxiety meds, which can also be very addictive.
Marijuana competes directly with these classes of drugs and many more.
It’s a full-on nightmare for Big Pharma.
This may partially explain why Big Pharma stocks are so “cheap” today. I believe people are pricing in a decline in sales of patented medicine as marijuana markets continue to open.
And with the recreational pot market opening up now (I believe it could be larger than alcohol in the future), investors can’t afford to ignore this sector. Big money is already starting to flow into this market.
Beer giant Constellation Brands (Corona and Modelo are two of its biggest brands) just invested $3.8 billion in Canopy Growth Corp. (NYSE: CGC), one of the biggest marijuana companies around.
Now let’s look at some pot stocks.
Note: These are not recommendations. This is an exercise to help you get familiar with the market and look at some interesting companies. Please do your own research before deciding to invest in any of these stocks.
Innovative Industrial Properties
Innovative Industrial Properties (IIP) is a cannabis REIT (real estate investment trust) that trades on the New York Stock Exchange. A REIT is a special type of stock that owns, operates or finances real estate. It’s required to pay out 90% of profits to shareholders.
Most REITs own malls, commercial buildings or apartments. IIP is unique in that it focuses on acquiring and leasing land for growing medical cannabis.
Because IIP deals directly with only real estate and not marijuana, it is one of the few American cannabis firms that’s publicly traded on a major exchange.
IIP pays out a 2.9% dividend, and its current market cap is around $292 million. IIP has shown that it can effectively raise and deploy capital in the cannabis real estate market.
Because the regulatory issues around cannabis-growing real estate can be tricky, it makes sense for a firm to specialize in such deals.
IIP trades on the NYSE under the ticker IIPR.
Aurora Cannabis
Aurora Cannabis is a leading Canadian medical marijuana company. It is one of the largest pot stocks in the world, with a market cap of $6.8 billion.
Aurora owns large grow operations. According to the company, Aurora has the capacity to grow a little more than 617,000 pounds of medical-grade cannabis per year.
The firm expects to reach nearly 950,000 pounds of grow capacity next year.
Aurora is developing a strong international presence. It’s currently exporting medical marijuana to Germany and Italy. And it’s building a large high-tech grow facility in Denmark.
Domestically, Aurora is building up a strong distribution network, acquiring attractive cannabis companies (14 in the past two years, according to Investor’s Business Daily) and investing in others.
Aurora is well-positioned to take advantage of the booming medical marijuana market. My primary concern with the company is that there is likely to be a glut of cannabis hitting the markets soon, and prices will almost surely move sharply downward.
However, Aurora’s investments in extraction technology, distribution and strong brands should help it weather the coming price wars.
Aurora is also one of the most well-capitalized cannabis companies in the world, and it should be able to continue raising money and expanding its footprint.
The stock is currently priced at a very high valuation. That’s not out of the ordinary at this moment in time.
I expect leading marijuana stocks will continue to sport lofty prices for the foreseeable future. There is an incredible investor appetite for cannabis stocks, and the winners in this industry have the potential to reap huge rewards.
Aurora trades on U.S. OTC markets under the ticker ACBFF and on the Toronto exchange under the ticker ACB.
LiveWell Foods Canada
Don’t let the name fool you. LiveWell Foods Canada is a cannabis and hemp pure play.
This is the most speculative of the stocks we’re reviewing today, as LiveWell’s market cap sits at a modest $76 million. LiveWell is a developmental-stage company, with more than 1 million square feet of marijuana grow space under construction in Canada.
Despite its small size, LiveWell has already signed deals with leading companies such as Canopy Growth Corp.
LiveWell is betting big on cannabidiol (CBD), an extremely promising compound that occurs naturally in both marijuana and hemp. CBD shows immense promise for treating various medical conditions, including epilepsy and inflammatory conditions. LiveWell recently signed an 11,000-pound CBD distribution deal – worth up to $35 million annually – with a Brazilian company, according to the Ottawa Business Journal. The contract has renewal options going out five years.
LiveWell trades on U.S. OTC markets under the ticker LXLLF and on the Toronto Venture Exchange under the ticker LVWL.
Unprecedented Opportunity
The marijuana market is one of the hottest in the world today, with good reason. In the coming years, cannabis will create real economic growth, provide a badly needed option to millions of patients and offer a less harmful recreational alternative to alcohol.
It is extremely rare that an industry as large as cannabis goes from black market to fully legal. Needless to say, the opportunities for investment will be plentiful. So we’ll be paying a lot more attention to this market in the coming months.
As we come across worthy investment options, we’ll be sure to let you know about them. If you have any great pot investments, shoot us an email at mailbag@earlyinvesting.com. ■
bitcoin loves chaos
Bitcoin Thrives on Fiat’s Woes
Bitcoin was created during the aftermath of the last credit bubble in 2008. Its creator, the pseudonymous Satoshi Nakamoto, made it clear he wasn’t happy with the monetary status quo.
Satoshi made this point often, back when he (or she) was still active on chat boards.
The root problem with conventional currency is all the trust that’s required to make it work. The central bank must be trusted not to debase the currency, but the history of fiat currencies is full of breaches of that trust. Banks must be trusted to hold our money and transfer it electronically, but they lend it out in waves of credit bubbles with barely a fraction in reserve. We have to trust them with our privacy, trust them not to let identity thieves drain our accounts.
Satoshi created bitcoin because he believed the world needed a medium of exchange that did not require banks, middlemen or custodians. Against all odds, his idea blossomed into the global phenomenon it is today.
“Mini-Crisis” Spurred Bitcoin’s Growth
There has not been a global financial crisis since cryptocurrency came along, and I don’t believe we’ll see its true power and importance until that occurs.
Unfortunately, another worldwide financial/monetary crisis is inevitable. Deficit spending, reckless banking, widespread corruption and constant debt accumulation guarantee it. When it happens, governments around the world will undoubtedly resort to “monetizing” their debt (creating money to pay it off).
And even though crypto has never seen a global financial crisis, there’s strong anecdotal evidence that as the old system crumbles, crypto thrives.
Exhibit A is the Cyprus bank crisis of early 2013. As often happens, Cypriot banks were overleveraged and blew up. In this case, depositors with more than 100,000 euros were forced to forfeit 47.5% of their cash to make the banks whole. This was the first bank “bail-in,” and some believe this model will be the standard going forward.
In the midst of this financial uncertainty, people began buying bitcoin. In March of 2013, here’s what Nicholas Colas, chief market strategist at ConvergEx, told CNBC:
Incremental demand for bitcoin is coming from the geographic areas most affected by the Cypriot financial crisis – individuals in countries like Greece or Spain, worried that they will be next to feel the threat of deposit taxes.
The events in Cyprus set off an incredible bull run for bitcoin. At the start of 2013, bitcoin traded for as little as $12. By November, prices had topped $1,000. This is when bitcoin skeptics began (wrongly) comparing bitcoin to tulip mania – when 17th century investors speculated on Dutch tulips only to watch their prices collapse.
Chaotic Times Are Good for Crypto
Today the world once again finds itself in a chaotic financial situation. The U.S. will pay more than $400 billion in interest on our debt this year. We’ve finally reached the point where interest payments are beginning to sting, and eventually it will be crippling (particularly so when interest rates rise and Uncle Sam begins to pay higher interest on debt). Most countries around the world are in a similar situation.
Fiat currencies in Venezuela, Turkey, Iran, Russia and Argentina have all experienced sharp devaluations recently.
Trade wars are heating up, with China and the U.S. levying ever higher tariffs against each other. It’s a mess out there, and the old system is struggling under its own weight.
This is the type of environment that crypto thrives in. The sooner we develop alternative monetary systems, the better.
Fortunately, many of the best entrepreneurs and investors around the world feel the same way and are working to make crypto a viable alternative to fiat.
To be clear, I’m not saying crypto can solve all these problems. But it can form the foundation of a return to sound money and financial discipline.
And scarcity is something we desperately need more of in the monetary world. So next time someone compares crypto to tulip mania, consider offering them a different perspective. ■
this month in fintech
Blockchain Finds Pension Fund Success
Wall Street loves Sinatra. It’s a New York kind of thing. But bankers from Canada?
After seeing what the Bank of Montreal (BMO) just did, I’m convinced it was inspired by ol’ blue eyes.
The BMO sold $190 million worth of debt notes (one-year floating rate) to the Ontario Teachers’ Pension Plan. Nothing wrong with that. It’s typically a safe way to generate income. And pension plans are more about safety than big gains.
That’s especially true for teachers’ pension. There’s no way you want to put it at risk. It’s a sacrosanct rule that has governed Wall Street behavior for decades.
But this was not your typical debt instrument.
What the BMO did required guts…
It tested an unproven blockchain-based settlement process. In effect, it used its local teachers as guinea pigs.
Fortunately, the experiment worked as expected and it turned out fine, handing the bank an intriguing selling point…
If our poorly paid teachers trust the blockchain, so should you. Not the tagline I would choose.
But I could just hear the blockchain developers and Canadian bankers singing Frank Sinatra’s iconic line: “If I can make it there, I’ll make it anywhere.”
This is a big deal. How banks currently settle and clear transactions is an exercise in unnecessary complexity (much like an over-engineered BMW).
Here’s how the CEO of the Australian Stock Exchange describes this convoluted process…
Settlement is the act of transferring securities and final funds between two parties, as opposed to clearing, which is the process of determining the obligations – who owes what to whom. Settlement is the process of actually fulfilling those obligations.
This is reportedly the first time the BMO has tried this technology for a Canadian dollar “fixed-income issue.”
Back in April, a few other banks tried something similar. The National Bank of Canada, along with JPMorgan Chase, Goldman Sachs and others, used the Quorum blockchain platform to imitate the steps needed to settle the transaction.
So we have banks from Canada and the U.S. demonstrating that the blockchain is able to capture significant cost savings in the overly complicated and expensive clearing and settlement of fiat transactions.
Canada wasn’t the only country witnessing blockchain history recently. Australia just witnessed its own big “first”…
“Today We Make History”
So says Australia’s Commonwealth Bank. Using a private Ethereum blockchain, it has created the “bond-i,” also known by its less succinct name: blockchain operated new debt instrument.
The bond will be issued by the World Bank… and is set to be the first global bond using distributed ledger technology to raise money from public investors.
The legal architecture of the smart contracts that govern the bond was designed with the help of a law firm. And Microsoft reviewed its architecture, security and resilience. ■
portfolio update
“It might be the most underreported wave of new millionaires in history.”
– Adam Sharp, Angel Investor
A high school kid starts off with a few dollars and is now worth $1.09 million… A former U.S. Marine is now worth at least $30 million… A lifelong libertarian is now worth an estimated $52 million…
And (if you’re bold) you could be next…
To learn more, go to www.CryptoAssetStrategies9.com. Or call 800.514.5876 or 443.353.4335 and mention priority code GSUIU900 to take advantage of this special offer.
Positions as of 8/31/18