It’s finally happening–2 major public DTC companies just declared bankruptcy or sold for pennies on the dollar, respectively. And it’s not hard to predict who’s likely to be next.

On Friday, Smile Direct Club filed for bankruptcy. It was valued at almost $9B in its IPO in 2019. It’s currently worth nearly $0. Also on Friday, Blue Apron announced that it is selling itself for $103mm. While this is a premium to its pre-acquisition valuation, at peak Blue Apron was worth over $3B, so the sale price represents a drop of 97%.

Why is this happening? I’d argue that a business can’t exist for long as a public company if 3 things are true:

  1. It is unprofitable
  2. Revenue is declining
  3. Market capitalization is below ~$200mm

Applying this:

Smile Direct Club:

  1. Lost $86mm in 2022
  2. Shrank 19% in Q2 ‘23
  3. $170mm market cap day before bankruptcy

Blue Apron:

  1. Lost $110mm in 2022
  2. Shrank 15% in Q2 ‘23
  3. $35mm market cap day before acquisition

The long term value of a business is ultimately a function of its future profitability (#1). Unprofitable brands can exist in the public markets and even be valued highly if investors see revenue growth (#2). In that case, investors will reason, the company can grow into profitability. But if a company is unprofitable and shrinking, where’s the future profit going to come from?

Companies usually have some time to figure it out but eventually, investors question if the brand can ever reach consistent profitability. The stock drops and the company is worth less than ~$200mm (#3). At that point, the market is clearly doubting whether the company can survive as a standalone business and, if it can’t, it declares bankruptcy (Smile Direct Club). Or, the company becomes an attractive acquisition target for another company who thinks it can run the business more productively (Blue Apron).

Unfortunately, several other public DTC brands are ticking these 3 boxes and it’s not hard to predict that at least some of them are not going to make it for much longer as public companies.

I’ll name the companies and then list their 1. 2022 profitability, 2. Q2 2023 revenue growth vs. prior year, and 3. current market cap:

Allbirds (shoes):

  1. -$101mm
  2. -10%
  3. $164mm

Rent the Runway (fashion):

  1. -$212mm
  2. -1%
  3. $49mm

Bark (pets):

  1. -$61mm
  2. -8%
  3. $206mm

Grove Collaborative (household products):

  1. -$88mm
  2. -17%
  3. $92mm

AKA Brands (fashion):

  1. -$177mm
  2. -14%
  3. $49mm

Purple (mattresses):

  1. -$90mm
  2. -16%
  3. $165mm

What’s the lesson here? At the end of the day, I think it all comes down to profitability. Profitable companies are, to use Paul Graham’s phrase, “default alive” and have nearly unlimited runway to figure out to grow and eventually become even more profitable. But the market now has little patience for unprofitable, shrinking companies. It’s clear that Smile Direct Club and Blue Apron won’t be the last public DTC bankruptcies or buyouts we see.