This may be a tough read but I’m starting to think that most venture capital-backed DTC businesses will likely never be, by their very nature, profitable.

Let’s start with the facts before getting to the theory. As I’ve written about before, there are almost no examples of public DTC businesses which are profitable. Allbirds, Warby Parker, Bark, Smile Direct Club, Honest Co, and nearly all others lose money. Oddity, IPOing soon, could be a very rare exception.

I often hear about large, private VC-backed businesses which are profitable but, of course, their financials aren’t public. It would be quite a coincidence if all the profitable DTC companies happened to be private and all the public ones–where you can see the data–are not.

What went wrong here? A few explanations:

First, I think it’s pretty clear that many VC-backed businesses never had product / market fit and were able to hide that for years with venture capital. If your business is able to lose money from Day 1, you don’t really know if your growth is due to overspending on marketing, unprofitably low prices, or some other implicit subsidy. Bootstrapped businesses, conversely, only survive if they are sustainably filling a customer need and have product / market fit.

Taking a step back, VC isn’t really designed for DTC-type businesses. The archetypal VC-backed business has high fixed costs and low variable costs. Think software, which costs a lot to develop, but is basically then distributed for free. It makes sense why this type of business might need a lot of capital upfront; the business can’t make money until the product is developed.

But DTC isn’t like that. Fixed costs are relatively low–upfront R&D is usually limited. What’s expensive are the variable costs, namely inventory and marketing. But in a healthy DTC business, you don’t need VC for those variable costs. They are financed by the operations of the business.

Finally, it’s pretty clear that many DTC businesses are handicapped by the return requirements of modern VC. If a DTC business raises 9 figures of VC, it basically has to be worth at least ~5x what it raised to provide later stage investors a reasonable return. But DTC is not software where fixed costs–because they are fixed–become less important with scale and variable costs stay low.

In DTC, costs usually rise as you scale. Product costs may drop a bit but acquiring the incremental customer on Facebook or Google usually rises with greater spend. But because VC investors require that businesses reach a certain scale for a viable return, the brands are forced to grow past the point of optimal profitability hoping that someone will value them on revenue.

Does this all mean that VC-backed DTC is doomed? No. Just 18 months ago many unprofitable DTC brands were trading at 5x revenue. Anything’s possible.

In this environment, though, investors are looking for consistent profitability. I don’t think many VC-backed brands will be able to get there.