By Peter Lane Taylor. Source: Forbes.
If you watch enough Shark Tank a few trends quickly emerge. None of the judges like snake oil salesmen (especially Mark Cuban). They prefer start-ups born from a personal passion. And if you say the word “retail store” you might as well just pack up your display and go home.
What these trends speak to more broadly is the modern ascent of the “digital native vertical brand”. “DNVBs”, as they often are referred to within investor circles, are the opposite of a traditional chain brick and mortar store. They tell a passionate virtual story online that brings consumers along for the ride. They speak to buyers directly through B2C marketing and social media, avoiding middlemen, distributors, and retailers who might not understand their core message.
More structurally they put culture, passion, and giving back ahead of quarterly profits and annual investor reports, which has huge appeal to Millennial consumers who value the experience of “participating” in a product more than simply the fact of owning of it.
I never really thought about what this all meant to building a business in the modern economy until I met Davis Smith, the 38-year old CEO and co-founder of outdoor apparel and equipment start-up Cotopaxi, which is fast encroaching on traditional outdoor legacy brands like L.L. Bean, Eddie Bauer, and Patagonia.
Smith grew up a natural entrepreneur. Before Cotopaxi the Wharton business school grad started (and exited) two other businesses, one of which based in Brazil raised over $40 million in start-up venture capital in 2010 and had 400 employees at its peak when Smith got out.
Smith also grew up learning early on that the world can be cruel. Smith’s dad was a Mormon missionary in Latin America after high school. He later got his engineering degree and moved his family to the Dominican Republic, eventually carting them throughout rural Central and South America in the 1980s. Davis Smith was 4 years old when his family first moved to the Caribbean. He still vividly remembers local children his age standing naked on the side of the road malnourished, begging for food.
“I’ve never forgotten that image,” Smith tells me. “I didn’t really know what the emotion was at the time but I guess in retrospect I now know that it was empathy. This was poverty at the most desperate level. Most people in America don’t even know what this looks like. That there are still places in the world where there are no safety nets at all. Where children still die because they don’t have clean water.”
After graduating from Brigham Young University and Wharton, Smith made the decision to spend his life starting businesses that give back focusing particularly on issues related to children and poverty. Except that Smith didn’t share the traditional percentage of end-of-year profits approach to corporate charity. With Cotopaxi specifically Smith set out to re-imagine with what he characterizes now as “product, design, supply chain philanthropy” as well as “structural” corporate social impact.
The New Age Of The Digitally Native Brand
That Smith chose the outdoor gear and adventure apparel space to seed his pay-it-forward, Millennial-styled corporate philosophy makes perfect sense.
Legacy outdoor brands like Patagonia and L.L. Bean were some of the first pioneers to build their companies around cause-based marketing back in the 1970s, most often championing preservation efforts related to wilderness, river, open space, and environmental protection. Broadly speaking, consumers who buy outdoor gear and apparel are also well traveled, understand the impact (good and bad) of their purchasing decisions, and love a good story.
“I was always passionate about adventure and the outdoors,” Smith says. “Growing up in Latin America on vacation we floated down the Amazon, climbed into volcanoes, and survived on spearfishing while camping on remote islands. Adventure travel and the outdoors were genetic for me. My co-founders and I ultimately realized (three years ago) that there was a need for a digitally native brand in the outdoor space that told a story, could connect with what Millennials wanted, and make technologically advanced gear and apparel that made a difference.”
Smith got a lot of no’s when he initially went out for funding. Many traditional capital sources didn’t think that a new digitally native brand could knock the outdoor industry’s brick and mortar incumbents off their perch. Others didn’t think that a brand that “helps people” instead of saving grand, iconic landscapes would resonate with anyone. A few still wondered why you needed to tell a compelling brand story at all.
Millennials, CSR, And The Future Of Business
Smith, Jacob, and Whittaker launched Cotopaxi in April 2014 with $3 million in seed funding, five backpacks for sale, and a website. They launched their first apparel collection six months later.
Key to the company’s start-up launch, Smith tells me, was buying a llama (whose wool is the primary insulator in many of Cotopaxi’s jackets) on Craigslist and taking it around to various college campuses in a trailer to promote a 24-hour adventure race sponsored by Cotopaxi called Questival that would incorporate inherent acts of kindness along the way (think the show Amazing Race meets community service).
Over 4000 students and other supporters, particularly Millennials, participated in Cotopaxi’s first Questival event in 2014. It trended nationally on Twitter. Most of the early adopting participants remain loyal Cotopaxi evangelists and continue to organize community events with Cotopaxi’s support every year including donating mosquito nets, working with food banks, and environmental preservation efforts.
“The 1980s model of corporate social responsibility was to throw some money at something at the end of the year,” Smith says. “Today for most businesses their largest market is Millennials who value experiences more than things. Your product has to tell a story that resonates . You can’t just compete on the best technical performance, or make the best backpack anymore. You have to go deeper, and make a human connection that’s meaningful.”
The New Supply Chain Philanthropy
Cotopaxi has so far managed to nail that elusive Millennial retail balance between product quality, design innovation, profit, story telling, brand loyalty, and paying it forward.
Case in point is Cotopaxi’s Kusa Collection which utilizes a natural insulating fiber from llamas raised in some of the most remote parts of the Altiplano, Bolivia’s high desert. Llama fleece is hollow, making it lightweight, self-insulating and hypoallergenic. Cotopaxi partners closely with local communities to preserve the tradition of llama farming and create pathways to market for rural smallholder farmers who would otherwise make less than $100 a year (yes that’s a year).
The other success story Smith likes to point to is the company’s Del Dia line of backpacks which are manufactured in the Philippines. In addition to fair wages and hours, the people who sew together Cotopaxi’s expedition-level backpacks are given the opportunity to participate in design process instead of simply being told what to do. So most of them add their own custom stitching, pockets, or customized design accents.
“Our customers love the creative uniqueness of each of our backpacks,” says Smith, “And the people we work with love feeling that they’re involved in creating something that becomes a personal piece of art. If you start thinking about people throughout your entire product process as a core value these are the little things that emerge that can change your company’s entire approach to design and development.”
Follow The Money
Smith’s pitch on making “gear for good” while rewarding investors still elicits shock and bewilderment in some traditional venture capital circles. Yet Cotopaxi is part of a wave of successful start-ups who are proving that fundamentally realigning the balance between profit and philanthropy can generate win-win relationships for everyone involved .
And if you trust Shark Tank’s instincts, as well as thousands of other investors, digitally native brands are going to continue to reinvent the definition of the “retail” experience for years to come.
“Eradicating poverty whether it’s in America or globally can’t happen just through government and non profits,” says Smith. “Whatever your cause it’s expected these days that you give back as a business. But using your supply chain and the products you make to affect change rather than just your profits creates a culture that transforms how we look fundamentally at how we do business.”
In addition to a $3 million in initial seed capital, Cotopaxi has closed an additional $10.5 million including an investment from Campfire Capital, which is a new venture fund established by 35 current and former Lululemon executives, including the former CEO and CFO. The round also included an investment from TOMS Social Entrepreneur Fund. Cotopaxi is also about to announce another significant investment next month.