Allbirds’ strong IPO suggests investors are on board with sustainable fashion

Allbirds, the eco-friendly sneaker startup, is now a publicly traded company.

This morning, the San Francisco-based company had a successful IPO, with shares selling at $15, above the expected range of $12 to $14, and soared even higher today. Allbirds, which raised nearly $303 million, now has a market value of $2.16 billion, well above its $1.7 billion valuation last year. It’s a sign that investors believe that companies with a strong focus on sustainability can still be profitable businesses that create shareholder value.

Five years ago, Allbirds launched with an unusual product: A comfy wool sneaker. The shoe, with its minimal, normcore aesthetic, became popular among the Silicon Valley crowd, and eventually developed a following around the country. From the start, the brand has focused on material innovations, developing products made from renewable substances like crab shells, eucalyptus fiber, and sugarcane. This has helped the brand stand apart from its competitors. “There’s a transformational shift happening in the industry away from plastics and synthetics toward natural and sustainable materials,” says Tim Brown, Allbirds’ cofounder and coCEO. “That R&D engine has been there from the beginning for us. We’re going to continue to invest in that because it is a key differentiator.”

Brad Brinegar, executive in residence at Duke University’s innovation and entrepreneurship initiative, believes that Allbirds’ products and emphasis on sustainability entered the market at exactly the right moment. “They created comfortable products that fit in perfectly with consumers’ desire for athleisure,” he says. “And their focus on sustainability is increasingly resonating with consumers, as we learn more about climate change. The pandemic only deepened these trends, creating a perfect storm of needing comfort and being concerned about the future of the planet.”

The company took on $202.5 million in VC funding, most recently a $100 million Series E round from Franklin Templeton Investments. It used this money to expand into the apparel category, and to grow its brick-and-mortar footprint. It now has 35 retail stores across 8 countries. “We’ve gone international very early, imagining there was a young customer in Shanghai, Glasgow, Auckland, and New York who cares deeply about the health of the environment,” Brown says.

While the company has grown quickly, it is not profitable. In 2020, it generated $219 million in net revenue, with $25.9 million in net losses, and in its investor prospectus, it says it will continue to incur losses for the foreseeable future. In this way, it’s similar to other high-growth direct-to-consumer startups that have recently gone public, including Warby Parker and Rent the Runway. For investors, it is a tricky business trying to ascertain whether a company will eventually make money, says Daniel McCarthy, assistant professor of marketing at Emory University’s Goizueta School of Business. “There’s wide variation in the underlying unit economics, even though at the time of the IPO, most of these direct-to-consumer brands are losing money,” he says.

McCarthy points out that Allbirds did not share as many financial details, such as customer acquisition costs or data about repeat customers in its SEC filings as Warby Parker did. “Companies are not required to disclose any of this data, but if these figures look good, they are much more likely to put it in,” McCarthy says. “Allbirds could be doing well, but they didn’t give us enough information to be able to say.”

From the first day of trading, it appears as if investors are banking that Allbirds will eventually turn a profit. Brinegar points out that Allbirds has similar gross margins to Sketchers and Nike. “Within the realm of apparel, those are decent economics,” he says. “If they can achieve some of the scale advantages that they claim they’ll be able to, I can certainly see a path to profitability.”

This is particularly striking because Allbirds says it is dedicated to tackling climate change by developing more sustainable materials and building an eco-friendly supply chain, both of which are costly. The company is a B Corporation, which means it is legally required to focus on the public good and share progress on its environmental goals. “Investors are betting that companies that are trying to do good, and have fundamentally decent economics, have some real growth prospects,” Brinegar says.

For investors, this focus on sustainability has both pros and cons, McCarthy says. On the one hand, it makes it harder for the brand to achieve a positive cashflow. “It could signal that they’re not 100% focused on creating value, or they’re trying to rationalize their lack of profitability by being green,” he says. On the other hand, as the world grapples with climate disaster, consumers appear to be searching for brands that are authentically committed to having a positive impact. “There are some signs that consumers do care about sustainability, signaling to investors that this could be a source of consumer demand,” McCarthy says.

From Brown’s perspective, investors are increasingly open to the idea that it is possible to have strong business fundamentals while also serving the public good. Indeed, Allbirds’ IPO coincides with the COP26 U.N. Climate Conference in which world leaders are searching for ways to reduce climate emissions while keeping their economies growing. “I don’t think there has to be a tradeoff between profitability and sustainability,” Brown says. “We set out to build a great business and make great products, knowing that, increasingly, consumers expect you to put sustainability at the center of what you do. What we’re trying to prove is that we should be treated exactly the same as any business.”