Dear VCs, I Hope You Learned An Honest Lesson: Domain Expertise Of Founders Matters For Consumer Product Brands
Honest intentions can be thwarted without industry knowledge and experience especially in the case of a self-proclaimed natural and honest brand. Honest Co. has been completely dishonest about its “natural” detergent. Jessica Alba identifies SLS as a toxin in her book “The Honest Life.” Yet SLS is in fact an ingredient in Honest Co.’s laundry detergent despite the fact that the company’s website provides an “Honestly Free Guarantee” that it’s “made without: SLS.” This is the second time that Honest Co. has come under fire for its products. Frankly, I’m not surprised by these recent debacles at Honest Co. since neither of its founders are CPG experts and outsourced its product development to Earth Friendly. When I think about my struggle with fundraising and the read about Honest Co. being dishonest, I feel like I’ve died and gone to hell — at least professionally as a founder.
For a long time, VCs have been investing massive amounts of capital in founders without any kind of CPG (Consumer Product Goods) knowledge for all the wrong reasons. Because of their complete disregard for CPG/beauty/grooming industry knowledge and experience, they end up enabling ill-equipped founders to the detriment of other more suitable founders. These VCs wrongly believe that domain expertise can be outsourced and customer acquisition and subscription models are most important. (Nevermind that subscriptions are not novel since any company can do one. Long before Dollar Shave Club, Amazon and ZIRH had subscription offerings.)
Just as product managers leave Facebook, Apple, Google and Microsoft to start innovative startups like Instagram, the same phenomenon happens at behemoth consumer companies such as L’Oreal, Starbucks, and Kraft. The only difference is that the domain expertise of these entrepreneurs with a strong consumer background isn’t valued or understood by VCs and angels, and entrepreneurship isn’t really encouraged in the incumbent consumer world. (Although New York is the beauty, fashion, and consumer goods capital of the world, industry support networks and legit Y Combinator-caliber accelerators don’t really exist at the seed stage here.)
The inclusive culture of money
The advent of ecommerce and social media leveled the playing field for entrepreneurs by enabling startups to bypass Goliath retailers and sell directly to consumers without spending hundreds of millions of dollars in traditional TV and print ads. Although ecommerce leveled the playing field for entrepreneurs, seed stage VCs and angels have unleveled the playing field with their obvious funding biases.
Without question, there is a startup bias that favors founders from tech companies, even when they don’t have a solid tech background. Apparently, someone with business development experience from Foursquare can get venture funding to launch a personal care consumer brand easier than Jane Park, a former marketing executive from Starbucks who is the founder of Julep.
This bias for tech founders makes sense, since many investors come from the tech world and know and respect its leaders. However, this bias doesn’t make sense for a consumer-facing ecommerce company, especially one with physical (especially topical) products, since domain understanding — specifically understanding of brand, product, and retail, as well as industry relationships — are necessary for the proper execution of this type of business.
In the case of the beauty and grooming startups that have gotten early stage venture funding, the vast majority got funding without traction, domain experience or even domain understanding. It really infuriates me that the VCs who backed those founders did so on complete blind faith since they didn’t know how those founders would perform as first-time founders in a new industry. Meanwhile, they tell founders with domain expertise and even prior industry success to show substantial traction for funding consideration. Either everyone should prove traction — or just the founders without domain expertise or a prior track record of success in the industry. There is no fairness in early stage venture funding.
The access to money is skewed. A former VC or Entrepreneur-in-Residence from a VC fund with no traction, no domain expertise — or even understanding — of consumer brand building and product creation have carte blanche even if they are first-time founders. Funding is the least of their worries — pre-revenue, pre-launch, pre-business plan even. They can easily launch a CPG brand without a single product prototype or an iota of real traction.
The initial barrier to entry in a consumer product startup is relatively cost-prohibitive. Costs for building prototypes, production runs, stability testing, claims testing, insurance, trademarks, and legal fees quickly add up. Unless a founder has significant savings from a prior career in banking, a network of rich friends, a trust fund or a wealthy spouse, it’s really hard to bootstrap a consumer products company without going broke.
Great new American consumer brands are a rare breed
Historically, the US has been great at creating iconic, global consumer brands across categories. People all over the world have fond memories of their first pair of NIKE shoes or their first Apple product. These brands deliver more than just great products, they mean something. In the last seven years, I’ve noticed a fewer number of successful American brands emerge despite the increased volume of venture-backed ones launched online.
Among new consumer brands that have launched recently, there are only a few that are primed to be global leaders and even US market leaders: Bark Box, Spanx, and Happy Family. Happy Family, an organic baby, toddler and children’s food, is poised to be the next Gerber.
In a series of very candid articles titled Fundraising Saga of a Desperate Entrepreneur in Inc. Magazine, Shazi said,
“Of course, the process would have gone a lot faster if we had been able to leverage a VC relationship. Even as our business started to boom, there was an evening when I got to the subway with nothing in my wallet but maxed out credit cards and no way to pay for my ride home.”
I’ve been in this situation as I was building my company, HELIX. Most entrepreneurs would’ve given up at this point. Shazi didn’t. Happy Family’s revenue nearly quadrupled in two years to $64 million as of February 2013, and it was acquired by Danone because of its rapid growth and innovative products.
Great new American brands such as Happy Family are a rare breed, and they didn’t have VC funding early on. Seed stage investors should learn to recognize true talent of founders like Shazi sooner. Such founders are true innovators, not opportunists. They didn’t start their companies because they knew that they could raise money. They are innovative, passionate and deeply invested in their companies.
The current system of funding isn’t working — American innovation is being hampered
While some older existing brands struggle to understand how to adapt and are late to adopt ecommerce and social media, many new brands that launch online think that they can build a brand and product after launching and just spend money to acquire customers. Many outsource branding and product development, because they don’t know how to do it. (For example, Dollar Shave Club resells Dorco blades.)
The net effect is that these startups are not special brands and they do not have special products. In the same way you cannot fly a plane that hasn’t been built first, you cannot launch a brand without building it first — even with massive amounts of VC funding.
For a consumer product business, the focus should be product and brand first, not customer acquisition
Investors are used to valuing companies with traditional metrics like customer acquisition cost and lifetime value, but do VCs know how to really measure and value a brand? Bonobos’s Nordstrom partnership deal “helped with the biggest problem modern ecommerce companies are having: Customer acquisition costs. Nordstrom effectively gave Bonobos an acquisition channel that it also gets paid for. “ Despite that, getting a purchase order or an exclusive in-store national distribution deal, which would help scale a business, may not be enough “traction” for a new brand seeking seed funding from VCs. (At least that was the feedback I was got… Despite being head of product and marketing for ZIRH, which was a 7-person global skincare and grooming brand, before its acquisition by P&G in ’09, having won multiple product awards, having worked at several of the top beauty and grooming companies in the world, having an all-star team, having a vertically integrated business without any agencies or middlemen involved, having prototypes with proprietary design and formulas for my startup grooming brand HELIX, a getting a purchase order for HELIX from a major retailer, VCs didn’t care. They told me I needed traction, but they invested in male founders of Harry’s, Dollar Shave Club and Bevel who didn’t have an iota of domain expertise in grooming or traction pre-launch.)
VCs often fail to consider the power and soul of a well-built brand. When Steve Jobs died, many people all over the world who didn’t know him, including me, cried. I normally don’t care about celebrities, but Steve Jobs inspired me. I admired him as a marketer, brand builder and an entrepreneur. He built one of the greatest American global brands of the decade. An iconic global brand that inspires us to “think different.”
Sure, Apple sells great tech products, but it is a brand that has brilliant marketing and design. It’s an edgy brand with global appeal. There aren’t a lot of great new American brands like that anymore. Before helping create Apple commercials, he helped build and market products — great products. Steve Jobs was a brilliant marketer and innovator, not a customer acquisition guy.