Reinventing Retail: Navigating the Minds of VC/PE Investors
Two weeks ago, I represented Ground Up Ventures at the Harvard Business School Retail and Luxury Goods Conference. Along with meeting rockstar founders of early and later stage startups, I attended the “Investor” panel to learn more about what seasoned venture capital and private equity investors are looking for and how they add value to their portfolio companies. If you are an entrepeneur thinking about the investment process or a venture capitalist who wants to better navigate the retail landscape, keep on reading for takeways from some of the brightest investors in the space.
“The foundational building block of a great long term, sustainable brand is a pretty simple equation.”
A long term, sustainable brand can be summed up into A + B = C, where A equals a great product, B equals brand and C equals consumer loyalty. Matt of Tengram Capital Partners argues that everything goes back to the consumer so it’s important to find products that can bring repeat consumer purchases. Tengram Capital often serves as the first institutional investor that helps the founder who has built a really great brand to get their business and operations up to the level of the brand.
“My primary filter when evaluating these early stage consumer companies is particularly the founder and the founder fit with the company.”
Early stage investors sometimes invest before a company is generating meaningful revenue and before there are the repeat purchases that are highly relevant to later stage investors. In the consumer space, many founders are not burdened with a lot of experience, so instead they should focus on having a crazy desire to make their vision happen and an ability to force the walls and do everything possible to accomplish their goals. A huge portion of the due diligence process is dealing with the value of the founder and seeing if they have that vision and the resilience to push the wall.
On the later stage side, Katie Harris of Carlyle explains that before they make an investment, they sit down with the management team or founder and align their growth strategy to their five year plan, the near term 100 day plan, and their long term strategy. What’s important to them is to figure out why they can be the best owners and how they are able to execute in a value creation strategy better than other potential investors. They think about how they can leverage their shared resources to improve on the founder’s existing business.
“Before we tell you how we’ve done it successfully and how we evaluate founders, we should also tell you that we are wrong 50% of the time.”
Early stage consumer investing is really hard. Adam Valkin of General Catalyst posits that investing in the space has become more difficult due to an increased competition factor and an impressive availability of capital for consumer and internet companies. There has never been a friendlier time in the history of humanity to start a company, raise venture money, and raise capital for later financing rounds. This is great because it stimulates entrepreneurship but on the flip side this also means that there are significantly more companies that actually need to be funded which leads to more competition. Several early stage companies that do have traction deal with false positives because their growth and customer acquisition cost is just not sustainable. This makes it difficult to be right in early stage consumer investing.
“Technology has entirely democratized the space. What was once clear barriers to entry and barriers to access have nearly vanished.”
The pace at which a founder can build a business is so much faster today. Katie Harris of The Carlyle Group explains that you no longer need to be a large multibillion dollar company with millions of dollars of capital allocated towards marketing. What does this mean for a private equity investor standpoint? Harris explains that the traditional profile of a good leveraged buy out includes good solid fundamentals, high cash flow, and number 1 or 2 in an industry, which are all great to have but is now difficult co come by. Instead, the shifted consumer space has forced investors to be more flexible with their capital and to recognize that these barriers are limited.
Starting a brand today is much easier today than 10–15 years ago. If you have that idea or spark, then it is much easier to access today. However, Matt Eby of Tengram Capital Partners argues that despite say rapid fundraising of 10 million, 50 million, or 100 million, there is always terminal velocity where brands can’t scale past. Even if a startup has a great marketing strategy and a great go-to-market strategy, they will hit terminal velocity if they are not developing a product that customers want to purchase again.
“I look at the market in the perspective of the consumers, so I look at the Millenials and GenZ’s motivations because they have the greatest spending power.”
Jett Fein of e.ventures echoes previous sentiments that investors will be wrong if they try to go after timed market trends in early stage consumer investing. Instead he suggests to look at the market in the perspective of the consumers. The big headline for millenials is a lack of patience because they want things now, they are impulsive, and they always look for one tap access. In their case, anything that increases speed or access is interesting and relevant. Gen Z’ers are quite different. They’ve had technology for longer and they look for social proof before they buy something. They want feedback from friends, they look at luxury as an investment, and they are value conscious and think about the second hand market.
“We don’t worry about the risk on the early stage side compared to the private equity and growth stage side.”
Seed, early stage, and later stage venture have different risk profiles. Adam of General Catalyst explains that they don’t worry about risk on the early stage side to the same degree as the private equity and growth stage side which require larger sized checks that require a greater focus on risk and downside. The way they look at early stage consumer companies requires them to believe that they are not just an incremental company that has only found better marketing or a slightly improved product. They instead look at companies that are envisioning a solution that is 10x better than all other competitors with such a vast improvement for the experience of the consumer and a founder that has the gravitas to make it happen. They think little about what can go wrong and instead focus on what can go right. So if everything goes right and the founder is even better than what they thought, they get really good fundraising, and everything they say about the brand checks out, then they argue that it could be something epic that has a huge impact on their firm and fund.
“The investor-entrepreneur relationship is similar to a marriage because you spend a lot to get to know them before and you spend a lot of time after.”
What should an entrepeneur look for in terms of who they should take on for an investor? The panelists explain that they are all acutely aware of the entrepeneur-investor relationship. At least at the early stage, they are starting out their lives at the company and they sometimes need hand holding, help hiring and getting the first few hires, maybe some guidance on sales, performance marketing, and require services that the investors can provide. Ultimately, this is a relationship business. It’s like a marriage because you’re working with the investor for the rest of your life. You want to spend the ups and the downs with them. Entrepreneurs should not only ask investors about how they can add value and support their team, but also how they have reacted when things weren’t going on as expected. Investors and entrepreneurs should be partners during the good and the bad.
Ground Up Ventures is an early-stage venture capital firm investing in pre-seed and seed stage startups in the United States and Israel. If you’re an entrepreneur, we would love to hear from you.
