← Coffee N° 5 with Lara Schmoisman
Coffee N° 5 with Lara Schmoisman
Raising Capital & Scaling: What Investors REALLY Look for in Beauty Brands
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- [00:00]
A
Foreign.
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B
This is Coffee Number Five. I'm your host, Lara Schmoisman. Hi, everyone. Welcome back to Coffee Number five. And today I'm talking about money, money, money, money, money. And yes, every brand out there wants money, and every brand there is thinking of someday exiting and what do I need to do to exit a company and how you make money to make more money. And then what do you need to be. Be to exit? And that's a question that I honestly don't know the answer. So I brought you someone that knows a lot more than me, and it's been in this space forever. That, and he knows what brands need and he knows he was part of incredible deals lately. So I want to welcome Ilya. How are you?
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A
I'm great, Laura. Thank you for having me.
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B
Well, I'm so happy to have you here because you can explain a lot of important things to brands, or at least I'll try. Well, let's try. Let's do it together. So I talk to a lot of brands, young brands. To me, it's a red flag at a young brand is starting to think of exiting because exiting should be a lot more down the road. But I do believe that brands need to have their books clean for some days that happen. So when is it time? First of all, I want to talk about you and how did you get to be where you are now?
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A
Sure. So I've been in this business pretty much since college, so I went to NYU and then I graduated. I worked in finance, but on the research side. And at about 2008, I wanted to make a switch to banking to be just more involved with companies, because on the research side, you kind of observe and you comment on what's going on in the industry. But I think on the banking side you just have a more active role. You actually work with CEOs, founders, you know, shareholders, to, to help them, one, bring money to execute their strategy, but two, ultimately to sell their business if that's what they want to do. So I've been doing that for quite some time and I, I do enjoy it. It is, it's never a dull moment. You have characters in this business. You have, you see really interesting ideas in this business. You see, it's a, it's a never changing category. I feel like in beauty you have to go for continuing education every six months and now maybe even at a faster pace.
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B
Yes.
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A
So, so that's, that's how I ended up in this business.
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B
And so what's your job?
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A
To put it simply, my job is to Help founders raise money if they need capital to grow their business, if they want to sell their business, help them find a home for their brand. And we work with a few strategic buyers who are looking for brands or other businesses to acquire. We help them on that front. But the bulk of what I do is help founders raise growth capital.
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B
Okay, so when is the right time? And I want to talk about. A lot of people say I'm racing, I'm racing. What means that you're racing? And they're at A round, the B round. So can we specify the different types of raising fund money?
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A
Yeah, that's, you know, it's a great question. I tend not to get caught up in the whole kind of like Alphabet soup of fundraising. You know, to me, all I know is B comes after A. So, you know, your series A will come before your series.
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B
What is serious A? What is serious B?
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A
I think it's again, B comes after A. That fundamentally that's all that means. So I think the way to think about it is as you are as you brand and then as your business evolves, you probably start out with raising money from your friends and family, maybe some angel investors. And then as your business scales up, you're ready for more institutional type investors. And that's people like earlier venture firms, maybe growth private equity firms. And then as you scale up and your business gets bigger and more profitable, you have options. You can sell your business to a strategic acquirer or you can potentially sell your business to a larger private equity player. There are pluses and minuses for each one. There are, you know, dynamics that you need to be aware of for each
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B
one, but that's a little deeper in that.
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A
You know, ultimately when you talk about selling your brand to strategic acquirer, they look for brands that they want to own for the rest of their lives. So, you know, think of they, they need to get comfortable that you have a forever brand. It also means more often than not that they will take over operations of, of your brand because they want to integrate it into their existing footprint, most likely global footprint. That's where they, you know, they can really bring synergies to the business and help it commercialize it globally. I think when you are talking about doing a deal with private equity, you know, I kind of jokingly call it, it's a marriage that's guaranteed to end a divorce. Private equity is never going to be a forever owner of your brand or forever investor, you know, and they have one agenda and that is to make money. So you, you need to make sure. That what you're trying to achieve is aligned with what they're trying to achieve and think through those dynamics.
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B
Yeah. So when is you were talking about the first round and who is an agile investor and how do you find them?
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A
It's your personal network. I sort of friends and family. I always say it's very broadly defined. If you sit next to someone at a dinner table and you've really got along with them, you should definitely, definitely follow up. When you're raising money for your brand and check in with them, it's people in your immediate network. It's asking if you talk to an investor and they say this is interesting, but not for me, always ask them to recommend three people that you should talk to who may be interested in your investment opportunity. You got to do the legwork.
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B
And what's your recommendation for someone, Friends and family? How do you is that they are lending you money or you give them shares in the company? How does it work?
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A
I think more often than not they really want to, you know, if it really is your friends and family, I think fundamentally they want you to succeed. I think whether they admit it or not, at a certain level, I think they expect to never see that money again. So if you actually help them make money, I think that's a great outcome for them. You know, more often than not it is structured as, you know, debt with some equity participation. But it's flexible. These people, this is not the crowd that's going to negotiate harsh financial terms with you. That comes further down the road when you are talking to equity establishment.
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B
And so when is that down the road? When is you're ready to raise a little more capital?
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A
I think it depends on your, you know, how fast your business is growing, how profitable it is. But you know, to give you like some parameters from the scale perspective, I think in order to be able to raise money from a private equity investor, you probably need to be doing north of 20 million, you know, and have a profitable business. But there are a lot of pieces that go into it. Your business, you know, should be growing and it should have a diversified distribution picture. You should have good unit economics. You know, profitability is important, but how do you get to profitability? Are you investing the right amount in, in marketing in order to continue to grow the business? What does your team look like? Are you, are you properly staffed for the scale and the, you know, the growth opportunity of the business? So there is no, kind of like this is not a total science. There's a, there's an art element to it. But the way to think about it, institutional investors want to see growing profitable businesses. So if you, that's, if that's your starting point, you can have that conversation.
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B
What are the most important things that an investor would look into the company. That is a must do and that you need to pay attention to. And when you're growing like you need to make sure that your books are super clean or like you said, your marketing spend is in the right place. How can we give more specific or what an investor really must see and the things that we don't want to have.
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A
I think I would start with maybe something that's maybe less finance oriented and more just business oriented. And that is what everybody, whether it's a financial investor or strategic acquirer, they want to see a product that's the differentiated and that differentiation being validated by consumer purchases. That is repeat purchase behavior. So you have something that actually addresses a problem or solves an existing problem that's not solved by any other brand and that the consumer is actually pulling your product off the shelf. Whether it's a physical shelf or a digital shelf. That's what you need to fundamentally demonstrate out of that financials kind of will fall out naturally if you have the right unit economics, that is the right cost of goods sold. You have good gross margin profile which allows you to spend money on marketing. If you have good consumer engagement and the consumer really is genuinely buying your product again and again, you're going to get marketing efficiency because once you acquire a customer, they become a repeat customer. That will help, that will help with your overall profitability.
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Yeah, your lifetime value is. It's a metric that is super important.
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Exactly, exactly. So I think all of those pieces tend to come together when you actually have a product that consumers want. So I tend to tell founders, don't get so hung up on all the financial metrics as your sole focus. Just demonstrate to investors and buyers that you have something that's unique and that's validated by consumers.
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B
You see that the landscape of the retail world is changing a lot. How do you see this affecting brands?
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A
I think it makes your distribution conversation much more challenging. I think there are increasingly fewer and fewer true brand building retail partners. I think everybody is looking to build volume but build it on a batch of brands which means it, it just, it costs more to operate in retail channels then you. When you look at the digital world, it's just as competitive. The cost of doing business across whether it's Amazon or TikTok, you know, or other digital retailers. The cost is increasing the customer acquisition cost, you know, it's, it's a competitive market. So none of it is getting easier.
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B
Yeah, I see. I mean in beauty industry, the cost of acquisition and the PPC and the CL take is costing more and more even in platforms like Amazon. So you really need to diversify.
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A
Correct, Correct. Then you need to think about, you know, your marketing approach. It's not a direct sort of, you know, just one channel specific. You may have a TikTok strategy, but your consumer may be buying the product ultimately on Amazon or they might be going into Ulta and pulling it off the shelf when they're there. So you need to think more holistically about it. But again the importance of having a product that the consumer buys again and again becomes more and more critical in with this dynamic.
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B
Yes. But also is brand awareness. It got so much harder because you need to find your consumer need to find it. And for a brand that starts it's getting harder and harder.
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It is. And the attention span is getting shorter and shorter.
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B
Yes. And also is all about social proof. Is that something that you are keeping in consideration of a deal you have because social became so important?
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A
Of course, you know, your social engagement is definitely stats that we look at. But again, ultimately it all has to kind of trickle down to your sales number and how much of your sales are coming from repeat purchases.
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B
Yeah, but did you see that? Because also the all these years that you've been doing this business, you see so many transformations in the economy. How is this affecting the brand now? They had to put so much into, into social media, giving products away. People actually, I mean as a brand I see it all the time in marketing that how much product you need to give away for marketing purposes.
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A
Yeah. And it's again, it is getting more and more competitive. I believe there are too many brands out there which drives the cost of acquiring a customer. Again, it becomes more and more critical to have a product that's not a me too product that's truly differentiated and is and is truly solving a problem.
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B
But you're a true believer that this is a problem solution market.
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A
It's a problem. It's a. You know, in the old ways we kind of used to say, you know, product market fit. It's you, you need, you need to solve a problem or you need to generate on a consistent basis some sort of emotional connection with the consumer on a sustained basis. You know, you look at fragrances, fragrances don't solve any problems. They solve emotional problems. But it's not like clinical skin care. But if you can demonstrate sustained engagement with the consumer through how you formulate your fragrances, how you talk to the consumer about the brand and have that emotional connection, there's tremendous brand loyalty with certain fragrance brands. So it's. It's not just efficacy, but, but it, it's sustained consumer engagement is what brand really needs to. To demonstrate, whether it's through unique formulas in skincare, hair care, or through consumer engagement and, you know, other factors in your product and categories like fragrances.
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B
Yeah. So fragrances right now are hot. Are super, super hot. How is this affecting the investment? Do you think that their money is diversifying into fragrance and they're going to be more investment into fragrance in the next couple of years or it's coming from a different places?
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A
No, we definitely seen more money come into the fragrance category. I think, you know, we do need to see some strategic exits in fragrances, you know, to validate all the investment that has been made. But for sure, and to a certain extent, you know, financial investors do tend to get behind categories that have momentum, particularly growth investors. So, you know, there's been tremendous increase in the category from, you know, new consumer categories coming into fragrances. So I think the. From the demand side, the market has expanded significantly, which in return drives investment dollars into the category. But all of that will need to be validated by exits.
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B
Yeah. So when you talk about strategic exit, what does it mean?
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A
It means that fundamentally your brand finds a home within a portfolio of one of the large strategics, whether it's l', Oreal, Unilever, Estee Lauder, where the brand ultimately, you know, lives forever within one of their portfolios.
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B
Okay, I want to know the Niti Gritty. So how, when you are there and say, okay, this. Let's say I have a brand and I want to exit, what do you evaluate first? If I'm ready to exit and then how you start shopping around, it's because you understand what other these big ones are looking for, or there's an ingredient they're missing, or what is what you keep in consideration.
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A
It's a variety of factors. One, obviously, we always monitor the portfolios of large strategics, and you see where kind of like the white space is relative to where their distribution presence is, where their category presence is. Obviously, we always have ongoing dialogue with larger strategics, so we have a sense for what they're interested in. And the last piece, there's always defensive M and A. There's some strategics that have, you know, internal problems, whether it's from the growth perspective or profitability perspective, one of the ways to solve that problem is through an acquisition. And so you figure out who whatever brand you're working with, you know, who the relevant buyers could be for that brand. And then you start to have conversations.
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B
Do you think that main ingredients are a factor in. Because there are so many brands that I see out there, they have the same ingredient basically.
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Yeah.
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And they are buying because of the brand name or they're buying many times because they are missing that in their portfolio.
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I think strategics very much look at buying brands from the, you know, this is going to be forever brand in my portfolio perspective. So I think they ultimately need to get comfortable that the DNA of the brand, you know, is there to for it to last a long time. They need to be, you know, again consumer engagement with a product could be ingredients that other people use that that's totally fine. But are you doing something that's different from everybody else to engage that consumer and get them back. And then they look at the distribution footprint to see, you know, where can they actually grow the brand relative to where you are.
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B
I have a question because I came across some successful Amazon first brands.
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A
Yeah.
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And how do those play in the market of exiting? They will be considered same as any other brand.
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No, I think you need to demonstrate some diversity in your distribution. I think when strategics look at a brand they want to see that the brand is working in more than one channel. So I think an Amazon only brand from most strategics will be difficult to acquire because they want to see traction at, you know, more traditional retail. You know, oftentimes they want to see proof point in, you know, at least one international market if their thesis is to expand the brand internationally. So I think a lot of Amazon brands are great businesses for founders. They're not necessarily great candidates to, you know, for sale to strategic.
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B
But now brands are changing and scaling. Maybe some TikTok shop. How that affects a brand as a channel, how investors see that and it's as a sustainable channel?
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A
Well, it all depends how you're driving that channel. Are you cannibalizing dollars on TikTok that otherwise you would have received at retail or on Amazon? Or is this truly an incremental channel and are you driving kind of one off purchases because of discounting on TikTok shop?
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That's a problem. It's discounting and is at the same time then you need to give commissions. So the correct there is really brand is brand for brand awareness or you're doing it for Making money.
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A
Well, ideally you're doing it for both and that's what you as a brand have to demonstrate to any buyer. That may look, it may be that you're acquiring a customer through a discount on TikTok shop, but because your product is so great and you're able to capture that customer through your marketing, through other activations and get a repeat purchase through all of those dynamics, could be again on TikTok, could be on Amazon, could be when they walk in through a retail store. That's what you need to.
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B
That's basically what we call the halo effect. Because now also with AI, it's getting harder to see where the consumer comes from. But also because the journey had changed so much. They can find social media, but now we have one more level of validation. People will go and validate you on Amazon because of reviews. Now they can ask AI to validate you.
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A
Yeah, exactly, exactly. So it's just again, the complexity is only increasing. None of it is getting easier.
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B
So how important do you think, because I see that all the time, that smaller brands that they really want to scale, they have two issues. They are not putting money marketing, enough money marketing and they are thinking that the biggest chance is to be picked up by retail for Sephora or someone to fall in love with the brand, which we think we know that is not very usual or that it will happen, that we're going to come to a brand that has no sales and say, yes, I want it in my, in my stores.
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A
Yeah, I think, look, the advice that we often give to brands is it's not getting into pick your retailer Sephora, Alto, Target, the success release measure by staying at those retailers. So I think you need to be realistic of what the cost is going to be of doing business in those retailers. And do you have enough awareness for your brand to justify being in those retail doors? That is, is there going to be enough traffic going to your shelf at, you know, at those retailers? And in certain instances the answer is, you know, they're ready and there's enough awareness and they have financial backing to support that. And in certain instances, you know, they probably should say no. You know, getting old door Sephora is great for the ego. It may actually destroy your business totally.
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B
People don't realize the cost of being at Sephora.
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A
I think the cost is high. But at the same time, I think, you know, brands who want to grow digitally I think should also understand and look at the economics of just growing digitally and make sure you're not just spending dollars to acquire a Customer. That's one and done. Absolutely. So the good news on digital, you can test and you get real time results. You can't really test the Sephora launch.
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B
Yes. Well, and digital. So you get a lot of data about your consumer.
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A
Exactly.
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B
And you get a lot of feedback from your consumer.
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A
Exactly.
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B
And that's to me, for a young brand is super important to get feedback. And see, I always give this example. I had one client that their new product had a strong fragrance.
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A
Yeah.
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B
And for the founder, she didn't feel like it was strong.
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A
Yeah.
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B
But the consumer was speaking about it and even return it because of this, the fragrance.
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A
Right.
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It's something that if we address from the narrative and we just start talking about the fragrance, there are no surprises.
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A
Yeah. I think digital definitely allows you to work out a lot of the kinks. I think it also allows you to, as you said, to truly understand who your customer is, which I think ultimately informs who your retail partner should be. Sometimes, you know, you have a view of who you want to be a retail partner down the road, but if your customer profile doesn't fit that retailer, that really doesn't make sense. And I think it also helps with your conversation with retailers about who you're going to bring to their store. If you have an audience that they desire, I think you can, you know, you can negotiate better economics and you know, some favorable co op spending things. If you have a handle on how you are adding value to the retailer, just think you're coming at it from a much stronger position when you're talking to retailers. So digital definitely allows you to learn that.
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B
Yeah. So what are the three things that the brand should never do?
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A
That's an interesting one. A brand should never spend money where they don't understand what the returns on that are going to be.
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B
Okay.
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A
I think the brand should never go into a distribution channel where they are not ready to do business in. Not just to launch, but to do business for, you know, two, three years. They don't truly understand economics of that.
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B
That's a good one. Because also you never should do business where you don't belong to get too desperate. That puts your brand in a place that it doesn't belong.
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A
Exactly, exactly. And the last one, honestly, I'll say I think the brand should never launch products because either retail tells you to launch a product or because everybody else is launching a product. I think you need to launch products that are relevant for your brand and for the, and for your consumer. I think when you're too, when you, when you do things that are too calculated. I think the consumer can tell, and it. It rarely works out.
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B
Yeah, sounds great. Okay, I have one more question for you. How do you drink your coffee? I know that one, but let's share with people.
- [27:35]
A
Black, no sugar, no milk, no nothing.
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B
Just work.
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A
Just like every morning.
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B
Yes. Thank you so much for being here.
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A
Thank you, Lara. I love this.
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B
Okay. And to you guys, thank you so much for being here one more time. And I will see you next week with more coffee number five. Find everything you need at larashmoisman.com or in the episode notes right below. Don't forget to subscribe. Was so good to have you here today. See you next time. Catch you on the flip side. Ciao. Ciao.