Loading summary
Transcript121 lines
- [00:00]
Mike Gelb
Let's start from the very, very beginning of your career. Why did you end up investing in beauty and personal care and what about those categories did you find attractive?
- [00:07]
Rich Gersten
I invested in a natural and organic personal care business called Avalon Natural Products and it was the first investment I made in the beauty space and so
- [00:14]
Mike Gelb
I stumbled into it five years ago. You wouldn't have actually invested a brand if it wasn't. We didn't have retail partner. But that is something that I guess
- [00:21]
Rich Gersten
has changed for a consumer and this is a consumer driven economy at the end of the day.
- [00:26]
Mike Gelb
Yeah. Will you get like 100x return in beauty? Like that's really hard to achieve.
- [00:29]
Rich Gersten
Most brands don't scale from zero to one and plus in three years is unlike anything I've honestly seen before in my career.
- [00:43]
Mike Gelb
Hey, I'm Mike Gelb and this is Consumer VC where we break down what it takes to invest in and build scalable consumer brands and technology companies. If you're enjoying the show, hit that subscribe button on your favorite platform. Sign up to my newsletter@the consumerbc.com if you subscribe, you'll get a weekly roundup of the latest fundraises, product launches and and news all around the world of emerging consumers. And you'll also be the first to know when new episodes of this podcast drop. So what's not to like? Hit that subscribe button. Go to the consumerbc.com, subscribe. Hopefully you will not be disappointed. And please know that when you do subscribe, you're helping us make more of this content. Our guest today is Rich Gersten who is the co founder of True Beauty Ventures. True Beauty Ventures is a beauty and wellness dedicated emerging growth fund that was created to provide not just capital to independent brands space but also true partnership and sector expertise. Some of their early investments include K18, Crown Affair and Vacation. As you can tell by the name of Rich's fund, True Beauty Ventures. In this episode we focus on investing in emerging beauty and personal care companies. We discuss what made beauty and personal care attractive for Rich as categories in the first place, why he wanted to invest at the early stages and why he wanted to invest and partner with the other co founder of True Beauty Ventures, Christina Nunez. We get into a bit of the nitty gritty how he thinks about initial investment sizes versus how much to actually have on reserves for pro rata and fund performance expectations when investing in this sector and much much much more. If you really want to learn about investing in beauty and personal care and want to learn about the numbers and Some of the nitty gritties. This is a great episode for you. I really enjoyed chatting with Rich. But before we get into it, I want to share more information about our episode sponsor, Flips. Flips is an AI powered end to end deductions management service that's focused on recovering revenue from Kahi, Unfi, Amazon and consumer brands. They centralize deductions with backups. They fully handle disputing on your behalf, the brand's behalf, and they streamline the accounting process. They work with 100 plus brands, including Pure Hydration, Little Bucks, and much, much, much more. If you have a brand and would like to learn more about how they can help you fight deductions in retail, go to try glimpse.com without further ado, here's Rich. Rich, thank you so much for joining me here today. How are you?
- [03:06]
Rich Gersten
I'm good, Mike, Long time no speak and glad we could get a schedule.
- [03:09]
Mike Gelb
I know, so, so glad we got it scheduled and I'm so happy to finally have you on the show. That was completely my bad. So really excited to have you on this G be so much, so much, so much fun. Let's start from the very, very beginning of your career. Why did you end up investing in beauty and personal care and what about those categories did you find attractive?
- [03:28]
Rich Gersten
Yeah, I think like, like most things is a little bit of luck and fortune, probably more than misfortune that go into it. But I 20, it was like 22 years ago. I was working for a consumer sector focused fund called North Castle Partners and I invested in a natural and organic personal care business called Avalon Natural Products. And it had two brands, Avalon Organics and Alba Botanica. They were sold in health food stores and it was the first investment I made in the beauty space. And it wasn't that I was focused on it, it just was circumstantial. Two years later I made investment in skincare brand called DDF while I was also at North Castle. And two years after that I made a third investment in a beauty business called Glow Minerals also while I was at North Castle. And at that point in time was back in like 2005, 2006 really at the direction of the founder of North Castle. I started spending 50% of my time just focused on the beauty and personal care space. So the idea of focus is the benefit of focus is the cumulative knowledge and network you build in that focus area and the more time you spend in it, the more valuable that asset becomes. And so I stumbled into it. I was pretty good at it, I enjoyed it and it was enough to keep me busy. So by the end of my traditional private equity career at Tangram Capital partners, it was 100% focus of mine. No one told me to do it. I self mandated that even though my focus was broader, but that's all I did. And what I learned along the way to answer your question, was beauty. The beauty industry has some incredibly interesting characteristics that I think differentiate it from other consumer categories. Number one, it's an incredibly fragmented industry and India brands have consistently taken share from large legacy brands since the day I started investing in it over 20 years ago. It also has a margin profile from a profitability perspective and capital requirements less than other so margins higher, capital requirements less, not highly regulated depending on your categories and a very active exit market in part because the indie brands take share from the legacy brands that large legacy players tend to acquire the indie brands in order to support the growth that they're seeking. And so it has a very interesting dynamic. Lastly, what I'll say is the valuation multiples in beauty tend to be higher than other consumer categories, which means I have to grow sales and profitability less than other consumer categories to generate the same amount of enterprise. You get a multiplier effect in this category that's generally larger than other consumer categories, which effectively makes the value creation playbook somewhat easier. Not that it's easy, don't get me wrong, but the beauty and peripheral care sector has so many incredibly unique characteristics that I really didn't appreciate till I was kind of into it and then focusing on it. But I'm very glad I did.
- [06:13]
Mike Gelb
So was it because of those characteristics? That is what kind of actually got you interested into that actually kept you in and, and that's why you said okay, I'm going to focus here and, and not focus on the other and the other parts of them.
- [06:25]
Rich Gersten
I'll tell you the other thing I noticed that again is different than other consumer categories is I, I don't know too many of any other consumer categories that have what I would call a thriving healthy specialty retail business. Right. Most don't. I mean sporting goods has been dominated by Amazon and probably Walmart at this point. Although you see specialty sporting goods players, bookstores, we know what happened to them at the end of the day. But beauty has this thing called Sephora and Ulta on the specialty side which has really hurt the department stores, helped drive overall growth in the business. And our fund is very focused on omnichannel distribution and Beauty remains a very experiential, impulsive category in some respects. From a purchase behavior point of view. And so we love that it has strong DTC economics for all the reasons I talked about about the margin profiles. It has a healthy specialty retail channel as a very emerging Amazon presence and even Target and Walmart are major players on the mass side. So you do have a very interesting category in terms of being able to grow it omnichannel profitably.
- [07:25]
Mike Gelb
No, that makes, that's, that's also really, really interesting about how you about the, the, the retail and, and distribution piece where you have Sephora and Ulta, which I definitely want to come back to. But tell me a little bit, a little bit about why you decided to go a bit downstream or rather upstream I guess. I guess it's actually going upstream since you're, since you're, since you're going earlier.
- [07:46]
Rich Gersten
But why up or down? Because I'm crazy and I want it to be entrepreneurial. No, I think it starts with the decision to bet on yourself. Right. And so I was at a point in my career where I wanted to bet on myself and exploit the unique subject matter expertise that have been built over 20 plus years. I have a co founder, Christina Nunez who's been on your podcast and has weighed in on her thoughts and she and I work together, amazing co founders and partners and so I asked her to do.
- [08:15]
Mike Gelb
Why Christina? Why, why Christina?
- [08:17]
Rich Gersten
From the beginning, very important to do it with someone you know.
- [08:21]
Mike Gelb
Right.
- [08:21]
Rich Gersten
Don't take a bet on any strip.
- [08:22]
Mike Gelb
How did you meet Christina?
- [08:23]
Rich Gersten
Christina worked with me at Cater to. I was a partner, she was an associate. Yeah, I love the fact that we started our relationship as partner and associate and now we're co, founder and equal partners in every respect. And I'm proud of that for her and for me quite frankly. So that's been great. The reality is once I started spending all this time just focused on beauty, I would meet with any founder that I thought was interesting that was willing to meet with me. And I found myself meeting with many founders whose brands have subsequently gone on to sell for hundreds of millions of dollars that I am sure I probably could have wedged my way onto their cap tables at that stage if I could write a check less than $5 million. And the reality is most smart money institutional funds at minimum check sizes that don't allow them to play at this stage. And you have to size your fund to your strategy. And we'll get into that in a little bit. But like I just saw white space, like it's hard competing in the 25 million and above equity check against all the consumer funds that know beauty well and have a great track record in beauty. I'd rather play before they're able to play. And I can get into some of the brands that I think are most interesting before there's very much competition at all. And so I sought personally because I was unable to action interesting opportunities and I wanted to create a strategy that would allow us to execute them. I knew they'd be there.
- [09:39]
Mike Gelb
Obviously you come from a, a finance PE background. What do you mean? What made you confident that you can add value as an early stage investor in beauty?
- [09:50]
Rich Gersten
Yeah, I mean, I think as a traditional private equity investor you find ways to add value even if you're not an operator. Right. I mean, I think there's a skill set of investing that's more than just finance and private equity. I think just investing is a discipline and a skill set that makes you learn lots of different things around how a business operates and runs, that you can be a good partner. I think for us, you know, again, part of why Christina, Christina spent half her career in beauty operating roles in smaller brands. I think that was a very important part of our story in terms of our ability to have empathy with the founders and to actually understand what they were going through so that we could help. The other thing we decided to do, which I'm incredibly proud of and we're continuing to expand and build upon it, is, you know, when we were fundraising we often got asked, what do you, what's your biggest concern? And my biggest concern was we can't clone Christina and I. And we're, we're very in demand from our founders and how do we create a platform that can scale as the portfolio scales? And we, and we noticed some common pain points that our brands were having that we were spending time on.
- [10:47]
Mike Gelb
Right.
- [10:48]
Rich Gersten
One of them was how do I win at Sephora? I've launched in Sephora. I need to be successful at Sephora. This investment will be a failure and my business will be a failure. So the first partnership we struck was with a consulting firm called View from 32. There are three former Sephora merchants that are effectively are compensated by us by retainer and Carrie and they're available to our funds to help them on all things Sephora related and even brand and product positioning related. The second one was hr. One of the common themes in private equity that's equally as applicable in VC is I need to have the right team to be able to execute the strategy that we all think is, is feasible. And so we partnered with a woman who'd spent her career in human resources and beauty. And she now works across our entire portfolio into the same arrangement to help our brands in those areas. The most recent one we added was Amazon. Amazon's becoming increasingly more important to all of our brands, as you can imagine. And so we brought that resource onto the platform and we're trying to finalize one now on ops and supply chain. And so the way we can add value isn't necessarily just through our own experience, although that is very valuable because the pattern recognition is quite significant in terms of what mistakes are made and what strategies tend to work. But we had to augment our own capabilities with the ones that our brands are asking for help on the most. And so that's what we've done. And I think if you're a large fund, that's probably normal for a fund our size. At our stage, that's probably not that normal, but we think it's really important to our strategy.
- [12:09]
Mike Gelb
What were some of the biggest differences, though? I appreciate that in terms of the overall platform that you built and in terms of how you and, and how you think about helping your portfolio companies, what were some of the biggest challenges or differences going from traditional, more so private equity or growth equity to actually transitioning more so to the, to the Earl, to the early stage is.
- [12:30]
Rich Gersten
Yeah, I think having a real appreciation for how a brand operates with such limited human and capital resources. Anyway, at the end of the day, in my private equity days, I would tell the executive team we would put together that they're going to do an five years what another company would do in 10 years and we're going to have all the resources available to execute that time, it's still very important to our stage. Even more important potentially. But the fact that there's less talent and less capital availability because the businesses generally aren't profitable or aren't cash flowing. It's a challenge like how do you build a business capital efficiently with limited human resources and limited capital resources? So I think that resource strain clearly is different. Definitely data accuracy and credibility, obviously outsourced finance and accounting functions, less sophisticated reporting. We actually try to implement some of that, try to create dashboards, but there's, there's less information generally available to both manage the portfolio, but to make an investment decision as well. It's a lot more gut here than, than data driven at this stage of the market. And then how we leverage our time. The way I just said before, like we were, we were getting pulled in lots of different directions from our, from our brands and founders and wanted to make sure we had the resources to be able to deliver on the promise.
- [13:47]
Mike Gelb
How is that transition for you going from more data driven to gut since you obviously are at the earlier stages or not nearly as. As. As much data as you obviously would like to be.
- [13:56]
Rich Gersten
I mean, Mike, I would tell you we're five years into this and our strategy evolves every. Every day. You know, we learn a ton. I mean, we have a 21 rand living lab that informs us every day about what should we do, what we should be doing, what we shouldn't be doing. We've made some mistakes. We've had great success. So I think we're. We've created a big postmortem culture. What's working, what's not working? Let's talk about it. What's without our strategy is. Has failed us. What's worked. So I think there's lots of interesting learnings and we're evolving all the time. And so one of those learnings was trust your gut. More like don't pass on if your gut's strong. That probably counts more than any data at this end of the market. The spreads are just too young and nascent to actually have data matter other than gross margin profile. That's a data point that's very important for us.
- [14:44]
Mike Gelb
So you raised fund one. I think that you set out to raise 35 million, but you oversubscribed at 42 million in 2021. What was. What was the. The overall strategy in terms of deployment for that fund?
- [15:00]
Rich Gersten
Yeah, I think the number was 30 million. It was 30 million.
- [15:03]
Mike Gelb
Oh, excuse me.
- [15:04]
Rich Gersten
Okay. It was picked out of a hat. There was no rhyme or reason to 30 million. All we knew is it had to be a small fund in order to write small checks and have them be meaningful. Going to the point we talked about before, also wanted to try and make sure we could raise it. So too big a number could have been a failure for us. This is the type of strategy that's perceived by many, I think incorrectly, but I understand why is very niche and you know, it's overly super sector specialized. This isn't consumer. It's a beauty and wellness. So it's a subsector of consumer. And we picked 30 million because we figured that would be enough to get us started to prove that this strategy made sense. Thankfully, I've had lots of friends in my life that have been very successful who are willing to support us in that fundraise. I had a couple of institutional relationships that ended up being our larger investors in fund one. And so 12 months later we had a final close at $42 million. And it was a wonderful thing to be oversubscribed or above our target because I didn't know how it would pan out, to be honest. And we told people that the fund would have 12 to 14 investments. Again, number made up a little bit out of a hat. It was a guess because we hadn't started yet. The fund ended up with 13. So I guess we're, we're good speculators obviously in terms of how that worked out. And we invested it, you know, pretty much over three plus years and then went out to raise a second fund. But it was, it was, it was specifically sized to be able to make small checks be meaningful. And I think if we're going to continue the strategy that we're embarked on, we always have to have relatively smaller funds.
- [16:42]
Mike Gelb
So 13 investments. What was the typical, I would say amount per event, per investment that you did and in, and what kind of traction or metrics did, did the company need to have in order for you all to be interested? I know that also at the same time, early stage, it's tough because obviously it's gut. So maybe this varies quite a bit. But, but, but, but how did you all think about it?
- [17:03]
Rich Gersten
Yeah, well, I think the first investment we made was in a hair care brand called K18. And we invested three different, not that,
- [17:10]
Mike Gelb
not a bad first, not a bad first investment.
- [17:12]
Rich Gersten
We invested three different sub. Well, so when we started, this is what, this is what we told again, I think we, we're, we've done exactly as, as much as I said, the strategy is evolving over time. We have done exactly what we said,
- [17:24]
Mike Gelb
what you said you're going to do
- [17:25]
Rich Gersten
from the beginning, which I'm quite proud of. But one of the things you asked me, what is the big difference, what are the big differences between early stage investing and what I used to do and what I used to do? You know which ones needed more money? Only your losers, only your losers needed more money. Your winners didn't. And what I used to do, you had big investments and small investments and you know which ones mattered more to the fund outcome, the big investing investments, period. It's like, so if you had a big investment that went bad, it got bigger and it was really bad for the fund. Right? And so that, that's a big difference because when you get in early, of course your losers are going to need more money because the losers need more money regardless of the stage you're investing in. But your good Ones need more money. And what we've tried to do is execute a strategy because we know we're going to lose money on some. Actually, we told investors one out of every four deals we do, we think we'll lose money. We'll see. It's really to determine whether we were right or wrong on that. But that was our, that's what we said to people. And so when we go into an investment, we try to roughly weight each one equally so that at the initial point of investment, not one matters more to the fund outcome than the other because that's when they're most risky. Before you actually know what you've invested in. Then when we're in it and we've developed that relationship with the founder and we've in some cases, like a K18, developed an even stronger conviction in the opportunity that when those opportunities present themselves to invest more money, we want to back up the truck on those types of investments. And so K18 represented 10% of the total fund in fund one, we invested three different times and when it was sold to Unilever, we returned 80% of CALD Capital at the time we sold it. So almost returned the fund in three and a half years, which for a 2020 vintage fund is an incredible DPI to have because we backed up the truck and invested two more times. That's what allowed us to return that amount of dollars. First investment was the best return. Second and third investments were also very good. Overall investment, really good. When you actually step back and you look at all the brands we've invested in across our two funds, two investments represent 30% of our total invested capital over 21 brands. So you want to talk about executing a backup the truck strategy. And those two brands are Vacation and Crown Affair. And so when we're in something and we have a really strong conviction in it, we will invest at every opportunity we can and try to increase our ownership percentage over time.
- [19:54]
Mike Gelb
This episode is brought to you by Glimpse. Glimpse is an AI powered end to end deductions management service that's focused on recovering revenue from Khe, Unfi, Amazon and Target. For consumer brands, they centralize deductions with backups. They fully handle disputing on your behalf, the brand's behalf and streamline the accounting process. For more information, check out try glimpse.com and let them know that Mike sent you. But is that, is that also tricky? Because for all the, for all the, for all the companies that you maybe don't exercise your pro rata rights, right, that you don't think Maybe they're, they're not winners, they're maybe losers, even though I don't love, love any, any company losers. But, but, but, yeah, but it signals, it has a very negative signal to the marketing and can really hurt them because obviously you're the investors in, in the company, you know the most about information in the company itself. How do you kind of reconcile with that?
- [20:50]
Rich Gersten
Yeah, I've, I've thought obviously a lot about that. You have to, you have to remember we're not control investors. The founder is going to decide who they want to invest and some founders will spe that may choose to still partner with us or may limit us to our pro rata rights. That's happened before. Right. And so it ultimately comes down to the part the founder TBV partnership. Right. Because if that founder is looking for a different capability or skill set, wants to bring another partner onto the cap table, wants to diversify the composition of the board, that's fine. That's okay by us. We prefer in those situations where we have a really strong conviction at doing it ourselves, but ultimately the founder is going to decide it. Even when we led the series B in Vacation and in Crown Affair, Silas Capital still participated in the Series B alongside us, they were the series A lead. And on Crown Affair, existing cap table investors also in some cases increase their pro rata rights. And so we're not, we're not typically doing these things alone because our funds are not sized enough to do them alone. But the point of the story is we want to put as much money as we can that the founder is willing to let us put it into those types of situations. And quite frankly, Mike, if we don't want to invest anymore, we'll get diluted down and in some cases we'll lose our money. And that's happened, you know, it's happened on one occasion. So it's, it's, it's going to be a, a portfolio that we try to construct. But the end of the day, even when we're stepping up in a big way, we have other partners that come along with us.
- [22:12]
Mike Gelb
So is part of the strategy too, from the, from the initial check in, since it seems like you want to make a meaningful but maybe smallish first investment and then you really want to kind of go heavy on pro rata if it, if they turn out to be winners. What's that typical kind of first check size? And I reckon that if it's for example, like a seed round, you're typically not leading it.
- [22:35]
Rich Gersten
Yeah, I would say part of the evolution of the strategy.
- [22:39]
Mike Gelb
So okay, yes, that'd be great.
- [22:42]
Rich Gersten
We in fund one, $42 million fund, we tried to do an average initial check of roughly 2 million. In fund two we'd like to bring that up to between 2 and 3 million dollars. One of the learnings is sometimes we've passed on stuff that was too early that we probably shouldn't have. Right. Benefit of hindsight. Why did we pass? Reasons may have been flawed. So we've started going in earlier and earlier on some deals and we might weight those even smaller just because the perceived risk profile, that's something super, super early. You can precede in some cases we might do a million dollars. We've even gone as low as half a million in fund two. But we would hope to take that half a million up to 3, 4, 5 million over time if it's working. It also allows us an opportunity to get in early, build that relationship with the founder and position us well for future follow on opportunities. And so we definitely will never write in a $75 million second fund which will never write a 5 to $7 million check out of the gate ever. Ever. As a first check we might take it up to that level over time, but we want to de risk our deployment by only really putting significant dollars in something after we've been in it already.
- [23:55]
Mike Gelb
So with, with the fund too which I believe was $75 million. Is that right? So really like what you're saying is the change there is not actually what the first check size is. That was. That is fairly maybe relatively stable or it it's more so on the pro rata strategy and just. And just putting a lot more money into the winners.
- [24:14]
Rich Gersten
Yes, because even on K18 we, we had the opportunity to put more than we did in but because of the size of the flood and we limited it to. To the amount we ended up investing in, had Fund 1 been a little bit bigger, K18's dollars would have been a little bit bigger and the whole fund value would have been returned.
- [24:29]
Mike Gelb
So I know that you talked a little bit about how important Sephora and Ulta are to the beauty industry and how and really why. Beauty and personal care is very, very unique in that you have specialty retailers that only sell those products with Sephora and Ulta. Does does a company or brand what if they're not in Sephora and Ulta yet do for that to you all? Do you actually first want to see signs that they actually will if they're actually doing well in those channels before investing or how do you think about that relationship overall?
- [25:02]
Rich Gersten
When we started it was almost a prerequisite for us to have a anchor retail partner be in place or about to be in place before we invested. Because for us that de risked the investment. And again we're not true venture peeps by background, right? We're private equity peeps by background. So our risk tolerance might have been a little bit different. And in fact what we invested in do, which has been an incredible growth story for us. Skincare brand we did it in spite of it having a retail partner but we undersized it because it didn't have the retail partner. Now we don't have enough money in the thing, right? At the end of the day we wish we had put more in. We outsmarted ourselves in that one. There are others that we felt we needed more proof points and in those we waited and still entered. Right. So we've, we, we. There are deals in our portfolio where we've passed one or two times and then the third time it comes around and we go in and we just try to build that relationship with the founder waiting for that retail partner. I also said we've started doing earlier stage stuff and pre seed stuff but like two of the pre revenue ones we did, one was a brand called Calire and Fun 1. Another was a brand called Hung Bango in Fun 2, both makeup brands we invested before product was even created. But both had Sephora launch partners at inception. Right? So they were launching the brand in Sephora and so it was delisked, had no proof points of its success. But like is it really pre revenue seed risk if it's got that launch partner built in at launch? We didn't think so. There's one brand in our portfolio who hasn't launched their product yet. Was the first time we invested in something that had no retail partner secured and we took that bet for a whole host of reasons. And they will be launching a retail partner now in Q1. They'll launch their own business this quarter. So they'll have a little bit of direct to consumer before we tell. But we took a bet and not when the retail partner will be launched. A long, long winded way of saying five years ago, absolutely prerequisite, not anymore. Although we still prefer it because we like to invest at a breakout, an inflection point for breakout growth. That launch of a retail partner tends to be that inflection point and it tends to require capital which is why we used to be able to wait because they'd still come back to us. Because they needed more capital for that cow house. And I would throw Walmart and Target on the list too. While we definitely lean more towards prestige, we have actually watched a lot of success in the indie brand world for brands launching at Walmart and Target in the last five years and achieving exits or potential exit. And so we're not going to turn a blind eye to that as we think about portfolio construction and diversification. So we're, we're leaning in a little bit more to mass generals where we think it's appropriate depending on the category.
- [27:35]
Mike Gelb
So it seems like you're maybe leading a well more into risk if that's fair to say since you come from, you know, like a private equity grow that way background. Five years ago you wouldn't have actually invest in a brand if it wasn't, if it didn't have a retail partner. Probably still a majority of of of your companies do have a retail partner when you invest in. But that is something that I guess has changed a bit.
- [27:58]
Rich Gersten
I'll tell you what inspired the change. Again, we try to learn a lot from our living lab, right? And when you post mortem the portfolio, what you'll find is the brands that break through 5 million in sales tend to break through and go. The brands that have underperformed have, tend to get stuck in that 2 to 3 million revenue range and they don't break through for whatever those reasons are, retail partner or otherwise, they just don't break through. And so if you look at the portfolio and say, well I was waiting for things to get to 2 to 3 million dollars in sales because that felt like commercial proof of concept and traction. And so therefore it's less risky versus going in super early. And the reality is the data says maybe that's not less risk risky, maybe it says the risk is the same. And if the risk is the same, then get in earlier where the terms are generally better, right? More bang for your buck or be able to influence them before they might make certain mistakes by waiting. And so you get in early, you get a little better terms, you get a little bit more influence and the risk profile doesn't look different, but the reward does, right? So if risk reward is better getting in super early as opposed to waiting, then let's do that. So I think what you start to see maybe is a little bit of a bifurcated strategy where like in Fund 2 we've led the Series B's in Crown Affair and Vacation little bit later stage de risk. The earlier investments were done in fund one by the way. So we did cross funds on those because of our conviction. So you have less, less upside, less risk in a handful of deals and then you got a bunch. You went in super early that you hope to scale over time into Series A and maybe Bees as well. But at the end of the day, if the risk in our judgment really was no different, then get in earlier. One of the insights.
- [29:46]
Mike Gelb
So how do you, how do you overall, and this is a loaded question, but how do you overall would evaluate a brand? Like how, how do you think about if a brand's risk? Like what, Maybe they're. Maybe they're in Sephora Ulta, maybe they aren't. But how do you. I know that you're seeing, you know, probably thousands of, of, of companies per, per year, but how do you and Christina both think about it?
- [30:07]
Rich Gersten
Yeah, I think that's the key is what you just said, how many we see each year. It reminds me of a conference I attended out in LA like three or four years ago where there was like 12 brands pitching to the audience, right? And you were supposed to pick the one that was most interesting. And after the second one, the person sitting next to me said, oh, this must feel like a day in the office for you. And I chuckled. I laugh. I'm like, yeah, it does. And then like five brands later, the person turned to me and said, I actually don't know how you do what you do because these all sound the same to me. And I'm like, well, that's the point, right? If you listen to a hundred brands pitch and 99 sound the same and the one doesn't, that's the one where your ears perk up. That's the one where you get a little bit interested, right? And so if you're not seeing sheer volume to be able to really understand how to differentiate and then have the understanding of the nuances of this industry and what works from a scale scaling perspective, it's really hard to haphazardly guess which ones you think might win. And so we're distilling down from, you know, a hundred to one. That sounds interesting. And we multiply that by four or five times a year and that's how you get your deployment. But we're really looking for stuff where after that initial zoom or after the review of the deck, or the combination of both, our team sits around and says, yep, there's something about this one that just feels different. And that's where the gut really does come in. And it's honestly why we've leaned more into the super early stage stuff, Mike, because when we see the stuff that's in the market coming to us, none of it sounds really interesting or differentiated. Everyone's launching the same SKUs, the same products, slightly different formulations, but it's a sea of sameness out there. And at the end of the day the stuff that's just being launched is the stuff that sounds different. It's another reason why we've gone in earlier.
- [31:51]
Mike Gelb
Well, how do you think about, in order to like developing insights and, and, and hopefully those insights turn into trends. How do you all think about that? Because I mean you, there's kind of almost two schools of thought. I want to say there's kind of top down investing where you, where you kind of think through in terms of what's happening and then you go out and you maybe are very bullish on a particular trend or insight and you go out and maybe you try to find the best company in that and these other school of thought of that, hey, things are happening so fast that you can't even, you can't even begin to, to do that. You just have to go and just keep talking to people and talking people and talking people and you have. The founder actually is the one that's actually kind of building the insight to you. How do you think about from like those though? Where, where, where true beauty sits.
- [32:33]
Rich Gersten
Yeah, I think for us with a 21 brand portfolio, we got bogged down in our portfolio and took our eye off the ball on sourcing. Right. And I think it's really important that as sector specialists, all we do is live and breathe this space that we should be seeing stuff and hearing about stuff before any of our peers do. And we started to hear that others were seeing stuff that we weren't. I'm very competitive, so that annoys me when I hear that, especially given the position we built in the beauty industry. My team knows that I get upset when I hear about stuff that we're not seeing because we should be seeing it. We're not doing our job in my view. Like we've talked to founders like, oh, I love your portfolio, you guys are amazing. But yet they were speaking to other investors, not us. Well, how does that doesn't make sense to me. But it happens, right? So literally like in the last three weeks we put a mandate down to the team that we need to be better at this. And all of a sudden through in person interactions, proactive outbounds, network referrals, we see our deal flow picking up again. And it's the stuff that's super early. And part of that, Mike, like, people thought we waited for a retail partner. They thought we needed to see 2 million in sales. And so if you were a brand new brand, you weren't coming to Tribute Ventures because it wasn't in your mandate. I was in a meeting in LA last week that I think is going to result in an investment for us. And the woman who I've known for 10 years said I wasn't going to bring it to because we're not, we're too early.
- [33:48]
Mike Gelb
Wow.
- [33:48]
Rich Gersten
And I'm like, and what I try to explain to people and this is the part I've got to get out. So all your listeners to your consumer VC podcast, if you're a brand that competes within the beauty and wellness space, you're in our mandate. It's that simple. Maybe pre revenue C, maybe it's a series A who. But if you're a beauty and wellness brand, you should be talking to adventures because worst case, you'll learn something from us. Trust me, we will educate people. In conversations with us, we always get told we sound different than others when they're speaking to us, but we want to see everything in the space and we want to be the arbiter of the decision to invest or not, not someone else assuming that we might not.
- [34:28]
Mike Gelb
Well, how do you think about then balancing your time or managing your time? Because as you said, you were kind of too in the weeds for your portfolio companies because obviously you come from, you and Christina both, and your team comes from deep beauty, personal care backgrounds. So I'm sure you can obviously be super helpful to your current. And that's part of your mandate. Same time, you also need to find the next deal. You also need a source. How do you think about how you think about like managing those two components of your job?
- [34:54]
Rich Gersten
Yeah, I think what we've, what we've tried to do is empower the younger professionals to really step up their game. I think it's really important that. Listen, if it reminds me of a meeting I was at with one of my colleagues, Caroline, with a brand founder and the brand founder, we were out for lunch, said, what are your hours like? She was curious how, how long Caroline, what was her workday like? When did her workday stop and start? She asked Caroline and Caroline answered her and said, well, that's an interesting question because if I'm on TikTok at 10:30 at night, is that work or is it not? Then that's the reality. Like, I want my team engaged on TikTok I want them on the social channels because that's how you discover and hear things. If you think a brand's interesting, either let us know. It will make the inbound, because people generally will respond to my inquiries on LinkedIn or otherwise. We've even started messaging brands on Instagram from the True Beauty Ventures account when we think they're interesting and people know our brand, so they'll generally respond and reply. But like, be. Be curiously engaged in the space. If you work for True Beauty Ventures, it's part of your job. Everyone's job on our team is to source, and I think that's starting to pay off as well. We're coming with. People are coming with more ideas than ever before, and we're establishing those interactions earlier than before because we're empowering everybody to do it. It's part of everybody's job. Not to mention, like, I mean, we have a relationship with contract manufacturers, 3 PLs, other strategics, other funds. There's no shortage of ways for us to have opportunities come our way. And I. What I can tell you with a great degree of certainty is if a brand comes inbound to us that we've never heard of and never spoken to before, the odds of it being interesting are almost zero. In the reality, it's like, it's not going to be interesting. But most of the stuff we invest in, it's. We're going, we've identified it, we've got outbound. We've tried to build a relationship with the founder before we invest. We're not trying to react to brands that are raising. We're trying to proactively convince brands to raise when they're rich.
- [36:45]
Mike Gelb
How much do you feel your investments come from outbound or, or, or you reaching out versus inbound?
- [36:52]
Rich Gersten
Oh, most outbound.
- [36:54]
Mike Gelb
Most outbound. Okay, okay, okay.
- [36:56]
Rich Gersten
That's.
- [36:57]
Mike Gelb
That's really interesting.
- [36:58]
Rich Gersten
And if it's an inbound, it's because another founder connected. I told the other founder to connect to us. That's like a cold inbound. Probably zero.
- [37:06]
Mike Gelb
You know, I mean, switching gears a little bit just overall, what you said about the kind of dynamics and of, of beauty and why they're attractive, obviously, you know, margins. Although I remember one of another investor who invested in beauty kind of when I said, oh, yeah, the margins are great, she kind of chuckled and said, yeah, like the margins are great. However, I hope people understand, like, the marketing costs are also just. Just huge. Yeah, exactly. Yeah. Because. Because that's a huge part of the P and L. And we, but we've Seen, I would say food and Bev, traditional food and bev. Investors kind of come into few into beauty and personal care and starting to invest in beauty and personal care and seems to become a lot more of an attractive market than it used to be. Is that right or am I Totally? Totally. Has it become more competitive for you or we're not really?
- [37:54]
Rich Gersten
Yes and no. When I was a partner at North Castle Partners, before I started investing as much as I was in beauty, I did all things consumer, including food at beverage. And I used to joke with people that I started calling myself the human version of Unilever. Right. So if you look at Unilever as a company, Unilever started a lot in food and beverage, started doing less and less of it, divesting itself out of it. And Unilever is largely a personal care and wellness company today. And that's because I think the dynamics and the characteristics of those categories are more attractive. So when I was a food investor, what would I typically see? I would see a brand that would be lucky to have a gross margin profile in the 40s. It would have huge gross to net dilution because of this thing called couponing and trade spend that you have to do in grocery market. You sometimes have capital expenditure cost depending on if you were manufacturing your own stuff or not. None of the beauty brands really manufacture their own. It's all outsourced. You'd have higher FD regulatory risks and considerations. And so there was a whole host of reasons. Whereas a category it wasn't as interesting or as exciting, although you could scale it quite quickly depending on the number of grocery stores you decided to go into. And the consumption is faster. People use drink a six pack of soda faster than they use a 50ml of EDP fried a fine fragrance. Right. So there are plenty of attractive characteristics about it. But I think the overall M and A environment, the valuation considerations and the attractive margin profiles of beauty did attract people in. Now we saw a bit of a bubble coming out of COVID where everybody flooded in and valuations got crazy and brands got funded that shouldn't have and sadly many of them are going to go out of business. And then DTC got harder and they, they fled back and left again. And you know, I think it's gotten a little bit more rational in terms of who the players are that are competing and where valuations are.
- [39:45]
Mike Gelb
Are there any? No, that's. I, I appreciate that. Are there any? We talked a little bit about kind of go to market strategies when it comes to, you know, Going into Sephora and Ulta, how important and that is, have you seen any kind of go to market strategies within beauty and personal care that you think don't work? This episode is brought to you by Glimpse. Glimpse is an AI powered end to end deductions management service that's focused on recovering revenue from Khe, Unfi, Amazon and Target. For consumer brands they centralize deductions with backups. They fully handle disputing on your behalf, the brand's behalf and streamline the accounting process. For more information, check out try glimpse.com and let them know that Mike sent you.
- [40:25]
Rich Gersten
I mean today's world, the reason there's no luxury skincare brands in our TBV portfolio is because the only brick and mortar placement for them is generally department stores. And when I started investing literally 20 years ago, Ulta was not what Ulta is today. It was a failing concept. So four was about to be sold. It was exiting markets in the US and, and all the beauty was done, all the prestige beauty was done in department stores. That's where you went. Department stores have been crushed by specialty retail and by DTC and Amazon. And so we're not big fans of that channel of distribution. Especially as an anchor retail partner, you want to have a little bit of Nordstrom business alongside your Sephora business, that's okay. But like to be the driver of your growth, it's, it's very, very hard. I think we're brands tend to make mistakes in the playbook that doesn't work is when you launch direct to consumer only. Or in the old days QVC was your launch partner. Less so today. But like you didn't necessarily have a gross margin profile that would allow you to go wholesale. Right. Worked from a direct to consumer perspective because there was no wholesale market. But as soon as another channel came calling it was uneconomical for you to entertain them. Your cost relative to your price value proposition wasn't there. And so if you don't start with a gross margin profile that allows you to go to wholesale at some point, it's going to be very, very to grow your business profitably over time. So that's another mistake that I often have seen.
- [41:53]
Mike Gelb
What about Amazon as a channel? How do you typically think about Amazon?
- [41:58]
Rich Gersten
Yeah, I mean you can ask Lady Gaga how well that went for her because Haus Labs decided to launch on Amazon and it failed. It's also one of the top selling brands and one of the faster growing brands at Sephora right now. So it's now made the jump to Sephora and Sephora has probably saved that investment for the investors in that brand. That was also five plus years ago, I think. I've never considered Amazon to be a Discovery Channel, but I'm also surprised at how important it's become for our portfolio. And I think what's happened and why retailers like Sephora are a little leery of Amazon right now and even TikTok shop because if a brand has a moment on TikTok 3, four years ago, that moment might have converted at Sephora if it was a Sephora exclusive brand. Now that moment is likely converting within TikTok Shop's platform through TikTok Shop or likely onto Amazon at Sephora is being left out of that discovery equation. So if a brand is not on Amazon, my sense is it's giving up sales it would otherwise have. So I think Amazon's important. I don't think people are going to Amazon to discover a brand, but I think they go there with an intent to purchase a brand that they've discovered effort, which is very different.
- [43:16]
Mike Gelb
That makes sense. That makes sense. Well, so since you bought Lady Gaga, I want to talk about like just talent led brands in general. This is not about, this is not about Lady Gaga, even though I said that. But this is more so like talent led brands and, and in terms of how you, how you analyze them, when for you would be interested in terms of investing in, in a talent led brand, when does it make sense from, from your perspective?
- [43:38]
Rich Gersten
Yep, we debate this one all the time internally. When we raised fund two, we got asked by prospective investors what do we think of celebrity brands? And I had to pause and say tell me your definition of celebrity and I'll answer the question right because the lines are blurry. If celebrity is a list celebrity, someone you'd see in the movie theaters, that to me is a celebrity makeup by Mario, Mario Hung Van Gogh makeup brand we just launched and that's hung has over 4 million followers. He's a celebrity makeup artist. Does that make him a celebrity or does it make him a makeup artist? Like right 20 years ago, Bobby Brown, Francisco Nars, Laura Mercier, they were makeup artists. They had no social following because it didn't exist. So they just were makeup artists. There was no confusion what they were. They were makeup artist. This new crop dermatologist as well, Shereen Idris, huge social following. Charlotte Palerina, one of our co founders at do huge social following. I don't know if they're celebrities or not, but what they are is they have a skill set in a particular arena, makeup artistry, hairstylist, whatever, that just happened to have strong social following in part because of who their clientele is. And so I think the definition of celebrities, that, that's just blurring for us. I think we're very leery of a list celebrities and them launching a brand because it feels like a money grab to capitalize on their social following and the like. But if it's an authentic, true to the brand or product celebrity behind it, again, celebrity with lowercase C, I think we would consider that, although we're leery of it. But I will tell you, you know, we're anti celebrity brands in general. We think there's fatigue and we think that thankfully it's about to come to an end or slow down. But my team, from the get go when Road was launched, never viewed that as a celebrity brand and would have given their left arms to be on a cap table of roads.
- [45:42]
Mike Gelb
I would love to know what your thought of Road. Why was that different?
- [45:49]
Rich Gersten
I mean, their view is Haley had been talking about skincare for a long time. Like she had a following and she was known for talking about it. And while she may have been a celebrity in other ways, like she built a community around talking about skincare prior to the launch of Road, that's how my whole team viewed it. They thought it was very authentic, launched by a founder who knew what she was talking about. When we see it like Scarlett Johansson and the outset made no, it never made sense to us. Scarlett Johansson never had anything to do with skin care. And by the way, Scarlett had no social following. So you weren't even going to get the theoretical benefit you'd get by attaching your name to it. And our team liked the products for the outset. They didn't understand necessarily the story behind it, but they thought the products were good and they had a Sephora partnership when they launched it. Theoretically could have been interesting, but I think it was a little bit set up to fail for that reason. And so we're very leery of a list celebrity launches. But if there's a real authentic story, I think the other thing, I'll say, Mike, like when we, when we back a founder, what we're looking for is that failure is not an option. Gene, like Christina and I have it at True Beauty Ventures, most of the traditional beauty founders we back have it like they're going to run through walls to make sure whatever they've launched is successful. It's their baby. Some of these A listers, they don't have that. They'll never have failure is an option for them. And so you don't have that same skin in the game mentality that you want from all your founders.
- [47:19]
Mike Gelb
Yeah. And I, I also imagine that that partnership sometimes between the CEO and, and the talent, that can be also also really hard. Right. Because you might want the talent to really be involved and it really depends in terms of how involved in the brand. But even if they are involved in the brand, to your point, is this something they've. That they've even been talking about before they even launched a brand? Right. That they're, that they've kind of shown their audience that they're actually passionate about like Hailey Bieber did with Before Road. I agree totally how you know, consumer gets a lot of flack. It gets a lot of heat and beauty and personal wellness. In terms of why invest in early stage consumer. There's no power law dynamics, blah, blah, blah, blah. Do you, how do you think about overall what a healthy return is in a beauty personal care company and as well as for a fund that actually is realistic? Of course, if you got into the, the, the great companies, which is obviously a big if. But how do you, how do you think overall in terms of your perspective of is it more so does it look more, more like early growth? Early growth, for example, in terms of the distribution and overall returns, how's it all work?
- [48:30]
Rich Gersten
Yeah, I think because of our hybrid strategy with the heavy component, I do think what we've tried to pitch ourselves as is we should deliver better returns in a traditional growth fund because that first check that we write gets in at such attractive terms relative to what any growth fund could get into it. It boosts the overall return profile. So what do I mean by that? When I look at the, when we dissect the K18 investment, we put a million dollars in that initially that million dollars returned almost $16 million to the fund.
- [49:04]
Mike Gelb
Right.
- [49:04]
Rich Gersten
We put another 3 million in and follow on. And that 3 million returned another 15 to the fund. So a good return on the follow on. But the whole investment returned about seven and a half times because that first check gave us a boost right to the overall return profile. And so the way we think about it is we may not give you traditional VC like returns because of the power law effect we talk about, but we think we should be able to deliver you better returns than a traditional growth equity fund would. And yet we don't believe we're taking much more risk, if more risk at all than the traditional growth equity fund for the reasons I talked about. And if we are taking a little bit more risk. We're compensated through that, through the first check which gets the boost of VC like returns to the overall fund. And so it's a bit of a hybrid strategy. It actually makes us very hard, makes it hard for us to raise money. We've actually talked about does it make sense to separate our strategies over time and have one fund that's kind of the first check early and another fund that does the follow ons and then you could have, you know, a traditional allocator could figure it out perhaps better than this hybrid strategy that we've created. But we think we can deliver extraordinary risk adjusted returns relative to a growth equity fund.
- [50:15]
Mike Gelb
So and in terms of what those returns are averaged out like I think you, I think you said the K18 was about a 7x overall. What does that, what does that kind of look like from a, from a fun perspective in terms of ideally we're
- [50:27]
Rich Gersten
shooting for gross return on the fund at four times plus or down to three after fees and expenses and carry.
- [50:33]
Mike Gelb
Cool. Got it. That's, that's really helpful. Yeah I, I think that why, I mean why I think consumer is also just really interesting overall beauty, personal care just in general invested in brands is because you know what you're seeing with technology where you're seeing invested in tech and again I also have a lot of tech investors on but what I've kind of seen the seed stage is it's really hard when you're in a great company or trying to get, trying to get into a company because you might be competing against the big firms like the Andreessen and the Sequoias and all these ones and they can out price you, they can outprice you and they can, they can obviously deploy a lot more capital. The kind of like the pitch is, is that that's like kind of an option for them versus it's kind of, it's kind of like an option stock. They're not really actually you know going to be kind of in with you and doing the grind, you know but at the same time, you know, gain a lot more money that's still meaningful. And you know a lot of founders might go for that. And so what I think is really
- [51:38]
Rich Gersten
both their brands never heard stuff that brand not a day.
- [51:41]
Mike Gelb
Yes, of course, of course, of course. Exactly 100%. What I think is really interesting about beauty, personal care and consumer brands is that because the outcomes and I hope we don't take offense to this but I hope because the outcomes these you're not going to get 10 billion or $20 billion outcomes that you could get in technology. You might get you know, probably maximum and still would be like it was still would send shockwaves of like a billion or $3 billion outcome that would send shockwaves. Probably most of them I'd imagine would be like a really successful outcome was like 400 million or 500 million. But because the money just isn't you, you're not deploying so much money into these companies like overall that the Sequoias and the Adrissens of the world, they're not, they're not ever going to care or try to touch you. So it's great. You know that's what I think. Yeah.
- [52:32]
Rich Gersten
It's having spent my whole life basically investing in consumer sector focused funds. Yes. It falls in and out of favor because it's perceived to have higher macro and recession risk in other categories maybe not the return profiles so many other categories but last I checked it's like 2/3 of the US economy like the addressable market is massive for consumer and this is a consumer driven economy at the end of the day. And so I think people are a little shortsighted when they discount the attractiveness of the space from an investor perspective.
- [53:04]
Mike Gelb
Yes, I totally agree. And also you know. Yeah. Will you get like 100x return in beauty? Really hard to achieve. Like that's really hard to achieve. Could you get that in tech?
- [53:13]
Rich Gersten
Sure.
- [53:14]
Mike Gelb
But at the same time what are
- [53:15]
Rich Gersten
the odds of getting it?
- [53:16]
Mike Gelb
Yeah. What are the odds you do getting it? Exactly. What are the, what are the odds of getting it if you can deliver consistent returns and again you have to be in the great companies which is really hard to do but if you can deliver great returns across the sector and then as well as know that you don't have kind of you're not really probably having as much competition in terms of price and getting into these companies based on, based on price. It's, it's other, it's other ways that, that you can kind of affect in terms of being on the cap table. That's pretty great to me. So anyway obviously this is all theoretical a lot a lot harder to actually
- [53:48]
Rich Gersten
do a lot of practical of what you said. Trust me.
- [53:51]
Mike Gelb
Yeah. What of all your investments the so far true be what's one that's that has surprised you the most positively and
- [54:00]
Rich Gersten
why K18 for I mean you returned 80% of your fund in three and a half years. And it's funny because I met, I
- [54:07]
Mike Gelb
met and it was your first investment.
- [54:08]
Rich Gersten
Yeah, I met the co founders before True Beauty Ventures. They used to stalk me at industry events when they had this brand called Aquis, which was a hair, towel and turbine business. It was the predecessor company within what became K18 and I just didn't want to invest in a towel and turbine business. As interesting as it was, it wasn't investable from my perspective and circumstances were just fortunate for me that they had caught wind that True B Ventures was being launched and therefore I was writing small checks and they were doing an extension on their round for K18 and they wanted us to participate, so we did. And obviously most brands don't scale from 0 to 100 million plus in three years and fetch a strategic sale in that short period of time. And the problem we had post that acquisition is a lot of founders in our portfolio will be like, what did they do? And can't we do it? Like, no, it doesn't, doesn't work that way. And even I tell potential investors as successful as that one was, and I believe we can find one of those in every fund, it's an anomaly what that ha. But what they did in three and a half years and ultimately to achieve a strategic exit is unlike anything I've honestly seen before in my career. And so yeah, as bullish as we were on that one, it absolutely outperformed expectations because I've just not seen that what they did before.
- [55:21]
Mike Gelb
Yeah, that makes, makes a ton of sense and, and congrats again on that outcome. What's one mistake you see repeatedly in in early stage beauty and personal care founders that you'd ask them immediately to fix if you could?
- [55:35]
Rich Gersten
Yeah, I, I think when we look across the living lab that we have and we look at which ones have underperformed and which ones may not make it, I don't think we got the brand or product part wrong. I still don't. Even though they haven't worked out. What I do think happens and what they all have in common in some respects is an inability to execute what we all thought should be executed in part because of lack of team resources, lack of investment in a part of the organization that was required to make it successful. And that sometimes comes down to founder, founder gene willingness to let go and relinquish some of the things, or a founder thinking they can do it better than everybody else can, or founder being stubborn about letting the responsibilities get expanded to other team members. So you know, founder team execution tends to be what we've gotten wrong and we can't force it we're minority investors. In my control days I could have fired founders and I could have put a CEO in and said do this or do what you think. But we hired you for that reason. Right. We just try to influence and sometimes they listen and sometimes they don't. It's fine it's a portfolio but yeah, I would say it's execution misses ultimately where it hasn't worked out for us.
- [56:53]
Mike Gelb
How do you think about product and. And distribution or. Sorry, product. Yeah, well product and marketing. Do you ever for example would invest in a company that you actually think the product is eh. But the marketing, it's so differentiated. What they're doing is just so interesting that, that you. That you might actually very.
- [57:12]
Rich Gersten
It's very easy to get trial, very hard to get repeat. Right. And so great marketers can get trial but they won't get the repeat if their products are there. Our team will. Will try everything before we invest.
- [57:25]
Mike Gelb
Well how. How do you think about that from yourself? Like have you ever tried a product? Not like the product but still want to. But still want to make the investment?
- [57:32]
Rich Gersten
No.
- [57:33]
Mike Gelb
No. Interesting.
- [57:34]
Rich Gersten
Unfortunately I can't try the hair care products so I'm disadvantaged in that respect.
- [57:41]
Mike Gelb
How good one? Good one.
- [57:44]
Rich Gersten
Although to be fair when we do pre revenue and the product hasn't been created yet, we're taking that risk obviously.
- [57:51]
Mike Gelb
Yeah, that's fair. That's fair. Talk a little bit about the M and A, how the M and A activity has evolved. How is the ever. How has the eggs environment changed over the last few years? We've obviously seen, you know, quite a few exits so far this year. But has the buyer, in terms of the buyer profile, has that changed at all?
- [58:09]
Rich Gersten
For example, when I first started investing in the space 20 years ago was you basically had Lauder and L' Oreal at the table and to get a great outcome you wanted at least one of them at the table, believing the other one was also at the table. That's how you drove outsized returns. Over the course of the last 20 years there's been an emergence of new buyers in part because of the fragmented nature of the space has resulted in consolidation activities from other acquirers who have built large greedy businesses as well. So I would say the number of buyers today versus 15 plus years ago is very different. There's many more of them. There's also many more brands seeking liquidity than ever before. And so I wrote a substack post not long ago on the laws of supply and demand as it relates to beauty. M and A Right. And as an economics major, what I learned, the only thing I remember from economics was when supply and demand are out of whack, prices fall or increase until they get into alignment. And what you have in the market right now is too many brands seeking liquidity, in part because people like us invested in them. And we need liquidity. It's our business model. Not enough buyers. And the problem with not enough buyers today isn't there not necessarily enough buyers, it's that some of the buyers have their own internal issues. And so they haven't been active from an M and A perspective because they're kind of sitting on the sidelines. Right. And so you've got not enough demand for all the supply. And as a result, deals either aren't getting done or the ones that are getting done may be getting done at reduced prices or the ones that are getting done are such unique unicorn assets that they get done. And we can talk about that that in a second. When we look back over the last five years since True Beauty Ventures was launched, there was a major M and a bubble between the back half of 21 and the first half of 22.
- [59:51]
Mike Gelb
This episode is brought to you by Glimpse. Glimpse is an AI powered end to end deductions management service that's focused on recovering revenue from Kahi, Unfi, Amazon and Target for consumer brands. They centralize deductions with backups. They fully handle disputing on your behalf, the brand's behalf and and streamline the accounting process. For more information, check out try glimpse.com and let them know that Mike sent you.
- [60:18]
Rich Gersten
Huge volume of deals done in that 12 month period coming out of COVID Brands that had seeked, invest, sought investment, had investors and did well who waited for Covid to pass. All came to market at the kind of in that 12 month time period, all traded to Strategics, a lot of them for high values. Then end of 22, recession concerns started to hit. People thought the market would rebound again at the end of 23. It's when K18 fortunately got sold. Dr. Gross got sold at the same time. And everyone was super optimistic about 24 and it never happened. 24 never happened. You roll around to 25 and by 24 has been every makeup brand that was a good business that had private equity ownership in it, went to market and none of them traded. And they still have it traded by the way, which is its own separate issue around makeup. It's really a supply and demand issue when it comes to makeup. There's just not enough demand for the category Even though it's the largest category. But when you look at the deals that have gotten done in 25, and a lot of them have gotten done in 25, they're very fast growing businesses with incredibly strong EBITDA margin profiles. So you think of Touchland, you think of Road, you think of Medicaid, those all had incredible growth stories and 30, 40% EBITDA margins. Right. So they're very unique assets that found strategic homes. But you'd say Church and Dwight and Elf weren't normal buyers. They had made some deals over the years, but they wouldn't have been on the top list of anyone's team. Wrong list for buyers. And so it was this new universe and emergence of buyers coming out for whatever those reasons. Right now what you have is l' Oreal taking advantage of a weak marketplace. Their competitors are not aggressively making deals and they can. And the advantage l' Oreal has over any other company, maybe, but for you, and the lever is it operates in all categories across all geographies, across all distribution channels, including professional. That makes any brand available for sale relevant for l' Oreal because it fits in somewhere in their organization. Other companies don't have that breadth of diversification, which really is another competitive advantage that l' Oreal has. So l' Oreal's been the most aggressive acquirer for having done the caring deal, which was, is huge very recently having done Medicaid and color. Wow. Right on top of each other. You're talking about 3 billion plus deals all done in, in a relatively short time period.
- [62:36]
Mike Gelb
It's quite remarkable when you see this hap, like when you see this M and A activity happen and having in, you know, happening in specific categories, does that change at all the way you, you invest or, or categories that you actually want to pay attention to or, or not when you're kind of looking over your own over your shoulder.
- [62:54]
Rich Gersten
I would, I would say the bar for us to do another makeup investment is very, very high. Not because we don't. It's the largest category, it can scale quite rapidly. But if it's harder to exit them, and I'm not saying that will last forever, but right now it looks like it's harder to exit. What happens is companies come to market, strategics don't bite. So they go to the funds and the funds are like, well, if the strategics didn't bite, then how am I going to get out? And so then the funds, funds pass. And then if funds are passing, people like us say, wait a second, if I can't even get out to PE because they're afraid they can't get out to Strategic. Then you're going to get home on them. Right. So you got Makeup by Mario and Merrick. Two incredibly attractive businesses in my point of view, scaled quite rapidly, very profitable, have not been able to yet find a home. So we're very hopeful that something does break because there was a massive Makeup M and A bubble in the 2012-2016 timeframe. Everybody went heavy and hard on it. A lot of those deals haven't worked out for the buyers and some have divested them. P and G got out of Beauty, sold it to Cody basically. Now Cody wants to get out of it. Lauder bought Too Faced and Becca, they closed down Becca. Now they're rumored to want to be selling too Face and they're rumored to be closing down Smashbox. And so who's left to buy Makeup brands?
- [64:12]
Mike Gelb
Yeah, that's. Wow, that's very. That's a very fair point. Very, very fair point. How. How do you also think about like the term sheet overall? I remember having one banker on the show who was saying that in today's market some deals are just not getting done because when the founders raised at you know, honestly crazy prices when it comes to what the valuations were like sky high valuations but would do, you know, 3x preferred or you know, like kind of like not favorable stock preferences and now they can't really get an exit because they, they have offers from M and A. But the hover. The. But the offers are great for the investors because it's a 3x, you know, pref. But it's not great for the, for the founders so the founder blocks it. How do you, how do you think about overall, like your approach to. To pref or that kind of.
- [65:03]
Rich Gersten
Yeah. I mean again, we're, we're at early so we run the risk of getting layered over time, especially if we're leading something. So that's obviously something we consider but we always try to encourage and it's a tough conversation with the founders is valuation is one of many considerations you need to think about when you're raising money at the end of the day and you can set yourself up to fail if you get too aggressive a valuation early on because either someone is not going to want to price a down round for fear of it insulting the founder or they're going to in order to hit the value put crazy prefs on it that make no sense for the founders. And why frankly founders sometimes don't even understand what they're signing up for when it comes to those preferences. Right. And so I, I think the cleaner, simpler cap table cap structure you have, it's the better for everybody. I've, I've in my old P days done some pre like deals to try to bridge valuation gaps and they generally don't align interests. So I'm very leery of, of founders taking those types of deals to try to minimize dilution because it can really backfire.
- [66:10]
Mike Gelb
No, that's, that's really helpful. My final question to you. My final question to you. So we got two minutes. What's one book that's inspired you personally and one book that's inspired you professionally?
- [66:18]
Rich Gersten
Well, I would say the book that probably most recently inspired me personally was outlived by Peter Atiya. I love that book, whose audible book was sent to me by my co founder Christina Nick as she thought I wasn't very healthy and wanted me to understand what her life.
- [66:37]
Mike Gelb
That's why you picked her? That's why you picked her?
- [66:38]
Rich Gersten
Yeah. What her life looks like relative to mine and how different we are. And I actually found it quite eye opening in terms of his approach and what he said. So I actually really enjoyed that. Listen, I would say on the professional side, I spend a fair amount of time because of what I do for a living reading the books launched by the founder of Oui, the founder of opi, the founder of Dry Bar. They've all published books about the businesses and ultimately their exits. And as a student of beauty investing and I just pre ordered what it's about to come on Anastasia, they've all written books it cosmetics founder. I read that book as well. So if a founder in beauty has been successful or not and is writing a book about it, I like to read it because I actually find it. I can relate to it. I even know some of the names and players in the books sometimes. But I do know these people personally. I love to hear their stories and I learn from them and it helps me think about, you know, founder mentorship and education as we build true ventures going forward.
- [67:41]
Mike Gelb
I love that. Well, you're very original. I don't think anyone's mentioned these books on the show yet.
- [67:46]
Rich Gersten
That's kind of unique to what we do, isn't it?
- [67:48]
Mike Gelb
That's great. No, that's great. I love it. I love it. Rich, thanks so much for your time. This has been a lot of fun.
- [67:53]
Rich Gersten
Thanks, Mike. Appreciate you having me.
- [67:54]
Mike Gelb
And there you have it. Thanks for listening. I hope this was helpful. Rich, thanks so much for coming on the show. I love this conversation. Thank you very much for Glimpse for sponsoring this episode. If you're a brand in Keiki, Unfi, Amazon or Target, they centralize deductions with backups. They fully handle disputing on your behalf. Check out try glimpse.com and please subscribe to the ConsumerVC.com in the news newsletter. You'll get a weekly update of all the latest consumer deals that are happening in around consumer and also all the product launches. You'll also be the first to know when a new episode of the podcast drops. Thank you for listening and thank you for subscribing. Hopefully you will subscribe. Please Please subscribe. Thank you.