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DTC Podcast
Bonus: Preparing Your DTC Brand for Acquisition: Lessons on the PE Path from Because Ventures
00:34:30
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- [00:00]
Jeremy
The big thing that a lot of founders need to realize is what are.
- [00:03]
Eric
The signals that you're looking for from those brand owners that make them a good fit for an acquisition?
- [00:07]
Jeremy
Top three things. Money is not sloshing around like it's growing on trees. I think it's going to get tougher for a brand over the next six to 12 months. It's definitely not the rosy picture from four years ago, but deals are getting done, money starting to flow through the system and it feels like everybody is kind of adjusted to what reality now is. The three key financial statements I think is really important. Don't squeeze all of the juice out of the orange. I see this mistake a lot where people, people try to juice their stats or they try to get a little bit more revenue. We don't want to buy something that's about to die and that, you know, we need to go throw and rebuild. There's got to be a good, clean narrative.
- [00:48]
Eric
Jeremy, welcome to the DTC podcast. Excited to have you here to discuss PE in the e commerce world. Start by telling me a little bit about your hero's journey and what brought you to founding because ventures.
- [01:01]
Jeremy
Yeah, thank you for having me on, Eric. I basically spent actually my entire career e commerce. So the super short version, because I hate talking about myself, I started building magento connections back in the day, if anybody remembers what those things are. It's basically Shopify apps. Before Shopify was a thing. Actually got into the Shopify ecosystem working at a dev agency in New York City migrating WooCommerce brands over to Shopify and there met a company called Lumi. They were a client which I ended up going to work for full time for a couple years after that. Really high level 8 figure Shopify plus brand. Very early Shopify plus brand that sold Kim Kardashian's favorite selfie case. So you have a cell phone case with light rails on it. Now it's you know, what everybody uses for podcasts and recordings. But at the time, take a photo of yourself, your friends, your food when you go out, post it to social media. Joined full time, transition from the agency to full time there when we were going from about 78 figures D to C to high 8 figures. Massive retail expansion. Verizon, Sprint, Target, Best Buy, Apple, a lot of your major retailers. Worked there for a couple years, then joined my partner who had acquired an automotive aftermarkets business there. While he had acquired it, we were scaling that from six to eight figures and then we started building software to solve our own problems. Spun Those out into individual SaaS. Late 2018, 2019, all three of those businesses exit at the same time. My partner basically retires. I go to work for the SaaS side of the industry. So we're starting to look at deals again. We took a little bit of time off, he wanted to go on vacation for once in probably a decade. And then we started looking at some early stage deals. Then we started looking at, hey, like we really want to go back and operate. So I, at my day job, I was at Daasity, which is a Shopify plus app, and then Gorgias where we were looking at a bunch of deals. What could we acquire? What could we go, you know, recreate that playbook, acquire a brand, scale it up, figure out what software we could use to solve the problems that that brand had. Year ago, I leave Gorgeous to do that full time and then spent about that four year process, probably looked at almost 400 deals, pretty close. And then we made our first acquisition which was Cocoai, which is a Shopify app. We closed that in February, now operating that and we're still in talks and looking to acquire that first platform brand or that first big brand that we're going to base the whole fund off of.
- [03:13]
Eric
Very cool. I want to dive into Coco a bit later, but talk to me first about the macro environment right now for brands looking to be acquired, looking for investment. What's going on now versus is three years ago and how, how's the outlook?
- [03:27]
Jeremy
Yeah, money is not sloshing around like it's growing on trees. I would say that fundraising and exits in general in 2020, 2021, 2022, you know, once you got past that first initial, like oh my God, Covid's going to ruin the e commerce industry. And then it boomed was just amazing. Like if you got money in or if you sold your business at a time like enjoy the island that you're living on, I would say when that market corrected 2022, 2023, it got really, really hard. So one important thing to think of, like when someone like us, a private equity firm comes and buys a business is we're doing it with a combination of equity and debt. Interest rates are sky high. Means that our costs to buy your business is way, way higher. Right. Especially if you go from three to six, like your business same as your house. Like literally a business just became two times more expensive for us to acquire. And our LPs on the equity side are who we are. Investors who we get money from aren't as excited when they see Their stock market, you know, their, their public holdings and all their other investments get pulled down so they get a lot more judicious. So I'd say 2022, 2023, the markets kind of froze. Like it was this really weird spot where no, you know, everybody was a little hungover from the absolute heyday of 2020 to 2022 and we didn't really know what the market was. I would say that the market in the past six to nine months has really opened back up again. And I think that's a combination of two things. The first one is I think founders have a more realistic expectation. They're not, they don't have those 2021 highs of, especially for brands thinking that they're going to get multiple, a lot of multiples on their revenue versus their profit or what we call ebitda. I think the second piece is, you know, despite the current political environment in some capacities there, I think a lot of people on our side are itching to get deals done. We don't make money unless we buy businesses and then have some sort of liquidity event on the other side. And so it feels like the market's coming back to a better place where everybody's kind of meeting back at that zone of what's a reasonable expectation for a brand to exit. And just for context, we operate in the 10 million in top line to 100 million in top line. So we're not looking at megadeals, we're not looking at, you know, the poppies to PepsiCo's. That's kind of the exit after the exit from where we operate. But in that kind of SMB, lower mid market range is, I would say those two real factors are going where I, you know, we've seen a, just two kind of a tale of two cities to wrap up the point interrupt. To answer your question, you know, you have these mega exits that are looking amazing. Poppy, I'm sure I'm not pronouncing this brand right, but siete. And then you have like Stuart Weitzman getting dumped, Pura Vita being sold for a million dollars after a fifty million dollar acquisition a couple years ago where like everybody kind of seems to be like, okay, we need to get things done. We're going to either clean up house, have the massive exit and move on. And so I think it's going to get tougher for a brand over the next six to 12 months. And it's, it's definitely not the rosy picture from four years ago, but it's deals are getting done Money starting to flow through the system and it feels like everybody is kind of adjusted to what reality now is.
- [06:23]
Eric
And E commerce is not going anywhere. It's going to. It may not grow at the pace it was growing in those early Covid days, but it's going to continue to grow globally. Right. So it's still easy to be somewhat bullish on it.
- [06:35]
Jeremy
Yeah, I'm so for context, I am mega bullish on E commerce. Like if you take the macro, macro picture, pre Covid, we went from like 15% of the US economy was run through E commerce and now we're at like 20. And yeah, it went like the graph of the adoption went vertical for about a year, plummeted. But if you now zoom out to five years, it basically is just a straight line up. Like it, you know, it mean reverted. It just went to the average and we still have the same growth. And so if you just think about, however you want to picture the global economy, E commerce is only, and this is ridiculous to say out loud, Commerce is only $6 trillion. And so it's a massive, massive market already, but it's going to continue to grow. Who knows if over two decades it becomes 50% of the global economy, 80% of the global economy? I think that's probably a little ridiculous. But even if it goes from 20 to 25, we're probably talking about 8 or $10 trillion. And so there's this massive growth still to be had. And actually probably a completely different topic for a different podcast. I have this whole like map of how I think Shopify is going to become one of the next trillion dollar brands over the next decade.
- [07:41]
Eric
So I should keep my stock. This is not stock advice.
- [07:44]
Jeremy
Yeah, this is not stock legal financial investing advice. I was never here, but yeah, I'm a pretty big believer that.
- [07:51]
Eric
I love it.
- [07:51]
Jeremy
You're going to see E Commerce just take a very, very long tail up and it's definitely getting harder to have a great brand, but there's still so much more growth to be had.
- [08:02]
Eric
I love it. I disc you guys from a post that you made, I think about a year ago now, but it was basically about how PE could essentially save a brand like Tupperware in a turnaround. So I don't know if you want to reference that post specifically, but walk us through the role of PE in a brand right now that's treading water or maybe not doing as well as it should.
- [08:22]
Jeremy
Yeah. So for everyone who's listening, who isn't familiar with my content, what Eric is referencing is Every Sunday I have a news article, let's buy a business where I take a public company, go through their, show you all their financials and then basically what's my three step turnaround plan? And so this was either right before or right after Tupperware had said given their public warning. That's like, hey, we're not sure we're going to make it out the year. And so I think, you know, PE gets a generally a bad rap and there definitely are bad players in that space. Like they're bad players in every space but physical consumer. I think the great myth that a lot of brands believe over the past decade is that VC is actually a good investment vehicle for a DTC or a physical products brand. And it's actually terrible. And we can go into why. And you know, I did it, I wrote $10 checks into brand. So I was that person, I made that mistake. And we can go into why and the components. But if you look at most of the truly successful massive, and I mean massive brands, Yeti, Aesop, they were actually PE funded and usually when a brand like Tupperware. So the reason Tupperware went bankrupt is they had a billion dollars in sales. The problem was was that they flipped from like a sub 20 million profit for the year to a negative profit when they had $700 million in debt on their balance sheet. And so at that point, you know, it's a great brand. It's. I would honestly consider, and one of the reasons I was very passionate about that specific post is I consider it to be an iconic American brand. Yeah. Like I consider one of those brands.
- [09:49]
Eric
That you call other products. Even if it's like Kleenex. Right. You're not, instead of tissue you say, hey, hand me that Tupperware. Even if it's not Tupperware.
- [09:56]
Jeremy
Yes. I don't own a single Tupperware product in my household and they are all called Tupperware. And so really I want like, you know, how can we save this brand? How can we turn this around? And that's where a lot of PE is focused on is either, you know, there's usually two use cases we look at things are going amazingly well and how do we just throw fuel on the fire in a disciplined manner? You know, we don't look for 3,400x growth year over year. It's 20 to, you know, 100 is an amazing gear. 20 to 50x is great. Sorry, 20 to 50% is great because over 5, 10 years that's a considerable amount of growth. And you know we can make our math work. The other part is in the turnarounds. And you just need someone who has the financial two components, the financial literacy and the financial backing to get that brand out of that situation. And I don't know if you follow Drew Sanaki or if everyone's familiar with him, but he posts great content on this as well because this is most of his career is like going in and doing the turnarounds. And you need someone who you know, can, can you really stretch your cash flow? Can you really figure out how your payment terms. And it's very interesting of like when you study the brands that fail the same things that they fail, they're actually what makes the great brands great. Like, if you're doing well as a brand, one takeaway from this, go renegotiate all your payment terms. And now with like everything that's going on, it's a pretty good time to go do that. And it's really interesting to like dissect like almost like postmortem, like what didn't go well. And so you need someone also who can just work with bankers, who can work with the debt providers because essentially at the end of the day, debt is a great tool and a great lever for physical product brands. Especially when you think about, I lay cash out here for inventory, here for marketing, and then I get paid back all the way down here. But you really need to use it carefully. You know, it's fire, it can light your engine or light your house on fire. And so you really need to be careful and have someone who can understand and kind of talk that talk. And if you can really nail those couple of things, it can be a great way where yeah brand like Tupperware that should be doing very well. It should be at a billion dollars in sales at a 10 to 15% net income margin, really should have that player that can help them navigate those waters and then the operators operate the business, go scale it and figure out how to make that brand as great as it should be.
- [12:10]
Eric
I want to dive in actually on the reasons why VC isn't a good fit. But before I do go to Let'sBuyABiz XYZ. Jeremy's content is great. Follow him on Linked. We were just talking in the pre pre show you're following in the awesome footsteps of creating a media company to help grow your. Your venture fund, which I think is a really smart play. That's what we're doing here at Pilothouse. Talk a little bit to me about why VC and DTC are Not a match made in heaven.
- [12:35]
Jeremy
Okay? And I've done this so I can tell you, you know, one of one or two of them are still working out, but most of them have failed. The problem with a E commerce business is when does cash come out? When does cash come back in? And so the VC pitch was amazing. I don't have to give up any debt, which everybody's scared it will kill my business. I can get a lot of cash in now, plow it all through my inventory, spend a bunch of money on marketing and grow really, really fast. The problem is, is a physical product brand needs to be incredibly disciplined on their cash flow and their inventory management. Having a ton of money does not make you do those two things very well. And what I saw all of these VC businesses do is they hired way too many people. Like, one of the things I absolutely love about E Commerce and especially D2C is you can, you know, a great team of really solid people. I've seen people grow 10 to $50 million brands on six people. Everybody's wearing a lot of hats. I'm sure they don't have a lot of vacations and weekends, but they are absolutely crushing it. Like I can't tell you how many pitch decks in all these other companies I saw that was like a million dollars in revenue with 15 to 25 people. And the discipline in picking the right products that have great marketing, that you know, a couple of really big asymmetric bets, which is actually what you know, VCs want to see, is really hard to do when you have that much money. So I think that was the first mistake that a lot of brands made. The second one is just a physical products brand should not be growing 3 to 400% year over year. So for everybody who hasn't raised money, when you get a VC check at the seed or series A stage, they call it the triple, triple, double, double. And I've lived this twice in the past five years, so I'll just quickly walk everyone through it. If you're in a million dollars today, the VC writes you a check for let's say a million dollars. They expect you to triple your one into year two. So let's say you were going from one to three, then you're going to go from three to nine in your second year. That journey from one to 10 million is absolutely awful from a cash flow perspective, from a hiring perspective, from a marketing perspective. Because the one thing where DTC does not work like software is it actually gets more cash intensive the more you grow. The business. And then we need to layer on, you know, at 1 million in revenue, 2 to 3 great people plus a couple agencies, you're, you know, even one person plus a couple great agencies, you can be great and you can have a nice profitable business. You could be taking out a couple hundred thousand dollars a year and do very well to get to five and to get to nine. That's when you have to start layering on teams and managers and a lot of people to get there. Where, you know, you go from one, you know, it sounds like a lot, but to go from two to 10 people on a team is a lot. And then when you add in, that's probably somewhere around a half a million dollars in salaries and opex, you just evaporated your profits. Now the big bet is, is that you can swing and get to 20, 30. I mean, really what the VC is looking for is 100 to $500 million. And when you just think about how many brands can actually grow to that scale, it's not very many. And the third reason why this doesn't make really work or make sense is once you start getting to that scale, you need debt. Like you need to put debt on the business because you probably are in retail and you know, we can talk about the awful cash conversion cycle of retail, but marketplaces, right? Amazon doesn't pay you net 40 until net 45, net 60. And you need debt to just basically float that inventory purchase. Especially if you're shipping stuff from Asia and you know, just continually raising more vc. More vc, more VC isn't going to solve your problem because you're just going to burn through the cash, which then you need to put into inventory ads, get as much of it back as possible to cycle it all immediately back into inventory and ads, you basically have to just survive the like, just a little bit bigger, a little bit bigger, a little bit bigger ride. And really that's where you want debt. Because debt, you essentially, especially what's called a revolver, it's essentially just a loan from a bank. They say, we'll give you 500,000 million, $10 million. Whatever it is, you pull it down, you pay it back, you pull it down again. And that's really what you want. Because yes, there's a fee associated to that, but you're not one, you're not selling probably 80% of your company along that journey. But it also allows you to just basically, especially with the cyclicality of your business, just cycle money back and forth as you grow. And it's, yes, it's Scary. And yes, you have to sign covenants and yes, you know, if things don't go, if things don't go well in either scenario, someone else gets your business. But you know, you can't just keep burning through a stockpile of money trying to make it all back, trying to put it in, trying to pay it all back. And you know, at the end of the day a VC, they need 1 out of 100 to hit to make the, to make their return. So in also your business just candidly isn't that important to them.
- [17:22]
Eric
That makes sense. Yeah. Talk to me about the golden path here or the brands that you're looking for and, and how it would work with a company like, because, yeah.
- [17:32]
Jeremy
So private equity in general, and I think we take this almost a bit of an extreme, you can't miss like private equity, you know, we're going for doubling, doubling our investors money in our 3 to 5, sometimes 7 year timeline. The difference in VC math is I just need one 1000x bet where you know, if I put in 100 I get back 10 million and I can cover all of my other bets. PE and for our fund specifically we are going to buy one brand, maybe we buy other brands that then, you know, we, what's called a roll up or a tuck in, like we essentially merge into that one brand. But like, you know, we got to be one for one, we cannot be one for 10. And so I think that's the biggest difference is that private equity also has much more realistic expectations on exits. They're not looking for the triple, triple, double, double in four years. They're really much more looking for, okay, if we put X amount of money in, how do we 2x our money in 3 years? And they care greatly about, especially we care greatly about cash flow and profits and distributions which if you are the founder of your business and you have never raised money, that should be your goal. An exit is great at the end of the day, like if you can sell your business and it's worth a lot, that's amazing. But really the value of your business should be in what are called distributions or essentially leftover profits that you don't have to put back into inventory, marketing the team or taxes. And so like really aligning, you know, if that's your goal and you're not just completely optimizing for an exit, you really want to align yourself with a partner because you know, if we're splitting a cap table and we own a portion, you own a portion, the bigger the distribution is for everybody regardless of your ownership, the better it is for everybody as well.
- [19:08]
Eric
So what are the signals? So we've got, you know, thousands of brand owners who listen to this podcast. So what are you looking for among those. What are the signals that you're looking for from those brand owners that make them a good fit for an acquisition?
- [19:22]
Jeremy
We have a whole list of stuff, so I'll try to keep it short, I think. Okay, top three things, and this depends on whether they're looking for. Let's just go with the full exit. Like, you know, I'm done with my business, I'm ready for the next person to take over, and it's been a great ride. The core fundamentals, you have to have really strong unit economics. So gross margins, normally over 50%, contribution margins, usually somewhere around 30%. And then your net income, literally just, you know, your top line, take every expense out of your business is usually around 10 to 15%. You know, there have been some what I would call unicorns in this respect that have 25, 30, 40% net income margins, but they're very special businesses. We specifically look for 50% or more DTC businesses just because that's our model. There are people who love majority retail, majority Amazon, and then, you know, if you really want to go, like, cash a check, go hang on a beach. Really strong team and really strong sops and procedures. I think a big mistake I see with a lot of founders in our space is they're like, I do everything, I am the business, and I want you to give me the most amount of money possible, and I want to go to a beach tomorrow. And I think the big thing that a lot of founders need to realize is if someone's writing you a check, and the bigger the check, the less they want to do the job. And so I think what I. What I have a lot of talks with a lot of founders who are like, considering exiting is, do you want to actually sell your business or do you just want to hire an operator to run your business? And you can kind of step out of the, you know, the grind in the day to day and all the sleepless nights. And I think that role should be higher no matter what, because it's called keyman risk or key person risk. You lose points on your multiple, which, you know, we could go from a 8 to a 6, a 6 to a 5 or 3 based on not having that person. So I say that's like number two, absolutely crucial. And then the third part is, you know, we can get into all the specifics, but a really, really well defined product in an interesting category. Now I'll probably bite my tongue on this, but I cannot tell you how many clean beauty and yoga pants businesses and athleisure businesses we've seen. And the problem is, is if you're not differentiated, it's really hard for someone to write a big check into that because we're just concerned that like, you know, why is this going to stand out versus the 50 other players in this space? And so having something truly unique that stands out about your business product is usually really helpful, but it could be the way you go to market your distribution, intellectual property, something about that's really unique to your business that, you know, a lot of people refer to this as a moat, but I think a moat is a little bit misleading. It's something that's either impossible for someone else to recreate or copy. Like, you know, why can't one of my partner always looks and I said, why can't we copy this in six months? And I think if you have a really compelling story and narrative around that, specifically with a really strong team that can take over with really strong unit economics, you're going to do very well when you exit your business.
- [22:16]
Eric
You've got the added pressure now of all the Chinese sellers on TikTok. Every third video I scroll to on TikTok are the Chinese sellers being like, you can buy Lululemon pants for, you know, $1, plus the tariffs is still 100% cheaper. So that's added pressure in the industry, which is just great. So one of my questions was like, what could a founder do six to 12 months in advance to a potential acquisition to improve their valuation? One would be that key man, make sure that you've got your SOPs. Make sure that you're not the linchpin in your business because if you want to leave, that's not going to work. Anything else that you'd advise founders to do in advance?
- [22:53]
Jeremy
Yeah, I mean the first piece of advice would be to start six to 12 months in advance. I cannot tell you how many people I talk to and it's like, oh yeah, I want to sell my business in a month. And so having like, and I mean clean sops, like, you know, I like to pretend that I'm a 7 year old when I joined a new company and like, can you train me up on how to do everything? Like that level of like, very good detail, very simple, you know, there's nothing that's stuck in one person's head. So that'd be, that'd Be crucial. Two is really clean financials. I know it's expensive to work with a broker or an investment banker or an advisor, but you know, clean up your QuickBooks so that it's understandable. And there are so many templates for E commerce brands. We have a bunch that I'm happy to share as well and like what a good E commerce P and L looks like, but just really, really simple going back a couple years. The three, also the three key financial statements I think is really important. Your P and L, your balance sheet and your cash flow statements. And if you don't know what those are, I would recommend talking to someone to get some help and advice on building those out because that will determine so much of the value. A couple of tactical things that you can do. Think about really every single cost in your business and is it absolutely 100% necessary? Your business will trade on them. For most brands it will train on a multiple of their profit. And so if you can take out $100,000 in costs to your business that don't need to continue. A great example of this from one of the brands we looked at last year was they went to naked shipping, they stopped paying for boxes and they stopped wrapping their boxes. And you know, at a unit margin level, if you want six times your profit, you can add $100,000 back into your profit. That's $600,000 that you'll make in an exit. And so really thinking through those components and those pieces, My one last piece of advice, just because we see this occasionally is like don't squeeze all of the juice out of the orange. I see this mistake a lot where people try to juice their stats or they try to get a little bit more revenue where either they cut their revenue, they cut their advertising completely to make it look more profitable, or they start running a ton of just clearance level discounts to try to just boost sales. We don't want to buy something that's about to die and that, you know, we need to go through and rebuild like we want to. You know, there's got to be a good clean narrative of this was my part of the journey. I did a great job in XYZ. My strengths were not 1, 2, 3, you should buy this business because of that. And a great example of that is like, you know, I crushed dtc. I'm amazing at meta ads, but I did not want to invest in other channels, in email or I did not want to go into retail or you know, those, or you know, it didn't work for us. At the time we didn't have the funding, the structure of the team, you know, whatever the real reasons are. But definitely create a narrative around this is where the business should go. I've thought about this and I've realized that it's just not a fit. For me, that's a really compelling narrative because then we can go, okay, well, you know, I do know the person that's an expert in getting into CVS and Walmart and Target and whatever. And I do know the person who's amazing at Amazon. And then it's a compelling business for us because just so you know how private equity works, every single we have to write a deal memo, which is actually where my newsletter started is I just basically created public versions of them where there's a section called EBITDA Expansion in English. All that means is we need to make the business more profitable because if the business becomes more profitable, we can sell it to whoever we will sell it to down the road so that we can make more money back. And really thinking through clean paths on how the business can become more profitable and grow and you know, not ruining it for the next person is also crucial because you might get some interest seeing, you know, the 100% year over year growth or the impressive profits. But when someone looks at your business, you're just going to have kind of what I always call like a bad date. Like they're going to look, they're going to show a lot of interest, be like, yeah, this is great. They're going to look at your books and be like, oh my God, what is going on? And so really having that clean, I think like the clean story, really thinking through your narrative. You know, you spend so much time optimizing the sales pitch on the way up, really have a clean narrative on the way out as well as like, this was perfect for me. I have a family event. I have this candidly, I also hear a lot of just like, I'm bored and I'm ready to move on to the next thing. And just really make sure you have that wrapped up so that it's a very clean story for us. Because we just do the same thing. We go to our investors, we pitch them, we say, hey, this is a great idea because of XYZ, we want to buy this business because of 1, 2, 3 and then the story needs to make sense, clean throughout and give us enough confidence if you want a multi million dollar ten hundred million dollar check that everybody in the chain feels comfortable writing it.
- [27:15]
Eric
The power of the story is something I Hear again and again on this podcast, whether you're marketing, exiting, building, everything.
- [27:21]
Jeremy
It's all a narrative.
- [27:23]
Eric
Yeah, it's all. It's all. We're all storytellers. You mentioned 50% DTC, and I love to hear that because it's like, you know, this is the DTC podcast, but everyone at some stage wants to be omnichannel. You also mentioned the terrible cash conversion cycles in retail. Maybe a bit on that. And also, are there any other benchmarks in terms of like, AOVs or retention rates or things like that that you're looking for that make great businesses?
- [27:45]
Jeremy
So other than the P and L benchmarks, I think so the 50% DTC thing is purely just us. We. That's our area of expertise. That's our zone of genius where, you know, we can take a brand that does that, layer on the other components. And then also part of the reason why is the people who would buy businesses from us, they're retail experts. Like, you know, we kind of, like, you know, our narrative is also, we took it from here, we added these layers on, and then, you know, it's ready for the next person, and we're not gonna be the best fit when, you know, you got to go into 10,000 doors across the country. As far as benchmarks, I think, you know, there are kind of these standards by industry, and I think it's really important to know just generally what your industry is. That's actually where I started a lot of this, like, you know, tearing up public companies is. I would constantly look for comps, and I would constantly look for examples of, you know, what is. What does a standard beauty P and L look like versus a great example. Right. Beauty versus food and Beth or CPG or most people triple A refer to. Right. Beauty probably can have 80% gross margins. Right. Beauty is 90% packaging. The liquid inside of it's really not that expensive. So you usually have very, very high gross margins. But then your marketing spend is a massive portion. 20, 30, 40% of your revenue goes to marketing. Whereas food and Bev usually very, very low gross margin, like 40%, much lower marketing spend because, you know, you don't have the other 40% to spend on marketing. And so I would say there's a lot of great resources out there. I've posted a lot about this as well. Is like, figure out more of what the standards are in your industry and try to beat them. Like, you should not. I mean, I wouldn't say you shouldn't. It's very, you know, if you're a food and bev business trying to shoot, you're at 40 and you're trying to shoot for 80. That's the completely wrong thing to focus on. Right? Like you should work within the constraints of your business. But really what it mostly comes down to is the metrics on your P and L. Like how much does it cost you to acquire a business? Sorry, acquire a customer. How many times do they come back to purchase? I think the other misleading thing that a lot of people read in the Shopify dashboard is they read repeat purchase and think of what percentage of my revenue is coming from returning customers. We honestly don't really care that much about that. What we actually want to see is do you have a one and done problem? And what we're really looking for is what's called the repurchase rate, which is what percentage of the customers, like the humans come back to buy and how often do they. Because what you as a brand owner, what you should also be thinking about is what's my CAC payback period? I spend $10 in marketing today. How long does it take me in gross margin to make that dollar back into my business? Essentially, what's your return on your dollars invested in marketing? And then we want to know how much money are we going to make on the back end? So that if we do say, hey, you're spending 10, that's very outdated, you're spending 30. We want to go spend 50 to acquire way more customers. How long is it going to take us for, for that to be profitable? And so I'd say really knowing those numbers of repurchase rate, what your CAC is really important. The other thing that I always ask and stumps people a lot, so I highly recommend doing this is what's your weeks of sale of your top performing inventory? In English, just what that means is it's dividing how many units do you have in stock versus how many units do you sell every single week of your, you know, take your top 10 products. Do you have two months of inventory on sale where you know you're going to sell through your inventory in two months or do you have two years of inventory on hand? Why this matters is that's how much cash you just have sitting locked in a warehouse somewhere. And if you want to unlock more cash in your business, the fastest way is to unlock the cash out of your inventory. And so that's a, that's a data point that, you know, there's no true benchmark for it. It kind of just, it fluctuates A lot based on your business but could not, you know, if somebody wants to optimize your business and get ready for a sale, really optimizing that where you know you don't want to sell out ever because that's not, you know, you can't run a business if you don't have any inventory but you also don't want to hold anything and it's a great way to free up more cash in your business. And so I would say like really focusing on like not just your P and L but those kind of metrics of like how is the, how is the money flowing through your business which you can pretty high level sum up with cac, CAC payback, LTV or repurchase rate and then your weeks of supply on hand.
- [31:57]
Eric
Nice. Love it. Talk to me about Coco. Talk to me about Coco AI. I know it's your first acquisition in the space or with it with because maybe it's a WhatsApp platform. Talk to me about that.
- [32:09]
Jeremy
It is. So the great thing about creating content all the time is people will reach out to you and people will offer you great stuff and great deals and yeah, this kind of just came out very fortuitously. The founders reached out to me late last year. Essentially what we're selling is if you're familiar with an SMS platform in the States, nobody in Europe or Australia uses iMessage as their primary vehicle to talk to their friends and family. They use WhatsApp. So if you're in another platform, you know, if you're in another country, you're not texting each other. They literally use it for like, you know, their utility confirmation or going to the like hair salon or restaurant and getting like, you know, your reservations at 6. But they're not texting their mom or their best friend, they're WhatsApping their mom and their best friend. And I was very, very involved about five, six years ago in the SMS space and when that was very early and I just saw the exact same thing emerge in WhatsApp. So we bought Cocoa Shopify app. We're working with 625 customers, mostly internationally but very heavily concentrated in Europe. And the goal is basically just to build Klaviyo for WhatsApp. So campaigns automations. The one unique flair that we have is we've added an AI agent that can respond to the messages when customers respond. So common use case a lot of our customers have is abandoned cart message goes out. Hey, it's Marie from you know, whatever, Jeremy's hat brand. Do you have any questions Is there anything I can help you with? You know, really customize, make it seem like Marie is reaching out from the brand. Customers will respond, ask, you know, what's your shipping policy? Do you. What's, you know, can I return this in 20 days? How does it fit all those kind of components? And yeah, it's been great to see. We're seeing great results with brands just recapturing a lot more customers. And I'm very, very bullish just knowing, you know, if you're running SMS in the States, you're probably looking at 15% of your revenue coming from SMS. And my big bet is that Europe and Australia are going to see the same thing over the next couple of years.
- [34:04]
Eric
Very cool. Well, if people want to follow this, first of all, you got to go to I mentioned let's buy a Biz xyz. We'll put all of the links in the show notes follow Jeremy as well on on LinkedIn. And because dot Ventures, if you're out there looking to talk to someone about any of this stuff, you're obviously a wealth of information. Thanks for coming on the podcast today. This was awesome.
- [34:25]
Jeremy
Yeah, really appreciate the time, Eric. If there's anything I can help with, just reach out on LinkedIn. Happy to help.