Are You Building for the Right Reasons — or Just Because the Category Is Hot? Should there be a Better Business Bureau for VCs? w/ Sid Banthiya

0:00Do you think there's too much money in venture? Why are you building what you're building? That we glorify venture capital too much in the headline. Oh my gosh, what a crazy valuation. This is unbelievable that they're able to raise this valuation. Maybe it was 1x preferred. To what extent does the adoption rate of consumers accelerated by AI? If you get connected with one and receive capital from one, all of your problems are solved. If you have no flexibility within a market, it's going to start to be more turbulent. And to your point on COGS, right? Like where are the ways that you might be able to lower them?

0:34Could you start to distribute something that's a different version of what you do that doesn't cost as much? Hello, I'm your host, Mike Gelb, and this is The Consumer VC. We discuss the world of venture capital and wonderful consumer businesses. If you're enjoying the show, please subscribe on YouTube, Spotify, or whichever platform that you're viewing this content. And if you want the full experience, subscribe to my newsletter at theconsumervc.com. I send the latest consumer news and fundraisers in a jam-packed weekly email called the Consumer Roundup that you'll receive once you subscribe. And you'll receive new episodes as well straight to your inbox.

1:12All content episodes are for informational and entertainment purposes only. It is not investment advice. Thank you, Taylor Foxman, for the intro to our guest today, Sid Banthea. Sid is an investor and advisor to many consumer brands like Aeroflow, Holy, Splendid Spoon, and previously was a chief strategy officer at Milk Bar and the head of strategy and corporate development at Blue Apron. We're going to focus this episode on the two articles that Sid wrote, avoiding the road to mediocrity and the case for a better business bureau for investors. I would say this is one of our deeper episodes as we talk about human psychology, why to start a business, what progress really looks like, and term sheets.

1:59Thank you to our episode sponsor, Highbeam. Highbeam is the finance platform built for consumer brands. You can learn more at highbeam.co. Without further ado, here's Sid.

2:13Sid, thank you so much for joining me today. How are you? I'm great. Great to be here, Mike. Thanks for having me. Oh, thank you so much. It's an absolute pleasure to have you on the show. And thank you as well, Taylor, for the introduction. I know you've done a number of things in your career from being an investor, from being an operator. I wanted to start with as well these kind of two articles that you wrote, first of which is Avoiding the Road to Mediocrity. Can you give us a bit of the inspiration in terms of why you decided to write the article? And if there were companies or sectors that you were inspired by in order to, in order to really, really, um, wanting to put your thoughts on a, on a pad and start, um, as are writing.

2:56Yeah. Um, yeah, it's interesting. You know, I, I, the, the motivation for it kind of came from a couple of different areas. One over the course of my career, I've seen sectors where you just see a ton of capital that goes into that one sector and then a number of businesses that are all funded. And it's happened in many sectors. The example I give in the article is about pet and pet food, right? And the number of different businesses that all got created at once. And the mediocrity part that I sort of draw the conclusion to, which is what I've seen, and it's happened in food, it's happened in beauty, it happened in personal care, it's happened in beverage, it's happened across sort of, I'd say, consumer, is there are so many businesses that get funded and then there end up being people who are deciding on what they want to build in life.

3:55And they see where the capital's flowing and then they decide, oh, that's interesting. If that's sort of the formula for being able to raise capital, maybe that's what I should be building. And on the other side, I've seen a lot of businesses that really don't care about where the capital is. And that side of the world has changed a lot because I think that the ability to create a$20 million revenue business is much easier. And I say that with all humility, It's still really difficult, but much easier today than it was 10 to 15 years ago. And so those folks can have much less capital and then be able to build something where it's really based on where their observable sort of hypotheses are and where they see sort of cracks, inefficiencies, things that are actually pain points for them.

4:54And they're running after them because they think they actually be great businesses, too. Um, I think those, those two things were in some ways, the distinction I was trying to make. And it's a bit of a compliment to the folks that are out there that are founders, right? Like so many of them are so talented. Um, and so part of what I wanted to instill was this question of why are you building what you're building? Do you think on that front, when it comes to, you know, your example of building, you know, a$20 million business, which is incredible, especially obviously if it's bootstrap. But do you think that we glorify venture capital too much?

5:32Are we part of the problem? Is consumer VC part of the problem for glorifying it? I think that's certainly a part of it. I mean, if you look at the headlines, right? I mean, the vernacular, the word unicorn got introduced, right? And it got introduced in a way that was, this is an achievement and this is what we're all looking to do. And there were associated venture capital firms, right? And whenever you see the TechCrunch articles, the ones that come out And basically all of the rags that are out there, you see X person got funded by YVC firm to do Z, right? And then, you know, you see on LinkedIn and everybody's like, oh, wow, that was great.

6:23Like, congratulations. You know, this is really wonderful. So I think there is sort of this element of positive reinforcement on, you know, being funded by venture and that that is an achievement in and of itself relative to I got a concept out in the market. I solved a problem. I made things easier for people. and people are just, from a customer perspective, super excited about what I've done in the world of consumer, which I think is different than saying, hey, I got$20 million from General Catalyst. Do you think this also changes a little bit of the mentality when it comes to being venture-backed?

7:03Meaning you might be less focused on revenue, for example. You're more focused on the fundraise. I think that's right. I mean, first of all, fundraising is a full-time job. 100%. And it has to be a CEO, which they're doing. It has to be a CEO. You can't just delegate that. Absolutely. And I'm very sensitive to that. In fact, to some extent, I've made a career out of that idea, which is, hey, this is a full-time job. you probably need someone to help you with it because you need to be really focused on the business, right? So, yeah, I mean, I think that the focus on the fundraising part of it, and then once you have the funds to your revenue question, you have funds and so therefore you have the ability to go spend.

7:59Whereas when you don't, you're super focused on unit economics, right? Because you've got to keep the ship afloat and you got to do it in a way that works. Once you have cash in your account, you can start to take more risks. And that can be good and bad, right? Depending on what it is that the incentives are around you and how you're choosing to use that capital. On that note, do you think there's too much money in venture? It's a good question. And there's statistics around this, right, Mike? But you think about sort of the last 10 years, what have been the highest performing asset classes and ventures right up there, if not number one, probably close to number one in every single one of those years.

8:47So you can understand why any LP would say, I want to allocate more and more to this asset class that is achieving, right? But with that then comes more and more capital, which means you then have more and more firms that are created. You have larger and larger funds and you have more and more people who are out trying to deploy those funds. So I think it has gotten larger and people have decided to take different takes on it. Right. It was a much smaller community when I sort of got out of investment banking or when I was in investment banking than it is today. And I think, you know, but with any sort of proliferation, right, where you have more and more people stepping into a place that they otherwise wouldn't have stepped into.

9:36I think there are things that come with that. and I think venture is sort of no different. Yeah, I mean, I guess it kind of goes back to the article in that when there's a boom happening or a sector gets hot, right? Then there's a rush of people that want to get in. You could call that for venture when it comes to LPs. You can call that, you know, what your article was originally talking about, which was building a company, right? And you actually just want to build a company in a specific sector because you see that there's a lot of maybe other companies doing it. And hey, it might be a little bit easier to raise capital here.

10:14And maybe that's the primary goal. When you talk to founders and you talk to operations, I know you know a lot of founders, probably speak to them daily. And obviously you advise a lot of companies. Can you sense if the founder is actually building a company? if the company founder is building is truly innovative rather than they're just kind of getting into this area because the sector is hot? It's a good question. I suppose I think about it a little bit differently in the sense that when I'm talking to them, I can sense that they have different constituencies that they're trying to satisfy, right?

10:58They've got the constituency of like, what's the vision of this business? The constituency of the employees, the constituent of the investors, right, who have ideas of where they think the business of this founder should be over the next year or two. And I can sense, I think, that conflict in many instances where those incentives for those different constituencies around them are not necessarily aligned. And so that misalignment then sometimes leads to decision making that might be, to your point, less focused on innovation, more focused on market share. Pick a metric, right? But it may change the way that you operate the business as a result of where you're leaning on that sort of as you think about those different constituencies and who you're trying to satisfy.

11:52Do you think you can course correct? A company can course correct? If the reason why they maybe started the company was because it wasn't really about innovation. It was more so, hey, I can build like, this is a sector that I think is just really kind of interesting, but and investors think are interesting. So I'm going to go and kind of build this company. And, you know, I come from maybe a business background, but you don't, but maybe you, maybe you don't really have quite an edge that you need to. Do you think that you're able to kind of course correct if that's the reason why you started the company and still build a successful business?

12:35I think that you are, but I think it's one of those things that require you to really dig into yourself for leadership, for the ability to see things, for trusting your gut, for being able to convince people that you may want to take a different direction. All of that, to some extent, is entrepreneurship, is leadership. And I think, you know, I'll give you an example just to make it a bit more concrete, right? I mean, back in the day I was at Blue Apron. At Blue Apron, you could argue was a perfect example of everybody deciding meal kits was the next big thing, right? Blue Apron, HelloFresh, Hungry Brute.

13:17I mean, there's so many of them, right? Purple Carrier. I mean, all getting funded by venture, all coming in. So you can sort of argue, okay, so what happened to all those businesses? Which ones survived? Which ones didn't? And what was that pivot point to your point where it was sort of like, hey, I came into this for one reason, but then I decided to go a different direction and I found the ability to do that.

13:45Take Hungry Root. Um, that is an interesting example in the sense that they are, um, to some extent, uh, giving you an ability to be healthy by curating the products that are out there. And they, that wasn't the mission of the business, uh, at least as I remember it back in the blue apron days, but at some point Ben and his team or, you know, the investors sort of said, hey, what about this? Because this seems to be happening. I think this could be really interesting. And I mean, Mike, I think a lot of that comes, it comes from a lot of different things. I mean, it comes from your read on the consumer, which is, I think that fundamentally for me is one of the things that, you know, differentiates consumer from all of the other areas to invest in, right?

14:35Like you have a view on what people are going to do and why and on behavior. And I think, you know, we, we saw this to some extent too at Blue Apron, and it was a bit of a fundamental question, which was like, do people like going to the grocery store or not? Right. And we had a view that there, that there was friction there. And then if we could provide you with meals, it would be easier for you. And I think to some extent, when you're curating effectively a grocery store for a lot of products that aren't in the grocery store, which to some extent is what Hungry Root is doing, they found that opportunity.

15:11They were able to merge those two ideas of we like grocery stores, but we can't find this stuff. And then layer on a bunch of things to make a business that's successful, both from a unit economic perspective and also from a consumer perspective at the end of the day. So was the pivot, just so I understand, so for the pivot from Hungry Root, was that them going from being a supplier and actually producing their own, um, other meal kits to more of a curator or like marketplace type, type model. Yeah. I mean, it was, um, and I, you know, I didn't, I didn't, you know, full transparency. I didn't work there.

15:48I just understanding from a competitive perspective is they went down a different route from a lot of the things that we were doing at blue apron, which was creating meal kits, which means sourcing all the food, putting them into a place that made sense, being able to create recipes on a weekly basis, then dealing with sort of all the permutations and combinations of how the fulfillment sort of equates with, you know, the software piece and being able to provide that to consumers and doing it in a way where you can manage inventory of a perishable sort of nature versus what's happening now is, you know, they've got effectively a grocery store of healthy products and they're reselling them in many ways.

16:34But because it's specific and you get a lot of the information that you otherwise wouldn't get in terms of curation and being able to understand sort of the consumer and what they want, it's a different direction. And it certainly was a pain point. And I think that business probably evolved over time to what it is today. And I think that kind of thing can happen in any sector, right? You may start it for one reason, then be able to read what's happening with the consumers. If you're really listening to them, manage the constituencies and then start to move your way into a different direction. Yeah.

17:15I mean, and also a hundred example makes sense on paper in that being a supplier, building these meal kits and actually doing all the work yourself, I mean, incredibly taxing, incredibly tough, where if you see yourself as like a destination more so and you actually move like the curation model, I'd imagine it's a much better, not better, but easier business model in some ways too. How do you, with all this being said, how do you think someone should decide if they want to start a company? Or rather, if you were thinking about starting a company, how would you think about if this is something that you actually should pursue or not?

18:01Yeah. I mean, for me, it's all about product market fit. And that product market fit, in many ways, comes from... And I think this is where a lot of the passion and energy and everything that you're going to need to create something comes from is it's something you just you see and it's a pain point for you. And it's observable and you can understand it. And every time you do X or Y, you experience that pain point. And chances are of you experiencing it, other people are too. and then you begin to think about a solution for it, find a fit for the solution that you have, which is the product market fit, and then see if you can develop the economics, the underlying economics that can make it successful.

18:47But I think it really starts with that sort of observable pain. And if you feel it yourself, the likelihood is that others do, which in the article, I was trying to draw that distinction between that sort of philosophy in terms of starting a business and the philosophy of taking into account capital flows, which is not to say they shouldn't maintain account at all, but if it's sort of the only factor that you're considering, that's the distinction I wanted to make. When do you think it makes sense? Let's say you have found a market fit, right? And you're the right person or you believe you're the right person that has the unique skill set to start a company in this particular market.

19:38And it's a deep pain point for you. When does it make sense to consider venture versus bootstrapping or even maybe angel money? But it's quite different to venture capital. I think not everybody has access to capital in sort of the bootstrap sense, right? There are people that have existing networks of friends, family, former colleagues, et cetera, that may be open to funding your business. And you can get a certain extent down the road by doing that. And there are other sources as well. Right. And I think to the extent you can you can do that in order to find out the answer to the question, which is, is there there there?

20:29I think you can try and do that on minimal capital. I was talking to a founder the other day that, you know, basically wants to do curated meat from very specific butchers at a very sort of high end level. and he's doing it very geographically specific. He's trying to do a hundred customers. He's planning on doing it for a certain amount of time and then figuring out whether there's a fit there. Do those people keep coming back? Is the feedback, he's going to do the deliveries himself. Is the feedback, you know, really great? Does it really make a difference in their lives? Are they finding it that it's economic?

21:12And which is a really big question today, right? Like markets are volatile. people seeing pullbacks in the consumer across income segments. But as you're doing it, are you seeing that, that traction that gives you the confidence that trying to expand it, scale it, makes sense? And I think you could do that with a smaller group of customers in order to get that sort of feedback up front before you decide that you need more money to scale. Well, there's the kind of, I guess what's been said is go slow and then go fast. I forget to kind of point that, but for you, and also in this particular example, when does it make sense to actually start slow?

21:59I mean, CPG, for example, a lot of what I have a lot of investors on a lot of a lot of what they say, not to generalize, but kind of go slow in terms of being very specific about retail expansion, not kind of going too fast when it comes to retail. Right. Which I've also had founders on the show that were actually went scaled retail very, very quickly. Yeah. When do you when do you how do you think about this as well when it comes to when it makes sense to actually go slow versus when it makes sense to actually go fast in building a company? Yeah. Yeah. I mean, you know, as it relates to, you know, use the example of food again, there are different sales channels in which you can sell.

22:46Right. And, you know, as an example, you could rent a kitchen. I mean, I'm here in New York. You could rent a kitchen, decide that you're going to start to, or frankly, create things out of your own house, sell them at farmer's markets and start to see if you're getting some level of traction. You can take that and then say, okay, I'm going to start selling this stuff online, right? And if you sell online and you sell out, your issue is you sold out, right? And there are people that wanted it and you could have gotten those sales, et cetera. If you sell out and you're in CPG and retail, right, and your partner, whether it's Whole Foods or Target or Walmart, et cetera, feels like you don't have the inventory to satisfy the demand that they're giving you shelf space for, it's a real problem in the relationship.

23:41up. So I think that's one of those examples where if you're going to have a partner in terms of the way you're selling goes, as in this example, you don't want to create that friction with Walmart, right? Because they may give you some shelf space this year and next year, and they may decide, look, we had this issue with them. We don't want to have a stock out such that we're not selling and optimizing our floor, right? Our plan. So I think that's an example of like, hey, if you're going to go into retail and you're going to pick a mass retailer, you probably need to figure out your inventory, your ability to fulfill that demand, et cetera, under different scenarios before you decide you're going to go to whatever the number of stores are, 500 stores versus 100 stores.

24:32You know what I mean? Whereas if you want to go fast on the online side, so you can try and get more of that information and in particular customer information, which you get less of when you go into retail, you may want to go faster online barring sort of the issues of, you know, performance marketing and, you know, some of the economic impacts of that. But it's probably, you know, from that perspective, from a channel diversification perspective of places where you go faster or slower depending on um what you want to achieve yeah that's fair and also on the retail side really kind of understanding what those retailer relationships are as well and you know because if they don't if they lose interest or you're you're moving too fast your velocities are too fast you don't actually have the inventory to scale because you've actually expanded way too much on the retailer side then that's also really bad even though it on the paper it looks great because you sold out but at the same time then the retailer can't so the retailer will probably bring in like competitors to actually expand the to expand the category when you see or identify maybe a category is hot or there's a lot of investment in a particular category take i don't know take uh take anything take like you know crypto back you know two three years ago or even maybe a ai right now um uh i know that you mentioned pet as well um uh before as a as attractive category or it could be even a theme.

25:57Like for example, you know, I just came back from Expo West and, you know, protein was a huge, huge theme across the category. Yeah. Totally. Totally. Does that, as an investor, when you start hearing that a company is hot, like people are just want to talk about it, does that actually make you want to cool off and say, you know what? I actually don't really want, like I'm maybe I'm too late here. Maybe I don't actually want to interested in this category or a company really needs to wow me in order for, for me to get involved in this category. How, how, how do you typically think about that? Yeah.

26:32Um, you know, I, I think on the one hand, when a lot of money goes to a particular category, let's, you know, call it supplements, right? Sure. The interesting thing about it is all those companies then begin to spend money. And in the area of supplements, and there's all kinds of things, there's protein, colostrum, like, you know, you name the number of different things that are out there these days, right? But those companies start spending on education, right? They start telling consumers, what's the differentiation between what they're doing versus what other people are doing, and why it is that their company and you should be using their products versus others.

27:15And in a lot of ways, that ends up educating the market, right? People start to do and have access to more research and more information, and they become more familiar with a particular product or sector. So from that perspective, it's good, right? Because you're able to educate a market in a way that's much quicker than you would have if you were sort of one business within that sector. But on the other hand, there's a valuation component to it. There's a competitive sort of component to it. And then I'd say probably the last piece, which is just like, what does that adoption curve really look like?

27:59And then what's the macro environment look like, right? I mean, today we've got a really interesting macro environment. And if you think about sort of, you know, discretionary spend, you know, that's probably one of the things that you think about versus something that's a little bit more essential. And what level of pricing power you might have in what might be a more risk averse sort of, you know, consumer sentiment time. how all how then also do you think about price discipline when it comes to even investing in in a company that might be in a hot category and that you're like oh oh like from your first i guess first example if it is a hot category there's a company's gonna be spending a lot of money on consumer education this is great you know and kind of all tides lift up all all boats type of environment.

28:56How, by the same time, it might mean then that in hot categories, the prices to actually invest might be a lot higher. How does, I've heard people say price discipline doesn't matter. Although that was more so I would say like two, three years ago. Now I think people have kind of scaled back, but how, how do you think as an investor about price discipline? Does it matter to you? How do you think about price? Yeah, it absolutely matters to me. I mean, I was working with a business called Holy that's out of Germany that does sort of energy drinks, iced tea, great business, now sort of pan-European in terms of its operating footprint.

29:41And we talked about around and I had talked to a few investors about just sort of considering the opportunity. And as they thought about valuation relative to what an exit might be, once you started getting into territory that was too high and you considered what the exit might be, the probability just started to get really low. And even though it's an interesting business that's performing really, really well, once it hits a particular valuation and the requirement for the exit is too high, and you go back and look at all the precedents within consumer and say, what's happened? You'll find in the example of that company and many that get to a particular size, how many billion dollar exits have there been?