Don’t Raise VC Money Until You Hear This | Mike Gelb with Shamin Walsh | Consumer VC

0:00There's very few people who've taken even one company from zero to a billion dollar plus public exit and he had done it multiple times across categories. and melody is like porn. Change a public perception of the sexiness is more of an output problem than an input problem. Even in that hype era that you're kind of alluding to, we were still price disciplined on the tech side. It's like, how much effort have you put into this thing? If you look at like someone's average phone, they probably have like 50 or 100 apps and probably use like four of them on a daily basis. Hi, I'm Mike Galp and this is Consumer VC where we discuss what it takes to invest in and build scalable consumer businesses.

0:40A big thank you to Odile for introducing me to our guest today, Shamim Walsh, who is the managing director at BAM Ventures. BAM is an early stage consumer-focused venture capital firm based in LA. They've backed some of the truly iconic consumer companies. Cotopaxi, NerdWallet, Zola, Away, Thrive Market, Honey. The list goes on. seriously some of the most exciting consumer businesses and success stories out there. In this episode, we dig into what it actually means to invest at the pre-seed stage and how BAM thinks about its fund size today and where they're headed. Also, how they balance investing across consumer brands, consumer tech, and commerce enablement.

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2:44Shamim, thank you so much for coming on the show. How are you? I'm good. Thank you for having me. I was just saying how it's been nice to meet you in different contexts and you've moderated a panel I was on and we did that group lunch, but I have yet to see you in your space. So it's cool to be here. No, I really, really appreciate you coming on. Yeah, we met through Odile, right? And then started off with lunch. And then, of course, we also did a panel together. And now you're here. This is wonderful. Yeah, look at that. So let's start from the very, very beginning of your BAM journey. What made you decide to join BAM?

3:25So prior to BAM, I worked at a small early stage fund in LA. our differentiator was that we own tangible assets like 3PL fulfillment logistics and I had done all the consumer sourcing there and kind of run the day-to-day because I'd had a great deal flow network I'd been angel investing for years I had the privilege of being one of the first investors in sweetgreen and thankfully based on how well they had done other great founders knew other great founders and so the BAM guys were one of the first folks I had met when I started in venture. We'd ended up investing in a lot of deals together. A good example is Thrive Market where they were the very first investors.

4:06They had so strong in consumer and then we had our 3PL logistics background and so it was very synergistic in that way. That fund performed really well but they wanted to go even deeper into logistics and more majority stake private equity type. And I wanted to stay an early stage consumer. I just love consumer and starting at the earliest phase. And there's no one that I know that does it better than the BAM folks. And one thing that had particularly been helpful is that we'd been on a board together. So it wasn't just, you know, sharing deals, socializing, but you kind of like we're in the trenches with them.

4:42And then, of course, Brian's credibility as an entrepreneur. I mean, there's very few people who've taken in even one company from zero to a billion dollar plus public exit. And he had done it multiple times across categories and just he loved the earliest stages of consumer. And so did I. And it was just the perfect fit. So yeah, I joined in 2017. We've always been equal partners, which was kind of like revolutionary at the time. I feel like it's revolutionary even today, sadly. And we raised Fund 2 together, Fund 3 together. And then now we're at the very tail end of raising from four. So we'll probably unlock that later this year.

5:24Amazing, amazing. What made the BAM folks so special when you met them and also when you work with them? I think that there is a true, look, venture is risky as is. No matter what category you're in, there's always a level of speculation when you're investing in anything around its future potential and growth. But I think that there's a lot of folks that feel a particular way, and rightly so, about consumer in the sense that there's a lot of touchy-feelyness around it, or it's like more of an art than a science. And coincidentally, totally irrelevant to our careers now, but Brian and I are both lawyers by background.

6:07And it reminds me of this law school case where they asked about the definition of pornography. and the judge couldn't really articulate it. He's just like, you'll know it when you see it. And I feel like pre-seed consumer is very similar. There are, you know, at this stage we invest, sometimes you have some metrics, but maybe not a lot. Like there's not a lot of like quantifiable, like X, Y, Z you can point to as to why you think something will be great. And the VAM guys, you know, Brian did it and he wasn't afraid of it. and he's also really good at it and he's also created it. So there's really no one else I could imagine wanting to work with that both got it themselves but was able to create it as well.

6:57No, that's a really – no, I really do appreciate that. It actually reminds me a little bit just from what you said about pornography. I had this music teacher who said, melody is like porn. You can't describe it, but you kind of know it or hear it. You kind of know what it is once you see it. So very, very, very, very cool. What, I mean, consumer is also really challenging though, right? Really, I mean, and it's not quite, even though it's really sexy on one level, because it is products, it is things that we touch, it's things that we buy. From an investment perspective, it's not very sexy, though.

7:41It's kind of been left in the dust for quite a few years. What is exciting to you about consumer and consumer startups, and what was your original attraction to consumer? That's a really good... I think what you're saying articulates a lot of what folks have been saying in the market in general. But I think for us, consumer has always been sexy, which is why we've been doing it across four funds for the past 10 years. because I think, you know, what has changed a public perception of the sexiness is more of an output problem than an input problem. So sure, consumer, you know, is not sexy if you define it only as consumer brand and you can only have a$10 billion outcome.

8:24Then maybe it's not the right category for you if you're, you know, a billion dollar, multi-billion dollar funnel, of like that's the parameter you're going after. Your pool of opportunity is extremely limited. But there are many, many, many, you know, hundreds of acquisitions a year for$300 million,$500 million, you know, sub-billion just on the brand side alone. Then, of course, you have the once-in-a - lifetime generational tech companies that, you know, people define as the five largest companies in the world, like four or three out of, you know, three, four out of the five are consumer companies, which are, you know, do come once every 10, 15, 20 years definitively.

9:08But between those two, there's still been a lot happening in consumer. And for us as a$50 million fund who writes initial checks very early on, we're primed to return venture-like returns, whether this company exits for$300 million or$30 billion. And I think when you put a target on consumers back because you expect every company to have the same kind of outcome as Apple or Facebook, sure, they are consumer tech. But if you expect that to happen on a recurring annual basis, then of course. But I don't think that's a category problem. I think that's just people taking outlier examples and now wanting everything to be that.

9:55Do you think you can still get a cheap power law type returns in consumer? Of course. I mean, I've used this example in other podcasts and I have multiple examples that are like this. But I mentioned we were early investors in Pretty Litter. They only raised a million and a half. They've exited for north of half a billion. And that was 70, 80x. That was power low return type. And that was just on the brand side. And then we're investors in honey, which is, you know, over a 360 X return for us. Like you can definitely get that. But again, it depends on when you invest, how much they end up raising.

10:36You know, you look at the capital stack, what they exit for. You don't necessarily need to have a multi-billion dollar outcome, but you do if you've raised a billion dollars, you know, you do if you've invested at a$300 million valuation. So again, like we're not talking about enough about the inputs, but the outputs are there. It just it's just a hard category for a lot of folks that are deploying a lot of capital because, you know, even going back to that pretty letter example. If you're a large fund, you know, a company that's only raising a million and a half might never even come across your radar or not even be worth your time.

11:19Right. It's just not meaningful enough. And it's not really going to, if you have such a large fund as well, that is actually not going to make a dent in terms of the actually ROI that you need to drive across, you know, if you have a billion dollar fund, let's say. Yeah. And again, that's not a category problem. That's just like a matchup problem. And by the way, like there's nothing wrong with those funds strategies. Again, it's like a puzzle piece. Like these two pieces may not fit together. Something else may fit with them. Doesn't mean that anyone else's strategy doesn't work, but it's not the category itself that's flawed or that has changed or that doesn't have outcomes.

11:59Because how could that possibly be true if, you know, 70 % of GDP has, you know, is still, you know, run by consumers? How can that be possible if we've had like the largest Black Friday sale, you know, last year or, you know, that we're not becoming any more well known as a country or culture for becoming massive savers? Like we're spending money and we're spending money somewhere. but we're you know how we spend it how we spend our time how we spend our money may be shifting but the spend is still there and the opportunities are still there is it a good thing that consumer maybe is underappreciated though in the venture community it's good for me yeah good for you yeah um how so the current fund fund three you said it was 50 million dollars right is that is that right?

12:48$50 million fund. I know that you're about to kind of lock up Fund 4. How do you think about fund size overall? And in terms of, because I'd imagine in consumer, well, I've talked about this before with different investors, but I mean, in anything, your fund size is your overall strategy, right? In terms of how big your fund is. In consumer, it seems like you have to be pretty disciplined in terms of in terms of how big the fund size is. So what what is how do you think about, you know, fund four, fund five, fund six, for example, how big you want those funds to be in order to be able to execute the strategy that you want to execute when it comes to investing consumer?

13:30Yeah. So fund four will be five billion dollars. I'm just kidding. Fund three is 50 million dollars fund four is 50 million dollars fund five will be 50 million dollars i mean this is the strategy um it's funny because i often feel when you have a smaller fund people think it's like a stepping stone to a larger size and it would actually have been much easier to raise a larger fund because your pool of capital is more limited yeah yeah and so it would have been especially with ryan's credibility in our past track record it would have been so much easier But there are, again, back to this is a great category if you have the right infrastructure and setup for it.

14:14You know, we want to be able to see founders who don't need to raise necessarily tons of money. And maybe they're building a multibillion dollar business that necessitates it, and that's fine. But we don't want to invest in founders who have to take in a lot of money because we're saying to them, well, we're X size. And so you have to take this$20 million check or else this investment like isn't worth it for us. Like we want to be as aligned with our founders and our LPs as possible where we're defining our success by performance and returns and not from management fees. I mean, the main downside of our fund size is obviously management fees.

14:52But other than that, I mean, we're as close to the founder journey as an investor can be. We're as close to like LP performance base as an investor can be. We're all just kind of in the same boat together. And I think, you know, there are a lot of different factors specific to our fund strategy and our fund size that contribute to, you know, why we have continued to have successes over the past four funds. Because even, you know, in the grand scheme of the world, even going from 50 to 100 million, for example, doesn't necessarily sound like a lot when there are billions and multibillion dollar funds, but it completely shifts your strategy.

15:36You know, the amount of capital you have to deploy completely changes. And, you know, we're particularly strong in a certain aspect. So, like, why would we try to change what we're good at if what we're doing is working? How do you think about investing? Because you kind of have three different buckets of categories that you invest in, right? Brands, commerce infrastructure, and consumer tech. How do you balance kind of how many brands, for example, commerce infrastructure and consumer tech companies you invest in across each fund? Those categories don't have quotas or like check the box like, okay, if we do 50 companies, X amount is this and X amount is that.

16:21We're very founder driven. We've always been founder driven. So we kind of back into it as, okay, these are the three categories where we feel like we can help you accelerate a potential competitive advantage, either based on what we've been focusing on for the past 10 years or have built ourselves. Like, this is where we think, you know, we can actually have a piece of knowledge that we can stand behind. Other than that, it's completely founder-driven. So we look at all that, you know, we have, you know, one fund may be slightly more brand driven than the other. Another one may be slightly more tech driven than the other.

16:59And it's really just a function of, you know, the founders and what we've come across. What then do you look for when you have a first meeting with a founder? We spend a lot of time trying to understand who founders are just as people. Like what's motivating them to start this business? Are they doing this for the glory? Are they doing this to have a title? Do they find it glamorous to be a CEO or not? Their ability to attract talent. You know, how much are they doing this where it's their thing as opposed to they're building something bigger than themselves? We're looking at someone who has kind of an eagle eye lens on different consumer behaviors.

17:44is perhaps they have unlocked a super fan community that, you know, that's already been pretty saturated. So for example, let's say everyone's looking at sports, but no one's doing anything in power sports. And we meet a founder who comes from that world and loves that world and building a marketplace for their people like in the power sports space. So the going deep in certain particular categories where you know that that audience is not just fickle, but what you're building is speaking to something that they can have an emotional connection with. And I think most importantly, that kind of ties in all of these things is a founder who truly understands how their customer behaves and knows how they behave.

18:34So, you know, I'll tell you, sometimes it's easier for me to articulate what I'm not looking for. I think there's a lot of really smart people out there that are building things that would be amazing in a vacuum or in a perfect world, but like people do not operate necessarily rationally or in a perfect world. So for example, you know, if you're meeting someone who was building a multi-step logging platform that if adhere it to perfectly will give you the most optimized way to track all of your macros, but it only works if you are diligent and meticulous about how you're doing it. Yeah, like if I did this perfectly right, I would love that.

19:17But, you know, that's not how we work, you know, and then you might, you might think, wow, if if used perfectly, this was amazing. but I only input a 30 % of it in or, you know, I've only used it for two days. And then I think the product sucks. And it's like, it's not a product problem. It's just the fact that that this founder didn't truly understand how a person's mind work and actually how hard it is to change behavioral change and like how you really have to lead a consumer a certain way to, to either connect with them or to get them to trust you or to convert that sale. What's an example of a company, it could be a company you invested in or it could be a company that you just really admire that you think have done a really good job in that in terms of making a new consumer behavior, but also was kind of in lockstep in terms of educating the consumer about the product?

20:18I think Thrive Market's a really good example. in the sense that, you know, when Nick was first raising, and Bam was the very first semester in the company, and when Nick was first raising, a lot of people didn't get that concept because it was during the time in which Amazon, well, you know, Amazon is still Amazon, but like it was at a time where people thought, I don't get it. You know, you're like, you're curating these like healthy foods at memberships prices and you're offering them this convenience and X, Y, Z. But like I could find all of these things on Amazon. Like how does this compete with Amazon?

20:58Like I could literally find the same exact peanut butter or whatever it is anywhere else. And he was a really good example to us of someone who understands consumer behavior or like how the consumer mind works. And, you know, he didn't try to necessarily say become defensive and be like, no, you couldn't or like, this is how he was like, you're absolutely right. You can find this on Amazon. But that necessitates a level of consumer intent that most people don't have. So if, you know, at that time, it was, you know, really at the beginning of certain food regimes for folks like, you know, Whole30, Paleo, Keto, etc.

21:46And whichever philosophy you followed, you know, I may know that it's something I want to try out. I can tell you if I wanted to try out something, I would have no idea where to even start on Amazon. So it's like, sure, if I knew I wanted a particular product, I don't even, you know, I can go and try to search for it. But in terms of feeling like I can be guided through a particular experience, that I feel like there's a community around it, it's one of the brands that had the earliest use that I'm aware of, of like true authority influencers, you know, with Mark Sisson and others like within like the actual leaders of particular regimes saying, participating with it and getting involved with the company and helping curate for folks.

22:36And to have a platform where if you're XYZ, and I don't even need to think about it. Like I can trust it. I know that they've done all the hard work of like the label reading and the sourcing and I can just go paleo and know that every product there is safe. Like just freeing up that mind share. That's the kind of thing you look for in a founder. It's not something tangible in terms of, oh, you're offering ghee. How great. It's like not about the particulars. It's about somebody who understands that people want to be healthy. People want to free up mind share. And like, these are the things that matter.

23:15And that's the kind of thinking that helps differentiate great founders for us. Yeah, no, that's a great example. So Thrive Market, part of the value prop to consumers was trust, trust in recommendations, trust in the actual curation of the products and alignment in terms of what your values are as a consumer in food, we actually have the exact same values so you don't have to go spend a lot more time finding the right products. Absolutely. Makes sense. You brought up kind of a couple examples on the physical brands side of it where a company might raise a million dollars or two million dollars, but then that might be the first and last fundraise.

24:07And you can achieve venture-like returns because it's hopefully in like a$300 million, $500 million type exit. And of course, Hunter's really happy. You all are really happy. It's really just a win-win all around, right? And then you also have, I'm thinking like commerce infrastructure, which is kind of interesting from the way I see it. And I'm curious about you. we've seen some funds that started off investing in physical brands. And then as they become bigger, I think kind of shifted towards investing into commerce infrastructure type companies, because typically these outcomes from a venture perspective are a lot larger, just on paper, the valuations from a valuation perspective.

24:58My point being, how do you think about reserves as well when it comes to investing in these companies? Because you obviously have the upfront investment when it comes to physical brand or a commerce infrastructure company or a consumer tech company. I would say consumer tech probably is more in the bucket of commerce infrastructure in terms of what those outcomes could be. How do you think about initial deployment? And then how much is actually reserving capital for pro rata? That's a really good question. and a good point. We typically invest 500k per seed seed and we're pretty valuation disciplined.

25:31So we're very early. If we invest in a brand, it's typically sub 10 posts, but the ideal sweet spot is around that like five or$6 million mark. And if we're investing in tech, if we think that there is truly the opportunity for a much larger outcome, you know, because you're always playing this like math trade-off game between larger outcome or dilution. There are very rare examples. I can't even think of one off the top of my head where someone only needs a million dollars and also is building a$10 billion company. So like traditionally, there's like this kind of like trade-off. And so if you think the math continues to math, we can go a little bit later with tech up to 15 posts, so not even that much later.

26:19But the way we think about it is initially 500k check size. And then we'll follow on with, you know, up to a million potentially in, you know, seed or our own A's. So we don't write initial checks in A's. Traditionally, I'd say about a third of the portfolio will probably get some level of follow on. And then we don't invest beyond the series A. And we have a lot of later stage funds that are investors in our funds. We have really strong relationships with other funds and growth funds. So nobody is starting from scratch after a BAM check. But in terms of BAM, to your point, we're trying to concentrate our check size and attention at the earliest stages where we can get the most juice out of the squeeze for like our dollars.

27:06It seems like when it comes to price discipline in this market, nothing's easy. I'm not saying it's easy, but it's much easier to stay price disciplined in this market than it was, let's call it 2018 to 2022. During the 2018-2022 years, how were you able to stay price disciplined? I think it's a function of having done it for, you know, as a fund, we've been around since 2014. Brian has been building companies since 1999. And, you know, I invested in Sweetgreen in 2007. I think we've just seen a lot of markets. And it's hard for sure, but you know the opportunities are there. and it helps a lot to cut out the noise and just focus on what matters.

28:01So even in that hype era that you're kind of alluding to, we were so price disciplined even then because we knew the numbers weren't going to math out. And also when we looked at some of our biggest successes from BAM1, which is, you know, a 2014 fund, it mimicked the same strategy we have now, which is invest early and invest at this valuation. You could see the difference. I mean, we had a couple of portfolios in BAMLUN that had, you know, from a PR perspective, had an incredible outcome, multi-billion dollar or public or whatever. And it made money and it looked good. But when you looked at like dollar for dollar, what went back to LP is you realize it's not just a logo game if you're seriously in this for the upside.

28:51So I think that's how we stay price disciplined is having the benefit of looking on actual use cases and really just looking at actual numbers. Were you able to still win deals, for example, while remaining price disciplined where other investors, for example, were happy to pay a higher price for the same company? I think you're always going to miss out on stuff. um i think we we benefited on winning from deals again because of how early we invest and i think a lot of founders really value brian's entrepreneurial experience as well because not only has he built multiple successive businesses but you know for us like we consider it a core strength that brian is an active ceo because the same kind of strategies that help LegalZoom become successful in 99 is not what's making Arena Club successful today.