Harsh Truth Behind Beauty Exits ft. Rich Gersten

24:13Yes. Because even on K-18, we had the opportunity to put more than we did in. But because of the size of the flood, we limited it to the amount we ended up investing. It had fund one been a little bit bigger, K-18's dollars would have been a little bit bigger, and the whole fund probably would have been returned. So I know that you talked a little bit about how important Sephora and Ulta are to the beauty industry and really why beauty and personal care is very, very unique in that you have specialty retailers that only sell those products with Sephora and Ulta. Does a company or brand, what if they're not in Sephora and Ulta yet?

24:51For that to you all, do you actually first want to see signs that they actually will, if they're actually doing well in those channels before investing? Or how do you think about that relationship overall? When we started, it was almost a prerequisite for us to have a anchor retail partner be in place or about to be in place before we invested because for us that de-risked the investment and again we're not true venture peeps by background right we're private equity piece by background so our risk tolerance might have been a little bit different um and in fact what we invested in do which has been an incredible growth story for us skid care brand we did it in spite of it having a retail partner but we undersized it because it didn't have the retail partner now we don't have enough money in the thing right at the end of the day we wish we had put more in we outsmarted ourselves in that one.

25:37There are others that we felt we needed more proof points and in those we waited and still entered, right? So there are deals in our portfolio where we've passed one or two times and then the third time it comes around and we go in and we just try to build that relationship with the founder winning for that retail partner. I also said we started doing earlier stage stuff and pre-see stuff, but like two of the pre-revenue ones we did, one was a brand called Calire and Fund One. Another was a brand called Hung Bang Go in Fund Two, both makeup brands. We invested before product was even created, but both had Sephora launch partners at inception, right?

26:10So they were launching the brand in Sephora. And so it's delisked, had no proof points of its success, but like is a really pre-revenue seed risk if it's got that launch partner built in at launch? We didn't think so. There's one brand in our portfolio who hasn't launched their product yet. It was the first time we invested in something that had no retail partner secured. and we took that bet for a whole host of reasons and they will be launching a retail partner now and Q1, they'll launch their own business this quarter. So they'll have a little bit of direct to consumer before we did, but we took a bet and not when the retail partner will be launched.

26:48A long-winded way of saying five years ago, absolutely prerequisite, not anymore. Although we still prefer it because we like to invest in a breakout, an inflection point for breakout growth. That launch of a retail partner tends to be that inflection. And it tends to require capital, which is why we used to be able to wait because they'd still come back to us because they needed more capital for that. And I would throw Walmart and Target on the list too. While we definitely lean more towards prestige, we have actually watched a lot of success in the indie brand world for brands launching at Walmart and Target in the last five years and achieving exits or potential exits.

27:24And so we're not going to turn a blind eye to that as we think about portfolio construction and diversification. So we're leaning in a little bit more to mass challenge where we think it's appropriate, depending on the category. So it seems like you're maybe leaning well more into risk, if that's fair to say. Since you come from a private equity growth that way background five years ago, you wouldn't have actually invested in a brand if it wasn't, if you didn't have a retail partner. Probably still a majority of your companies do have a retail partner when you invest in. But that is something that I guess has changed a bit.

27:57i'll tell you what inspired the change again we try to learn a lot from our living lab right and when you post-mortem the portfolio what you'll find is the brands that break through five million in sales tend to break through and go the brands that have underperformed tend to get stuck in that two to three million revenue range and they don't break through for whatever those reasons are retail partner or otherwise they just don't break through and so if you look at the portfolio and say well i kind of was waiting for things to get the two to three million dollars in sales because i felt like commercial proof of concept and traction and so therefore it's less risky versus going in super early and the reality is the data says maybe that's not less risky maybe it says the risk is the same um and if the risk is the same then get in earlier where the terms are generally better, right?

28:52More bang for your butt or be able to influence them before they might make certain mistakes by waiting. And so you get in early, you get a little better terms, you get a little bit more influence and the risk profile doesn't look different, but the reward does, right? So if risk reward is better getting in super early as opposed to waiting, then let's do that. So I think what you start to see maybe is a little bit of a bifurcated strategy where Like in fund two, we've led the series Bs in crown affair and vacation. Little bit later stage, de-risk. The earlier investments were done in fund one, by the way.

29:25So we did cross funds on those because of our conviction. So you have less upside, less risk in a handful of deals. And then you got a bunch you went in super early that you hope to scale over time into series A and maybe Bs as well. But at the end of the day, if the risk in our judgment really was no different, then get in earlier. One of the insights. So how do you overall, and this is a loaded question, but how do you overall would evaluate a brand? How do you think about if a brand's at risk? Maybe they're in Sephora or Ulta, maybe they aren't. But how do you, I know that you're seeing probably thousands of companies per year, but how do you and Christina both think about it?

30:06Yeah, I think that's the key is what you just said, how many we see each year. It reminds me of a conference I attended out in LA like three or four years ago where there was like 12 brands pitching to the audience, right? And you were supposed to pick the one that was most interesting. And after the second one, the person sitting next to me said, this must feel like a day in the office for you. And I chuckled. I laughed. I'm like, yeah, it does. And then like five brands later, the person turned to me and said, I actually don't know how you do what you do because these all sound the same to me.

30:34And I'm like, well, that's the point, right? Like if you listen to a hundred brands pitch and 99 sound the same and the one doesn't, that's the one where your ears perk up. That's the one where you get a little bit interested, right? And so if you're not seeing sheer volume to be able to really understand how to differentiate and then have the understanding of the nuances of this industry and what works from a scale scaling perspective, it's really hard to haphazardly guess which ones you think might win. And so we're distilling down from, you know, a hundred to one. That sounds interesting. And we multiply that by four or five times a year.

31:12That's how you get your deployment. But we're really looking for stuff where after that initial zoom or after the review of the deck or the combination of both, our team sits around and says, yep, there's something about this one that just feels different. And that's where the gut really does come in. And it's honestly why we've leaned more into the super early stage stuff, Mike, because when we see the stuff that's in the market coming to us, none of it sounds really interesting or differentiated. Everyone's launching the same views, the same process, slightly different formulations. But it's a sea of sameness out there.

31:42And at the end of the day, the stuff that's just being launched is the stuff that sounds different. It's another reason why we found it earlier. year. Well, how do you think about in order to like developing insights and hopefully those insights turn into trends? How do you all think about that? Because I mean, there's kind of almost two schools of thought, I want to say. There's kind of top down investing where you kind of think through in terms of what's happening and then you go out and you maybe are very bullish on a particular trend or insight and you go out and maybe you try to find the best company in that.

32:15And there's other school of thought of that, hey, things are happening so fast that you can't even And you can't even begin to do that. You just have to go and just keep talking to people and talking to people and talking to people. And you have the founder actually is the one that's actually kind of building the insight to you. How do you think about from like those where true beauty sits? Yeah, I think for us with a 21 brand portfolio, we got bogged down in our portfolio and took our eye off the ball on sourcing. And I think it's really important that as sector specialists, all we do is live and breathe this space, that we should be seeing stuff and hearing about stuff before any of our peers do.

32:50And we start to hear that others were seeing stuff that we weren't. I'm very competitive. So that annoys me when I hear that, especially given the position we built in the beauty industry. My team knows that I get upset when I hear about stuff that we're not seeing because we should be seeing it. We're not doing our job in my view. We've talked to founders. They're like, oh, I love your portfolio. You guys are amazing. but yet they were speaking to other investors, not us. I'm like, well, how does that? It doesn't make sense to me, but it happens, right? So literally, like in the last three weeks, we put a mandate down to the team that we need to be better at this.

33:21And all of a sudden, through in-person interactions, proactive outbounds, network referrals, we see our deal flow picking up again. And it's the stuff that's super early. And part of that, Mike, like people thought we waited for a retail partner. They thought we needed to see 2 million in sales. And so if you were a brand new brand, you weren't coming to Shoe Beauty Ventures because it wasn't in your mandate. I was in a meeting in LA last week that I think is going to result in an investment for us. And the woman who I've known for 10 years said, I wasn't going to bring it to you because we're too early.

33:47And I'm like, and what I try to explain to people, and this is the part I've got to get out. So all your listeners to your Consumer VC podcast, if you're a brand that competes within the beauty and wellness space, you're in our mandate. It's that simple. Maybe pre-revenue C, maybe it's a series A. hey, but if you're a beauty wellness brand, you should be talking to Should We Ventures because worst case, you'll learn something from us. Trust me, we will educate people in conversations with us. We always get told we sound different than others when they're speaking to us. But we want to see everything in the space and we want to be the arbiter of the decision to invest or not, not someone else assuming that we might not.

34:27Well, how do you think about then balancing your time or managing your time? Because as you said, you were kind of too in the weeds for your portfolio companies because obviously you come from, you and Christina both and your team comes from deep beauty, personal care backgrounds. So I'm sure you can obviously be super helpful to your current companies and that's part of your mandate. Same time, you also need to find the next deal. You also need a source. How do you think about managing those two components of your job? Yeah, I think what we've tried to do is empower the younger professionals to really step up their game.

34:59I think it's really important that, listen, it reminds me of a meeting I was at with one of my colleagues, Caroline, with a brand founder. And the brand founder, we were out for lunch, said, what are your hours? She was curious how long Caroline, what was her workday? When did her workday stop and start? She asked Caroline. And Caroline answered her and said, well, that's an interesting question because if I'm on TikTok at 1030 at night, is that work or is it not? And that's the reality. I want my team engaged on TikTok. I want them on the social channels because that's how you discover and hear things.

35:32And if you think a brand's interesting, either let us know it will make the inbound because people generally will respond to my inquiries on LinkedIn or otherwise. We've even started messaging brands on Instagram from the True Beauty Ventures account when we think they're interesting. And people know our brand, so they'll generally respond and reply. But be curiously engaged in the space if you work for True Beauty Ventures. It's part of your job. Everyone's job on our team is to source. And I think that's starting to pay off as well. People are coming with more ideas than ever before, and we're establishing those interactions earlier than before because we're empowering everybody to do it.

36:07It's part of everybody's job. Not to mention, I mean, we have a relationship with contract manufacturers, 3PLs, other strategics, other funds. There's no shortage of ways for us to have opportunities come our way. And what I can tell you with a great degree of certainty is if a brand comes inbound to us that we've never heard of and never spoken to before, the odds of it being interesting are almost zero in the reality. It's like, it's not going to be interesting, but most of the stuff we invest in, it's, we're going, we've identified it. We've got outbound. We've tried to build a relationship with the founder before we invest.

36:39We're not trying to react to brands that are raising. We're trying to proactively convince brands to raise when they're ready. How much do you feel your investments come from outbound or you reaching out versus inbound? Oh, most outbound. Most outbound. Okay. Okay. Okay. That's really interesting. And if it's an inbound, it's because another founder connected, told the other founder to connect to us in my eyes. That's like a cold inbound, probably zero. You know, I mean, switching gears a little bit, just overall what you said about the kind of dynamics and of beauty and why they're attractive.

37:12Obviously, you know, margins, although I remember one of another investor who invested in beauty kind of when I said, oh yeah, the margins are great. she kind of chuckled and said, yeah, like the margins are great. However, I hope people understand like the marketing costs are also just, just wasn't huge. Yeah, exactly. Yeah. Because, because that's a huge part of the P &L. And we, but we've seen, I would say food and Bev, traditional food and Bev investors kind of come into beauty and personal care and starting to invest in beauty and personal care and seems to become a lot more of an attractive market than it used to be.

37:48Is that right? Or am I totally, totally, has it become more competitive for you or we're not really? Yes and no. When I was a part of North Castle Partners, before I started investing as much as I was in beauty, I do all things consumer, including food and beverage. And I used to joke with people that I started calling myself the human version of Unilever, right? So if you look at Unilever as a company, Unilever started a lot in food and beverage, started doing less and less of it, divesting itself out of it. And Unilever's largely a personal care and wellness company today. And that's because I think the dynamics and the characteristics of those categories are more attractive.

38:26So when I was a food investor, what would I typically see? I would see a brand that would be lucky to have a gross margin profile in the 40s. It would have a huge gross to net solution because of this thing called couponing and trade spend that you have to do in grocery market. You sometimes have capital expenditure cost, depending on if you were manufacturing your own stuff or not. None of the beauty brands really manufactured or it's all outsourced. You'd have higher FD, regulatory risks and considerations. And so there was a whole host of reasons where as a category, it wasn't as interesting or as exciting, although you could scale it quite quickly depending on the number of grocery stores you decided to go into.

39:03And the consumption is faster. People use, I think a six pack of soda faster than they use a 50 ml of EDP fried fine fragrance, right? So So there are plenty of attractive characteristics about it. But I think the overall M &A environment, the valuation considerations, and the attractive margin profiles of beauty did attract people in. Now, we saw a bit of a bubble coming out of COVID where everybody flooded in and valuations got crazy and brands got funded that shouldn't have been. Sadly, many of them are going to go out of business. And then DTC got harder and they fled back and left again. And I think it's gotten a little bit more rational in terms of who the players are that are competing and where valuations are.

39:44Are there any, no, that's, I appreciate that. Are there any, we talked a little bit about kind of go-to-market strategies when it comes to, you know, going into Sephora and also how important that is. Have you seen any kind of go-to-market strategies within beauty and personal care that you think don't work? This episode is brought to you by Glimpse. Glimpse is an AI-powered, end-to-end deductions management service that's focused on recovering revenue from KEHI, UNFI, Amazon, and Target for consumer brands. They centralize deductions with backups. They fully handle disputing on your behalf, the brand's behalf, and streamline the accounting process.

40:19For more information, check out tryglimpse.com and let them know that Mike sent you. I mean, in today's world, the reason there's no luxury skincare brands in our TBV portfolio is because the only brick and mortar placement for them is generally department stores. And when I started investing literally 20 years ago, So Ulta was not what Ulta is today. It was a failing concept. So Ford was about to be sold. It was exiting markets in the US. And all the beauty was done, all the prestige beauty was done in department stores. That's where you went. Department stores have been crushed by specialty retail and by DTC and Amazon.

41:02And so we're not big fans of that channel of distribution, especially as an anchor retail partner. know you want to have a little bit of Nordstrom business alongside your support business that's okay but like to be the driver of your growth it's it's very very hard I think where brands tend to make mistakes in the playbook that doesn't work is when you launch direct-to-consumer only or in the old days QVC was your launch partner less so today but like you didn't necessarily have a gross margin profile that would allow you to go wholesale right work from a direct-to-consumer perspective because there was no wholesale markup but as soon as another channel came calling it It was uneconomical for you to entertain them.

41:38Your cost relative to your price value proposition wasn't there. And so if you don't start with a gross margin profile that allows you to go to wholesale at some point, it's going to be very, very hard to grow your business profitably over time. So that's another mistake that I often have seen. What about Amazon as a channel? How do you typically think about Amazon? Yeah, I mean, you can ask Lady Gaga how well that went for her because House Labs decided to launch on Amazon and it failed. It's also one of the top selling brands and one of the fastest run brands at Sephora right now. So it's now made the jump to Sephora and Sephora has probably saved that investment for the investors in that brand.

42:17That was also five plus years ago. I think I've never considered Amazon to be a discovery child, but I'm also surprised at how important it's become for our portfolio. And I think what's happened and why retailers like Sephora are a little leery of Amazon right now and even TikTok Shop. Because if a brand has a moment on TikTok, three, four years ago, that moment might have converted at Sephora if it was a Sephora exclusive brand. Now that moment is likely converting within TikTok Shop's platform through TikTok Shop or likely onto Amazon and Sephora is being left out of that discovery equation.

42:56So if a brand is not on Amazon, my sense is it's giving up sales it would otherwise have. So I think Amazon's important. I don't think people are going to Amazon to discover a brand, but I think they go there with an intent to purchase a brand that they've discovered, which is very different. That makes sense. That makes sense. Well, since you're about Lady Gaga, I want to talk about like this talent-led brand in general. This is not about Lady Gaga, even though I said that, but there's more still like talent-led brands. and in terms of how you analyze them. When for you would be interested in terms of investing in a talent-led brand?

43:33When does it make sense from your perspective? Yeah, we debate this one. A lot of times internally. When we raised Fund 2, we got asked by perspective with investors, what do we think of celebrity brands? And I had to pause and say, tell me your definition of celebrity and I'll answer the question, right? because the lines are blurry. If celebrity is A-list celebrity, someone you'd see in the movie theaters, that to me is a celebrity. Makeup by Mario, Mario, Hung Van Gogh, makeup brand we just launched, and that's hung us over 4 million followers. He's a celebrity makeup artist. Does that make him a celebrity?

44:14Or does it make him a makeup artist? Like 20 years ago, Bobby Brown, Francisco Nars, Laura Mercier, they were makeup artists. they had no social following because it didn't exist so they just were makeup artists there was no confusion what they were they were makeup artists this new crop dermatologist as well shereen idris huge social following charlotte palomino one of our co-founders at due huge social following i thought i don't know if they're celebrities or not but what they are is they're they're they have a skill set in a particular arena makeup artistry hairstylist whatever that just happen to have strong social following in part because it's with their clientele is and so i think the definition of celebrities that that's just blurring for us i think we're very leery of a-list celebrities and them launching a brand because it feels like a money wrap to capitalize on their social following and the like but if it's an authentic true to the brand or product celebrity behind it again celebrity with lowercase c i think we would consider that although we're theory of it but i will tell you you know we're anti-celebrity brands in general we think there's fatigue and we think that thankfully it's about to come to an end or slow down um but my team from the get-go when road was launched never viewed that as a celebrity brand and would have given their left arms to be on a cap table of road well yeah i would i i would love to know what your thought of was of road why was that different i mean their view is hayley been talking about skincare for a long time like she had a following and she was known for talking about it and while she may have been a celebrity in other ways like she built a community around talking about skincare prior to the launch of road that's how my whole team viewed it they thought it was very authentic launched by a founder who knew what she was talking about.

46:12When we see Scarlett Johansson and the outset, it never made sense to us. Scarlett Johansson never had anything to do with skincare. And by the way, Scarlett had no social following. So you weren't even going to get the theoretical benefit you'd get by attaching your name to it. And our team liked the products for the outset. They didn't understand necessarily the story behind it, but they thought the products were good and they had a Sephora partnership when they launched it theoretically could have been interesting but I think it was a little bit set up to fail for that reason and so we're very leery of A-list celebrity launches but if there's a real authentic story I think the other thing I'll say Mike like when we when we back a founder what we're looking for is that failure is not an option gene like Christina and I have it at True Beauty Ventures most of the traditional beauty founders we back have it like they're going to run through walls to make sure or whatever they've launched is successful, it's their baby.

47:08Some of these A-listers, they don't have that. They'll never have that. Failure is an option for them. And so you don't have that same skin in the game mentality that you want from all your founders. Yeah, and I also imagine that partnership sometimes between the CEO and the talent, that can be also really hard, right? Because you might want the talent to really be involved. And it really depends in terms of how involved they are, Brian. but even if they are involved in the brand to your point is this something they've that they've even been talking about before they even launched a brand right um that they're that they've kind of showed their audience that they're actually passionate about like uh hayley bieber did with um before wrote that group totally how you know consumer gets a lot of flack gets a lot of heat and beauty and personal wellness in terms of why invest in early stage consumer there's no power law dynamics, blah, blah, blah, blah, blah.

48:02Do you how do you think about overall, what a healthy return is in a beauty personal care company, and as well as for a fund that actually is realistic, of course, if you got into the, the great companies, which is obviously a big if, but how do you how do you think overall, in terms of your your perspective of is it more so does it look more or more like early growth, early growth, for example, in terms of the distribution and overall returns. How does it all work? Yeah. I think because of our hybrid strategy with the heavy for all her component, I do think what we've tried to picture ourselves as is we should deliver better returns in a traditional growth fund because that first check that we write gets in at such attractive terms relative to what any growth fund could get into it.

48:50It boosts the overall return profile. So what do I mean by that? When we dissect the K-18 investment, we put a million dollars in that initially. That million dollars returned almost$16 million to the fund, right? We put another 3 million in and follow on and that 3 million returned another 15 to the fund. So a good return on the follow on, but the whole investment returned about seven and a half times because that first check gave us a boost, right? To the overall return profile. And so the way we think about it is we may not give you traditional VC-like returns because of the power law effect we talk about.

49:27But we think we should be able to deliver you better returns than a traditional growth equity fund would. And yet we don't believe we're taking much more risk, if more risk at all, than the traditional growth equity fund for the reasons I talked about. And if we are taking a little bit more risk, we're compensated through the first check, which gets the boost of VC-like returns to the overall fund. And so it's a bit of a hybrid strategy. It actually makes it hard for us to raise money. We've actually talked about, does it make sense to separate our strategies over time and have one fund that's kind of the first check early and another fund that does the follow-ons.

49:59And then you could have a traditional allocator could figure it out perhaps better than this hybrid strategy that we've created. But we think we can deliver extraordinary risk-adjusted returns relative to a growth equity fund. And in terms of what those returns are averaged out, I think you said the K18 was about a 7x overall. What does that kind kind of look like from a from a fund perspective in terms of ideally we're shooting for gross return on the fund at four times plus or down to three after fees and expenses and carry cool got it that's um that's really helpful um yeah i uh i think that why i mean why i think consumer is also just really interesting overall beauty personal care just in general invested in brands is because, you know, what you're seeing with technology, where you're seeing invested in tech, and again, I also have a lot of tech investors on, but what I've kind of seen the seed stage is it's really hard when you're in a great company, or trying to get trying to get into a company because you might be competing against the big firms like the Indreasons and the Sequoias and all these ones.

51:10And they cannot price you, they cannot price you and they can, they can obviously deploy a lot more capital. The kind of like the pitches is that that's like kind of an option for them versus it's kind of like an option stock. They're not really actually, you know, going to be kind of in with you and do the grind, you know, but at the same time, you know, gain a lot more money. That's still meaningful and, you know, a lot of founders might go for that. And so what I think is really... By the way, they're brands. Never heard stuff that brand, none of them. Yes, of course. Of course. Of course. Exactly.

51:43100%. What I think is really interesting about beauty personal care and consumer brands is that because the outcomes, and I hope we don't take offense to this, but because the outcomes, you're not going to get$10 billion or$20 billion outcomes that you could get in technology. you might get you know probably maximum and still would be like it was still would send shockwaves of like a billion or three billion dollar outcome that would send shockwaves probably most most of them i'd imagine would be like a really successful outcomes like 400 million or 500 million but because the money just isn't you you're not deploying um so much money into these companies like overall that the sequoias and the adresans of the world they're not they're not ever gonna care or try to touch you.

52:27So it's great. That's what I think. Yeah. It's having spent my whole life basically investing in consumer sector focused funds. Yes, it falls in and out of favor because it's perceived to have higher macro and recession risk in other categories, maybe not the return profiles, some of the other categories. But last I checked, it's like two thirds of the US economy. The addressable market is massive for a consumer. And this is a consumer driven economy at the end of the day. And so I think people are a little short-sighted when they discount the attractiveness of the space from an investor perspective.

53:04Yes, I totally agree. And also, yeah, will you get like 100X return in beauty? Really hard to achieve. That's really hard to achieve. Could you get that into tech? Sure. But at the same time - What are the odds of getting it? Yeah, what are the odds of getting it? Exactly. What are the odds of getting it? If you can deliver consistent returns, and again, you have to be in the great companies, which is really hard to do. But if you can deliver great returns across the sector, and then as well as know that you don't have kind of, you're not really probably having as much competition in terms of price and gains.

53:35These companies based on price, it's other ways that you can kind of affect in terms of being on the cap table. That's pretty great to me. So anyway, obviously this is all theoretical, a lot harder to actually do. A lot of practical to what you said, trust me. Yeah. Of all your investments so far at True Beauty, what's one that has surprised you the most positively and why? K-18, for sure. I mean, you return 80 % of your fund in three and a half years. And it's funny because I met - And it was your first investment. Yeah. I met the co-founders before True Beauty Ventures. They used to stalk me at industry events when they had this brand called Aquas, which was a hair towel and turban business.

54:17It was the predecessor company within what became K-Teen. And I just didn't want to invest in a towel and turbine business. As interesting as it was, it wasn't investable from my perspective. And circumstances were just fortunate for me that they had caught wind that TrueBee Ventures was being launched. And therefore, I was writing small checks. And they were doing an extension on their round for K-Teen. And they wanted us to participate. So we did. And obviously, most brands don't scale from zero to 100 million plus in three years and fetch a strategic sale in that short period of time. And the problem we had post that acquisition is a lot of founders in our portfolio would be like, what did they do and can't we do it?

54:54Like, no, it doesn't work that way. And even I tell potential investors as successful as that one was, and I believe we can find one of those in every fund, it's an anomaly. What they did in three and a half years and ultimately to achieve a strategic exit is unlike anything I've honestly seen before in my career. And so yeah, as bullish as we were on that one, absolutely outperformed expectations because I've just not seen that, what they did before. Yeah, that makes a ton of sense. And congrats again on that outcome. What's one mistake you see repeatedly in early stage beauty and personal care founders that you'd ask them immediately to fix if you could?

55:34Yeah, I think when we look across the living lab that we have and we look at which ones have underperformed and which ones may not make it. I don't think we got the brand or product part wrong. I still don't, even though they haven't worked out. What I do think happens, and what they all have in common in some respects, is an inability to execute what we all thought should be executed in part because of lack of team resources, lack of investment in a part of the organization that was required to make it successful. And that sometimes comes down to founder, founder gene willingness to let go and relinquish some of the things or a founder thinking they can do it better than everybody else can or founder being stubborn about letting the responsibilities get expanded to other team members.

56:26So, you know, founder team execution tends to be what we've gotten wrong and we can't force it. We're minority investors. In my control days, I could have fired founders and I could have put a CEO in and said, do this or do what you think, but we hired you for that reason. We just try to influence and sometimes they listen and sometimes they don't. It's fine. It's a portfolio. But yeah, I would say it's execution misses ultimately where it hasn't worked out for us. How do you think about product and distribution? Sorry, product and marketing. Could you ever, for example, would invest in a company that you actually think the product is eh, but the marketing, it's so differentiated.

57:07What they're doing is just so interesting that you might actually... It's very easy to get a trial, very hard to get a repeat. And so great marketers can get trial, but they won't get the repeat. If their product and their art team will try everything before we invest. Well, how do you think about that from yourself? Have you ever tried a product, not like the product, but still want to make the investment? No. No. Interesting. Unfortunately, I can't try the hair care products, so I'm disadvantaged in that respect.

57:42Good one. Good one. Although, to be fair, Mike, when we do pre-revenue and the product hasn't been created yet, we're taking that risk, obviously. Yeah, that's fair. That's fair. Talk a little bit about how the M &A activity has evolved. How has the eggs environment changed over the last few years? We've obviously seen quite a few exits so far this year, but has the buyer, in terms of the buyer profile, has that changed at all, for example? When I first started investing in this space 20 years ago, you basically had Lauder and L 'Oreal at the table. And to get a great outcome, you wanted at least one of them at the table, believing the other one was also at the table.

58:22That's how you drove outsized returns. Over the course of the last 20 years, there's been an emergence of new buyers in part because of the fragmented nature of the space has resulted in consolidation activities from other acquirers who have built large beauty businesses as well. So I would say the number of buyers today versus 15 plus years ago is very different. There's many more of them. There's also many more brands seeking liquidity than ever before. And so I wrote a sub stack post not long ago on the laws of supply and demand as it relates to beauty M &A. And as an economics major, what I learned, the only thing I remember from economics was when supply and demand are out of whack, prices fall or increase until they get into alignment.

59:04And what you have in the market right now is too many brands seeking liquidity in part because people like us invested in them and we need liquidity. It's our business model, not enough buyers. And the problem with not enough buyers today isn't there not necessarily enough buyers. is that some of the buyers have their own internal issues. And so they haven't been active from an M &A perspective because they're kind of sitting on the sidelines, right? And so you've got not enough demand for all the supply. And as a result, deals either aren't getting done or the ones that are getting done, maybe getting done at reduced prices, or the ones that are getting done are such unique unicorn assets that they get done.

59:39And we can talk about that in a second. When we look back over the last five years since Tribute of Entrance was launched, there was a major M &A bubble between the back half of 21 and the first half of 22. This episode is brought to you by Glimpse. Glimpse is an AI-powered, end-to-end deductions management service that's focused on recovering revenue from KEHI, UNFI, Amazon, and Target for consumer brands. They centralize deductions with backups. They fully handle disputing on your behalf, the brand's behalf, and streamline the accounting process. For more information, check out tryglimpse.com and let them know that Mike sent you.

1:00:17Huge volume of deals done in that 12-month period coming out of COVID. Brands that had sought investment, had investors and did well, waited for COVID to pass, all came to market in that 12-month time period, all traded to strategics, a lot of them for high values. Then end of 22, recession concerns started to hit. People thought the market would rebound again at the end of 23. It's when K-18 fortunately got sold. Dr. Gross got sold at the same time. Everyone was super optimistic about 24 and it never happened. 24 never happened you roll around to 25 and by 24 has been every makeup brand that was a good business that had private equity ownership in it went to market and none of them traded and they still haven't traded by the way which is on separate issue around makeup it's really a supply and demand issue when it comes to makeup there's just not enough demand for the category um even though it's the largest category but when you look at the deals that have gotten done in 25 and a lot have gotten done in 25.

1:01:12They're very fast-growing businesses with incredibly strong EBITDA margin profiles. So you think of Touchland, you think of Road, you think of Medicaid, those all had incredible growth stories and 30%, 40 % EBITDA margins, right? So they were very unique assets that found strategic homes, but you'd say Church and Dwight and Elf weren't normal buyers. They'd made some deals over the years, but they wouldn't have been on the top list of anyone's wrong list for buyers. And so it was this new universe and emergence of buyers coming out for whatever those reasons. Right now, what you have is L 'Oreal taking advantage of a weak marketplace.

1:01:51Their competitors are not aggressively making deals and they can. And the advantage L 'Oreal has over any other company, maybe but for Unilever, is it operates in all categories, across all geographies, across all distribution channels, including professional. That makes any brand available for sale relevant for L 'Oreal because it fits in somewhere in their organization. Other companies don't have that breadth of diversification, which really is another competitive advantage that L 'Oreal has. So L 'Oreal has been the most aggressive acquirer, having done the Caring deal, which was huge very recently, having done Medicaid and ColorRow right on top of each other.

1:02:30He was talking about 3 billion plus deals all done in a relatively short time period. It's quite remarkable. When you see this M &A activity happen and happening in specific categories, does that change at all the way you invest or categories that you actually want to pay attention to or not when you're kind of looking over your shoulder? I would say the bar for us to do another makeup investment is very, very high. not because it's the largest category, it can scale quite rapidly, but if it's harder to exit them, and I'm not saying that will last forever, but right now it looks like it's harder to exit.

1:03:09What happens is companies come to market, strategics don't bite, so they go to the funds. And the funds are like, well, if the strategics didn't bite, then how am I going to get out? And so then the funds pass. And if the funds are passing, people like us say, wait a second, if I can't even get out to PE, because they're afraid they can't get out to strategic, then then you're going to get home on them, right? So you got Makeup by Mario and Merritt, two incredibly attracted businesses, in my point of view, scaled quite rapidly, very profitable, have not been able to yet find a home. So we're very hopeful that something does break because there was a massive Makeup M &A bubble in the 2012 to 2016 timeframe.

1:03:49Everybody went heavy and hard on it. A lot of those deals haven't worked out for the buyers and some have divested them. P &G got out of beauty, sold it to Cody basically. Now Cody wants to get out of it. Lauder bought Two-Faced and Becca. They closed down Becca. Now they're rumored to want to be selling Two-Faced and they're rumored to be closing down Smashbox. And so who's left to buy makeup brands? Yeah, that's a very fair point. Very, very fair point. How do you also think about the term show overall? I remember having one banker on the show who was saying that in today's market, some deals are just not getting done because when the founders raised at, you know, honestly, crazy prices when it comes to what the valuations were like sky high valuations, but would do, you know, 3x preferred or, you know, like kind of like not favorable stock preferences.

1:04:43And now they can't really get an exit because they have offers from M &A, but the offers are great for the investors because it's a 3x you know uh pref but it's not great for the for the founders so the founder blocks it how do you how do you think about overall like your approach to to pref or that kind of yeah i mean again we're we're at early so we run the risk of getting layered over time especially if we're yeah leading something so that's obviously something we consider but we always try to encourage and it's a tough conversation with the founders is valuation is one of many considerations you need to think about when you're raising money at the end of the day.

1:05:23And you can set yourself up to fail if you get too aggressive a valuation early on, because either someone is not going to want to price a down round for fear of insulting the founder, or they're going to, in order to hit the value, put crazy prefs on it that make no sense for the founders. And frankly, founders sometimes don't even understand what you're signing up for when it comes to those preferences. And so I think the cleaner, simpler cap table, cap structure you have, it's the better for everybody. I've, in my old PE days, done some preffy-like deals to try to bridge valuation gaps, and they generally don't align interests.

1:06:02So I'm very leery of founders taking those types of deals to try to minimize dilution because it can really backfire. No, that's really helpful. My final question to you, so now we've got two minutes. What's one book that's inspired you personally and one book that's inspired you professionally? Well, I would say the book that probably most recently inspired me personally was Outlived by Peter Atiyah. I love that book. Whose audible book was sent to me by my co-founder, Christina Nekas. She thought I wasn't very healthy and wanted me to understand what her life looks like relative to mine and how we are.

1:06:43and I actually found it quite eye-opening in terms of his approach and what he said so I actually really enjoyed that listen I would say on the professional side I'd spend a fair amount of time because of what I do for a living reading the books launched by the founder of Way the founder of OPI, the founder of Drybar they've all published books about the businesses and ultimately their exits and as a student of beauty investing and I just pre-ordered one. It's about to come on Anastasia. They've all written books. It, Cosmetics Founder, I read that book as well. So if a founder in beauty has been successful or not and is writing a book about it, I like to read it because I actually find it.

1:07:25I can relate to it. I even know some of the names and players in the books sometimes. But I do know these people personally. I love to hear their stories and I learn from them and it helps me think about founder mentorship and education as we build true adventures going forward. I love that. Well, you're very original. I don't think anyone's mentioned these books on the show yet. That's kind of unique to what we do, isn't it? That's great. No, that's great. I love it. I love it. Rich, thanks so much for your time. This has been a lot of fun. Thanks, Mike. Appreciate you having me. And there you have it.

1:07:54Thanks for listening. I hope this was helpful. Rich, thanks so much for coming on the show. I love this conversation. Thank you very much for Glimpse for sponsoring this episode. If you're a brand in Keihe, UNFI, Amazon, or Target, they centralize deductions with backups. that fully handle disputing on your behalf, check out tryglimpse.com and please subscribe to theconsumervc.com. In the newsletter, you'll get a weekly update of all the latest consumer deals that are happening in and around consumer and also all the product launches. You'll also be the first to know when a new episode of the podcast drops.

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