Kiva Dickinson & Madeline Kaplan (Selva Ventures) - Raising $34 Million Fund 2, Opportunities in Beauty & Personal Care, And The Value of $1 in Revenue Online vs. In Retail

0:00This episode is brought to you by Vobin from Carta. Vobin from Carta is the easiest way to launch and run your venture investing. They offer SPVs and fund vehicles for GPs at all stages of the journey, from your first syndicate to operating a multi-million dollar venture fund. If you're interested in investing in startups, stick around after the episode where I chat with Gabriel Shin from the Vobin from Carta team, who shares his perspective and tips about how to start investing and how Vobin from Carta can get you set up. The link to Vobin from Carta's website is in the show notes. One person loving or hating a product is so non-indicative of whether a brand will succeed or whether a movement or category will succeed.

0:42And it is actually the fragmentation of taste preferences and consumer preferences in general that allow this industry to flourish. It's what allows indie brands to go solve problems that big, large, established, well-resourced CPG conglomerates can't solve. And so that fragmentation, I think, is the magic of this industry. It's something that I think we should just be celebrating more. The differences between us and how these brands can solve our problems and how when we solve our problems, we can share those solutions with friends. That to me is the most special part of the industry that we work in.

1:19Hello, I'm your host, Mike Gelb, and this is the Consumer VC Podcast, where we discuss the intersection of venture capital and consumer innovation. If you're enjoying this podcast, I highly recommend subscribing to my newsletter at theconsumervc.com, where you'll receive all new episodes straight to your inbox and a weekly recap of all the consumer deals that are happening. All content and episodes are for informational and entertainment purposes only and is not investment advice. This episode is brought to you by Vauban from Carta. Vauban from Carta is the easiest way to launch and run your venture investing.

1:52They offer SPVs and fund vehicles for GPs at all stages of the journey, from your first syndicate to operating a multi-million dollar venture fund. If you're interested in investing in startups, stick around after the episode where I chat with Gabriel Shin from the Vobin from Carta team, who shares his perspective and tips about how to start investing and how Vobin from Carta can get you set up. The link to Vobin from Carta's website is in the show notes. So we're here. I I can't believe we're here. We're at episode 300. And I couldn't be more excited to have these two amazing investors on the show who just came off of raising their second$34 million fund.

2:30We have Kiva Dickinson, our first non-named Mike second time guest and Madeline Kaplan from Selva Ventures. Selva Ventures is an early stage venture capital firm dedicated to partnering with consumer brands that promote healthier living. We discussed their recent close of their$34 million fund too. how it's different from Fund One, the differences between clean and clinically backed beauty and personal care brands. Do they value$1 of online revenue more than$1 earned in retail? And much, much, much more. This is a really, really great conversation about consumer brands and as well as health and wellness.

3:08Without further ado, here's Kiva and Madeline.

3:21Kiva and Madeline, Team Selva. Thank you both so much for coming on the podcast. How are you both? We're doing great. Excited to be here. Excited to be back. Doing well. Thanks for having us, Mike. No, thank you so much for coming on. Kiva, you are the first second time podcast guest who is not named Mike. So congratulations. That's an honor. And I very much look up to the first one. So big shoes to fill. So Kiva, you came back, you were first on the pod back in 2020. A lot of things have changed, obviously, in the state of consumer. I know the state of Selva has also changed. Now you've gone from a team of one to a team of two.

4:00What have been some of your learnings over the past couple of years since we started speaking back in 2020? Yeah, I mean, probably at the highest level, building a firm is hard. I think we spoke probably like February of 2020. It was so close to the world shutting down that I remember we had to get back on the phone to record a little a little addendum. Went into working from my kitchen table and then a small home office for a long time without without a teammate for quite some time until Madeline joined the fold. And so I think probably just gratitude that I was naive enough to take a shot at this on my own at the beginning and very much aware of like how many battle scars came along the way to build something that more investors would want to be a part of and more companies would want to be a part of.

4:53and more importantly, that Madeline would want to join. Because ever since the team has expanded, it's been a game changer. I feel like we've grown up and really expanded our vision and ambition quite a bit while keeping the mission the same. So what led to Madeline joining the team? How did you first, both of you first meet? And Madeline, I guess, what got you excited to join Selva? Yeah, so Kiva and I met in the summer of 2021. At the time, I was working at a later stage consumer investment firm, kind of doing Series B all the way to pre-IPO and was looking to go earlier stage with my investing as well as focus on kind of more of a niche part of the market.

5:39And I'd always been super passionate about health and wellness in my own personal life. I was a student athlete all the way through college. I grew up in LA where me and my friends were always trying the latest health and wellness trends. And so it was an area that I was already pretty personally passionate about. And so every person that I spoke on the phone with, I was telling them about what I was interested in. And one of our mutual friends, Chloe Steinberg, suggested that I connect with Kiva and learn more about what he was doing at Selva, just in the context of learning more about what it would be like to actually do that day to day.

6:17And so we hopped on the phone and had a nice call and then really spent like the next eight or nine months getting to know each other, getting to kind of figure out how we operate. We looked at a deal together and felt super aligned both in terms of our core values and the kind of firm that we wanted to build as well as the strategy that Selva is pursuing. So I feel very fortunate to have joined the team and to be where we are today. Can we talk a little bit about the strategy that Selva is pursuing? And Kiva, how has that evolved from maybe where we were back in 2019, 2020, when you were first starting this firm?

6:56The strategy originally stemmed from a problem that I saw in the market, a hole in the market of value add high resource capital, supporting early stage wellness brands at Seed and Series A. it felt like there were a ton of really amazing supportive firms in later stages. And there were some amazing early stage firms that provided not just capital, but great resources across technology and healthcare, but really not a lot in consumer products. And so we came to market with a$10 million fund, really trying to more than anything, prove that this type of investing would work, that not only could there be a really interesting return profile at the earliest stage of consumer products, but also that what we brought to bear would resonate with the best brands and that they would want to work with us.

7:53I think what we found is a number of proof points that this does work, a number of proof points that this really is an exceptional opportunity in terms of risk reward and opportunity for partnership with these types of brands. these types of brands, I think, liked working with us and often were asking for us to be more involved. You know, we led three of the 14 investments we made in fund one. And I think, you know, there are at least twice as many that we probably could have led if we had the greater capital to do so. And so I think as we started thinking about this second fund, we started thinking like, essentially, how do we avoid changing our strategy as much as possible?

8:45Because the strategy is very much working. And it certainly seemed like the appetite from these companies that we like to focus on for us to say, right, a$1.5 million check instead of a$500 ,000 check was really there. And so that gave us the confidence really to run the same strategy back to maybe talk about some other categories, which we can spend more time on in this session, but to really not change the type of company we're looking for, which is, again, just that seed in Series A, really high potential, ambitious brand that's helping their consumers live healthier lives. In terms of the evolution, I guess partly it's writing bigger checks, being able to lead more rounds and become more and more involved in companies.

9:29Maybe we can talk a little bit as well as how you think about being involved and actually helping companies from that standpoint, too. But would love to first maybe dive into what are maybe some of the new categories that you're maybe interested in that previously maybe in Fund 1 that you weren't exploring? Yeah, I think the first one to start with is something that was a more minor focus in Fund 1 that is becoming a really major focus in Fund 2, which is beauty and personal care. you know we had invested in kinship and cake prior to madeline joining uh it wasn't until madeline joined that we were able to um to really dive headfirst into that space and try to become a leader uh it was a category that i always knew was was really interesting but it would have required much greater expertise than i had in order to play a force and so it was madeline's passion, which you should talk about, that really allowed us to make that a big strategic focus.

10:30I would just add to that, that beauty and personal care are categories that I personally love and spend a lot of time learning about and exploring in my own life. And then I think from the business perspective, can be very high margin, profitable businesses. And when you're truly solving a problem for the consumer, having that repeat purchase and people kind of coming back for more and really a sticky customer makes it a great business model when it works. So I think the combination of both being super interested in the category and then having a pretty compelling business model, as well as some strategic buyers who rely on these kind of early high growth companies to acquire them to continue to bolster their growth.

11:17It was just like a great, great category for us to get more exposure in. And so far in the second fund, two out of three of our investments are in the beauty and personal care space. So I can understand why beauty and personal care, broadly speaking, as a category is pretty interesting for a VC, right? You have high margin profile. If a consumer loves your product, then you hopefully have high retention, which those are two great things to have in a business that you can scale with. But how do you dissect within beauty and personal care of what kind of makes a company more interesting or different kind of sub trends or that you find quite interesting in today's market?

12:07Yeah, so I think it goes back to what we focus pretty broadly on at Selva is brands that are making products that are, you know, making consumers lives better in some way. And we think about that in three ways. Products that offer better function, better ingredients, and a better emotional connection with the consumer. And I think that last piece is pretty critical in the beauty category. I would say, like, in terms of what's interesting in the space, there has to be some sort of, you know, need for this product, some sort of innovation or reason that the product exists, and that the consumers are coming back for more and more.

12:50And then I would say on the brand side of things, that emotional resonance is really, really important. And having something that's either speaking to the consumer, making them feel seen in a way that they haven't before, you know, more so reflecting the modern world that we live in. There's such a need for those new brands that are able to kind of attract and reach consumers that have oftentimes not felt like, you know, the beauty standard or kind of what the traditional incumbents have reflected kind of reflects who they are. So I think that that's kind of another piece of the puzzle and definitely is kind of the Selva way of thinking about these brands is how is this making a consumer's life better?

13:33And that's kind of woven throughout both the brands that we've invested in today, as well as the ones that we continue to look at. And then the other piece of it is we do thematic mapping. So we kind of identify the trends in the space that we're really most excited about and try to talk to any and all companies that are building products in that category. So what are some of the thematic mapping side? What are maybe some of the different themes within beauty and personal care that you find particularly interesting and why? Yeah, so I think first is kind of this movement more towards clinical beauty over clean, which is just this idea of kind of the gold standard being product efficacy.

14:21And I think that as consumers become more and more inundated with so many new products, they just really, at the end of the day, want something that works. And so showing, you know, whether it's before and afters or clinical results or kind of a deeper level of exploration in terms of why does this product need to exist? And then being able to articulate that well through marketing to the consumer, I think, is one area across all of, you know, everything from beauty to personal care. We see this in supplements as well, but something that we're pretty excited about. And, you know, I think our investment in a company called One Skin is part of this theme.

15:04They're a longevity skincare company that creates topical products that help combat signs of aging. But what really the customer understands and keeps coming back for is this is like this is a skin health product. So it's not just improving the way your skin looks, but it's improving the performance of your skin, your resilience. you know, your skin is the largest organ in your body and it's making it stronger and more defensible to, you know, I think external factors. So that's one category that we're pretty excited about. I think one skin is a start and we're not done exploring that space. And then more recently, I've been going deep on sun care.

15:48I think that, you know, for a number of reasons, everyone should be wearing sunscreen every day. There's, you know, increasing education, there's increasing understanding of UVA and UVB rays and how essential, essentially, sunscreen is the best anti-aging product you can ever put on your body. But also that, you know, the education of all skin tones, all skin types need to be wearing sunscreen, need to be protecting their skin and finding the brands that are really at the forefront and creating formulations that work for different skin types is another category that we've been excited about and exploring.

16:30I really appreciate you sharing both those different categories, clinical beauty and also sun care. You mentioned in the beginning how you take how you're right now more focused on, for example, clinical beauty over clean beauty. What do you actually mean by that? How do you define clean beauty in your mind? Yeah, I mean, I think that's a great question. I would say it's a term that is interpreted in different ways by almost everyone. And so you've got a different clean standard from all of the big retailers that we look at. Credo has a different clean standard from Sephora, who has a different standard from Ulta.

17:06And I would say, ultimately, like what clean and kind of the dialogue around it has done is created more awareness of the ingredients we're putting on our body. So I think it's generally been a positive thing. But I do think that in some instances, it has almost steered us in this direction of going to the extreme of we need no chemicals in our in our products. Well, everything's a chemical, water is a chemical. So I think that this narrative, like while it started in a really positive place of, hey, let's be more conscious about the ingredients that we're putting on our skin has been now, to answer your question, I don't have a clear answer of what is quote unquote clean because there is different clean definitions.

17:53It's not standardized by anyone. And so that's why I think instead of just investing in companies that claim to be clean, because I don't think any business is going to say, hey, my product's toxic and terrible to put on your skin. I just don't know why you would ever come up with a product you don't view as clean. We are focused on how do we understand these ingredients? How do we understand these formulations? And what is the efficacy? What is the driver that's going to make people say, oh my gosh, this is improving my self-confidence, making me feel better about myself, making it easier for me to take care of myself.

18:30That's really kind of the North Star that we're going for. So when I think about this, and tell me if I'm wrong, Clinical Beauty, it's, you know, this is how the product can actually help and better your skin. Whereas clean ingredients, like let's focus on the source of the actual ingredients itself, where you're kind of saying, let's not as much focus on like the actual source of where the, and kind of nitpick over what is, you know, clean versus not. Let's just focus on how it can actually help your skin. Is that, is that roughly correct? Yeah, I think that's right. And I think it's also understanding that in the world of consumer, there's going to be different products that work for different people.

19:08So I think there's, you know, there are some ingredients that are not considered clean that work for some people and others where, you know, fragrance is a great example of this. Clean generally states that the products are fragrance free. And for people who have sensitized skin or different skin conditions, fragrance can really irritate their skin. But if you have normal skin, you might want the experience of fragrance on your skin. So I think it's also understanding that there's different consumer preferences. And so these different ways of shopping and ways of thinking about things work for different people.

19:48No, that's really helpful. I also wanted to focus as well about distribution channels. I know there's a lot of talk around, you know, maybe in 2022 is said that, you know, DTC is dead or what have you. And, you know, there's maybe more of an emphasis to go omni-channel or go retail maybe earlier for brands than previously. How do you think about, you know, DTC, retail, if you see a brand that kind of comes to you with their value prop, what kind of is the right answer or how do you think about as a brand maybe could grow in 2023 and beyond? Maybe Kiva, we'll start with you. Yeah, I think for a long time, people believed that direct-to-consumer was in and of itself an innovation would be how consumers would want to shop across a lot of different categories, across a lot of different parts of their lifestyle.

20:55And that trend really had picked up steam prior to the pandemic, which forced all of us into our houses and accelerated our adoption of shopping online and buying products directly from the source. I think we probably, as an industry, overestimated how much appetite there was for consumers to buy product this way. And in doing so, we collectively overcapitalized a large chunk of companies that had not actually proven their ability to scale profitably and create really interesting equity value appreciation for the investors along the way. Right. We like this industry of consumer products and consumer wellness, not only because there are really powerful tailwinds that we think are largely immune to cycles.

22:00We also like it because there are tens of thousands of points of distribution across the United States and Canada that allow consumers to pick up a product that they're familiar with without you having to spend money on an Instagram ad or a Facebook ad or AdWords to get them to transact in that moment. And as these businesses scale, it's those points of distribution that can be very profitable where you share a small portion of a sale with a retailer instead of spending$30 to$75 every time a consumer transacts, that is ultimately the unlock that we see to these consumer brands having attractive EBITDA margins over time and attractive P &L that an acquirer would want to buy.

22:59So as we have evolved in our thinking, we've probably put greater pressure on a young brand to prove to us how they plan to build that bridge between being a digital first brand that has gotten a lot of early consumers excited and being an omni-channel brand that really fits with a number of different retailers that can scale. And that means potentially seeing interest from retailers. It means having velocity from some early retailers. It means explaining why you won't hit a ceiling when you get beyond a certain type of niche retailer that's willing to take risks and hit the big time, which we think of as Walmart, Target, Costco.

23:48I don't think it makes sense to assume that a young brand with under$5 million in sales will have thought of all of that. But we pretty much dismiss at this point, the brands who have not thought of it at all, who simply think that direct to consumer will continue and that the next million dollars will be easier than the last million dollars, because I've yet to see the next million dollars of direct to consumer revenue be easier than the last million dollars. I would just add to that. We have a Selva book club every quarter where we read a business book and discuss how it relates to our business and the companies that we work with.

24:32And most recently, we read The Hard Thing About Hard Things by Ben Horwitz. And there's a quote in there about no silver bullets, only lead ones. And Kiva and I always kind of go back to that. And I think it's just remembering, you know, when the iOS 14 update came out and CACs rose for especially for these emerging brands, it just made the entire landscape hard. And so a lot of people turn to look to retail as kind of the silver bullet. And the reality is all these channels are really hard. It's really hard to scale a business. And so I think it's an important reminder as brands think about, you know, how do we scale?

25:16How do we continue to grow? You know, ultimately, at the end of the day, going back to, is this a great product? Is this a great brand? How do we find our customers that need and want this product and want to keep coming back for more? and then to Kiva's point, really having a strong and solid, well thought through plan for how you're going to go into retail and work with those partners, not only to be on shelf, but how are you solving something for the retailer? How are you tapping into a trend that they're excited about where you can come in and be on shelf and they're kind of helping to promote the brand and the trend that you're tapping into?

25:57So yeah, no silver bullets, but definitely we've been an omni-channel supporter since before it was cool, I think. When you're evaluating a brand, let's say the brand both is D2C and then also is in retail, how much is an online dollar worth to you compared to a dollar in retail? I don't think we can adjust with a lot of precision how we value one versus another. I've certainly heard the when you sell a beverage business, they mark your online revenue to zero. That anecdote has gotten thrown around a little bit. I understand why that's true in beverage, although I wouldn't consider myself an expert in beverage.

26:53I would say it's definitely not true in other categories. So we don't so much value online dollars as less than retail dollars. We do use a different set of metrics to evaluate them. So for an online business or a business's online channel, I care a lot about what percentage of their customers come back within 12 months, what percentage of their customers decide to subscribe, and what percentage of their subscribers are still around after 12, 18, 24 months. All of those things inform payback periods on customer acquisition costs. They inform what your return on invested capital is or LTV to cap.

27:54They also at their core just indicate signal as to whether you're actually solving problems for consumers, because if you've solved the problem for a consumer, they're going to buy it again. On the flip side in retail, what we're typically caring about is are you turning fast enough relative to your category benchmark and relative to your competition to one, stay on shelf, not get kicked out, to increase distribution in that door, meaning let's say you have two flavors on shelf and you want to get three and four on there, and three, attract other retailers to bring you on. Because if you're doing well in one retailer, retailer over here will look at your performance in that first retailer as a signal that you will work well in their retailer.

28:50So it's not so much that one is more valuable than the other between those two. But I think both tend to be powerful signals to us on how you stack up against your competition and whether you're ultimately an outlier. No, I think that those are some great points in terms of how to I actually think about it from a metric perspective as well. The DTC channel or different online channels versus as well retail channels. Walk me through a little bit about both of your due diligence process. I mean, I know that we talked a little bit about it, particularly within beauty and personal care. But overall, like when do you I know that because ultimately I know that you want to invest in brands that want to go mainstream or want to be, I'd imagine, on shelf at the big box retailers and be big consumer brands.

29:46But what kind of goes and tails into that on your due diligence process and maybe that you might have crumbles that this brand has potential to get to that level? We often ask ourselves in our process, once we have evaluated how a brand fits our framework, which I think we've talked about and written about in the past, the five M's, are you solving problems? Are you, are you the team to back? Does the brand have momentum? Is the market big enough to matter? Does it follow a mega trend? We often then at that point ask ourselves, what are we hanging our hat on? What is the thing that this brand or person or people or product really spikes in that when all is said and done and we look back years from now, whether it proves to be successful or not, is the shortest explanation of why did we invest in this company?