Melissa Facchina (Siddhi Capital) - Can You Be A Great Entrepreneur But Not A Great Operator, Why She’s Not Investing In Beverage Companies, Her Way of Scaling and more

28:34So if they're going to move to a bottom line enhancement model, it's okay that the growth on the top line is a bit slower while they're doing that. They're making edits to the bottom line. And what most people don't truly understand is P &L flow through for margin enhancements takes 12 to 18 months to actually materially flow through to the P &L. Do not expect to make subsequent changes in your operating infrastructure and have it be immediately financially impactful. So you have to give companies this time. And so back to your actual question, it's really hard to judge. Were they misrunning the company or were they going by the model that people previously set for it, which was just spend, spend, spend?

29:21The only way to get there is to challenge the entrepreneur about changing the approach and seeing if they have the business acumen and the mental capacity to understand the change in that model and what they need to do in their business or accept what they need to do in their business to make that alteration. And by the way, not every entrepreneur can get there. And those who can't get there are ones that are likely not going to get funded during this really challenging time. What that means as well, if you kind of do this kind of reassessment of your P &L and also maybe look at your margin profile and just do an overall assessment of your operations, it might mean that you actually then might say, we're not going to go into this new sales channel, for example, and we're not going to accept this.

30:05We're going to focus on how can we get our margin, you know, maybe better, our business tighter, so that then it's actually in a position to actually scale properly. That's right. And honestly, one of the directions that we're giving our portfolio companies is let's look at every retail partnership uniquely. Let's understand if that partnership is profitable or not and what it costs to maintain that retailer and or that channel. If it's just sucking the business of money all the time, it might not be a worthwhile thing to do and we need to throw it out the door right now. We only want to chase partnerships that enhance the business in one way or another, right?

30:43It's either going after a new consumer base and knowing you're investing in it, but now that line item is really a marketing expense, right? The loss on that retailer. You can't have losses everywhere. Do you want to take a shot at one retailer to go after new customer base? That's fine, but that's like one. You can't have 10 of those. The other nine need to be, you know, strong, financially strong partnership to the business. How much time do you give it in terms of if the retailer partner would actually be, if it actually is a profitable channel? I think every channel is a little bit different in terms of promotion activity and how many dollars you need to put in.

31:23In order to get interest, I'll also tell you we've seen some of the biggest retailers in the space, Walmart, Target, Publix, Kroger. take away the need for these brands to market. If they really, really want them in the store and on their floor, they're paying for that marketing activity. That immediately makes those retail dollars much more profitable because you're not having to promote your own business. You're having the retailer promote it for you. Those are really special products though, right? Ones that are hitting it out of the park. We have a handful of them, fortunately, in our portfolio that these large retail giants are welcoming in and not charging any dollars for.

32:03It's slightly erroneous though, because it looks like it's a profitable channel immediately. And once you have to start picking up those promo dollars at some point in time, it's going to cost more to hold that retailer afloat. I think it's probably, you know, and I'm not a sales expert. We have sales experts on our team. So I want to raise my hand at that, but you need to give it a good nine to 12 months to be inside the stores and fully stocked, by the way. There's many times you launch with retailers and it takes many, many months, sometimes two quarters to get fully stocked across every store you're supposed to be in.

32:38So how could you possibly tell what your velocities are, what your consumer base is, what your repeat purchasing power is if you're not fully stocked? You can't. So you have to give all of that some time. No, that's a really great point. We talked a bit about, of course, CityOps and kind of the origin story behind CityOps. What's the origin story behind CityCapital and why did you want to become an investor? Yeah. So also a unique story. The vast majority of my operating experience in CityOps continued to tell the same story, which was people who know how to operate these businesses as service providers are getting their voices are getting put aside for those who are willing to write checks.

33:27And so if an investor is willing to come in and give you$5 million and the investor tells you, you have to go do A, B, and C, who are you going to listen to? The investor's got$5 million or the service partner who you're paying money to? Are you able to give an example on maybe what an investor advice of 5 million maybe might not be well spent, for example, versus like what like a service provider would actually say? Well, sure. There are many that'll say, hey, we don't like your co-manufacturing pricing. So you need to go find a new co-manufacturing partner. Well, to move co-manufacturers, number one is a massive endeavor.

34:05Two, if you have a great partner and bad pricing, you got to go fix the partner relationship and understand why you have bad pricing. There's a variety of reasons for that, right? You don't just pick up and try and go find a new co-manufacturing partner because you could be trading bad pricing for bad quality. But they see I'm paying too much for this or I think I'm paying too much for this because I'm uneducated on what it actually costs to make this product. Now I'm making the business go chase itself to go restructure a whole manufacturing plan. And we would have said, let us get on the floor.

34:41Let us talk to the partners. Let us renegotiate the deal. Let us find out if that relationship is salvageable prior to making a move, right? But because we don't have the$5 million, they're going to go and do that. That can kill a business. So I just kept getting these stories over and over and over again. Then I started getting called into boardrooms all the time and investors started listening to a lot of the advice that I was giving. As those investors started listening, they then started asking, hey, can you help us evaluate this next deal? All of a sudden in 2019, we were the diligence partner to 44 different VCs, PEs, family offices, and sovereign wealth funds.

35:22We were diligencing check sizes of a million dollars to$125 million. That was the light bulb moment for me. That if we are building, scaling, de-risking companies and then diligencing them. And I had the founders ears and the management team's trust. I was on the wrong freaking side of the table. Um, most of it was, I wanted to change the interactions between investors and founders or investors and businesses. I thought that, uh, it was unfairly weighted. Um, and we're not the perfect investor, right? Uh, no one is the perfect investor. I'm sure we have our own war stories or, or, you know, people who don't love what we've done in certain circumstances.

36:08And I completely respect that. But the vast majority of the time, we really, really try and do everything we can that is the correct thing for the business and to support the business in its growth and support the founder in the vision and direction that they had for the company. I was fortunate. One of those 44 was a family office group. My co-founders, Brian and Stephen Finn, who are truly the best co-founders anybody could ever ask for. They had a family office. They were investing in deals that we were bringing them. And we were helping them diligence and evaluate it. And when I raised my hand about potentially thinking about getting involved in private equity, you know, the short story is the answer was not without us.

36:57We're going to do it together. And, you know, we did. We went out and raised a$70 million fund very quickly at the start of COVID. and are now on our$200 million growth equity fund too. And we have a food tech scout fund that is self-funded, but does very small food tech checks globally. What's been different from fund one to fund two? Fund two was uniquely formed in that one, it has 50 names in it, way too big for a$70 million fund. We would never construct it like that traditionally. traditionally what happened was um almost 40 of those names came out of the family office we and their strategy was not to be a fund it was to have full diversification across all food and beverage categories and make small bets in a variety of places right it was their own personal capital when they decided that they wanted to pull it together to create a fund and bring in outside investors we didn't want to hold certain things outside of that which would be called cherry picking.

38:05And then if those things were successful, but we brought investors into a whole nother group of things that wasn't successful, we now look like assholes. Okay. So, uh, and I'm sure somebody can sue us for it. Um, so we put everything in, whether we, whether it was a$200 ,000 check or a million dollar check, whether we would have wanted to support it in a fund or not, we dumped it all in there. Um, and so that's not how we would construct a portfolio now or anytime in the future. Now we go very deep. We write very large checks. We will only have, you know, 12 to 15 companies in fund two. And so first, that strategy is different.

38:42Two, we had a lot of early stage businesses in fund one. We've moved upstream, like a lot of investors who write larger checks. We're getting away from the risk, frankly, a very, very early stage. And we are wanting to get involved in businesses who've already proven some consumer concept to a degree. Three, we're scared of some categories now. Just to be frank with you, beverage, as an example, not on the top of our list. There's a handful of beverages in fund one. There's one real beverage, Orabora, in fund two. Mud water is a beverage, but it's a beverage without the water. It ships the powder.

39:21It's a totally different business. For me, it's not really a beverage in a traditional sense. So I think there's a lot of learnings. And the fourth learning is if you don't want to deploy our team alongside of you in some way, shape, or form, we're not the right investor because our unique value-added advantage is our ability to help you de-risk your business. And so if that's not something you want, totally cool, but we're just not the right fit. No, that's really helpful. And also just hearing about the evolution from like fund one to uh to fund two why are you no longer um besides of course Ouroboros in in fund two why have you stayed away from from beverage there's a variety of reasons one is highly competitive category two it's been done in every which way shape or form that you can think of um there's very little white space left three think about how many units you need to you You need to move if you're selling a one and a half, two and a half dollar, three dollar can or bottle.

40:27That's a lot of units versus a ten dollar box of cereal. Three or four, the consumer has a lot of choices when they go into the grocery stores or on, you know, some online shopping channel. There's not a lot of brand loyalty left except those really large beverage businesses like, You know, there are several out there who made their way through an exit. I won't mention them because they're in competition with some of ours, but they've secured that consumer partnership and the consumer wants to continue buying them. Four or five, distributions of disaster. Really, truly. Unless you're DSDing your business, in my belief, I don't think you can really grow beverage massively.

41:15And DSD is a whole nother, that's like a very asset heavy scenario, similar to building a facility. You're just building a people force to have to go everywhere. And I think lastly, the acquisition requirements now have increased so dramatically. Getting above a 40 % margin in beverage is very hard. Getting to 150, 100 to 150 or$200 million in revenue, which is the interest and profitability profitable very hard three if you outgrow that and we have one of them in our portfolio you can go and look I won't name it but if you outgrow that size you've now outgrown the consumer acquisition the acquisition route because now the acquirers don't know what to do with you you've penetrated every channel you have so much growth right you have you you have so much consumer uh interest that they're like how can I do any better than this so what do I do um so now that business has to get very, very profitable and likely sell to private equity as a cash producing business.

42:19So there's just a variety of reasons. And then I think the last one is manufacturing is hard. Not a lot of line time. You have to negotiate your way to the premium partnerships. Most of the small batch manufacturers are crappy. They don't produce good quality product and they cost too much. High volume line time is one, expensive and two, pretty much unexistent or non-existent, sorry. So you put all that stuff together. If you can't solve a lot of those issues, it's not of interest to us. Because we were operating Ouroboros from virtually day one, we solved many of those issues as operators prior to looking at that company as an investment.

42:58So where are, if you don't think there's right now, and I appreciate your explanation about why you're bearish on investing in emerging beverage brands. Where do you feel like are the opportunities within food? I mean, if you look at our portfolio, you see likely some outlandish founders in a few ways, outspoken, using media in ways that are unique, whether it's celebrity platforms, whether it's creating your own celebrity in social media you can probably think of three very well-known chocolate founders who do that um and so so one is like how do you activate the consumer for really cheap and if you've been able to get the consumer interested in not just the product but in you as people or as founders you now have a massive advantage um i think the functional categories, meaning the enhancements are very interesting.

44:05So Magic Spoon would be an example of that. It's a serial. Everyone knows. And by the way, let me tell you Citi's investing philosophy for a second, which is we don't want the niche products per se. Although our portfolio from Fund One has some niche products in it, I want to specify that now we care about mass market scalability. We care about non-intimidating product profiles. I don't want to teach you how to use my product over and over again, I want you to know already how to do it. We don't have to tell you how to eat a chocolate bar. We don't have to tell you how to eat cereal or what cereal even is.

44:39You know how to use those in your life. We're just finding brands that have the ability to give a better advantage on the nutrition front or fill a functional category in it. Sorry, fill a functional set in that category that a consumer is interested in. So magic spoon, high protein, low carbohydrate, but it's cereal. So people who don't want to fill their morning with carbohydrates or who want to end their evening with a high protein snack now have multiple usage occasions for cereal, right? That they wouldn't otherwise have. So it's not category specific to us. It's does the consumer understand it?

45:21Can they build it into their life in a variety of ways? And is there a way to get consumers interested at a cost that is less than what the average brand is paying for those consumers? Then there's another subset. And we're not talking about food tech. Food tech's about 30 % of what we do. We're just talking about CPG here. The other subset is cuisine that most Americans don't know how to create for themselves. And so mama fuku would be an example of that, right? Amy as a ramen noodle would be an example of that. How do you experience these authentic flavor profiles of other cultures, but are too afraid to take out a recipe book and literally go and buy 40 different ingredients that you're going to use one time before you throw them away and create, you know, spend two hours creating a recipe that may not even turn out very well.

46:19I really do appreciate the breakdown. I know that obviously the goal is to eventually have, you know, the products be mass produced and be available both in, you know, the natural channels and conventional channels. When you're diligent or talking with brands, because very few brands can kind of cross that chasm of going from natural to conventional. How do you think about it? When emerging food and beverage, and again, I want to specify, I am not a sales leader. And so I probably think about it totally wrong. And I acknowledge that. So anyone who wants to correct me is happy to. Natural was like an amazing thing when emerging food and beverage was starting.

46:58And everyone wanted to start at Whole Foods and everyone wanted to get products and sprouts. And they couldn't get much outside of that because conventional grocery hadn't expanded to better for you or healthy foods yet. And so Whole Foods was the win, right? Today costs a lot of money to do business with Whole Foods. You can't really make money there. The goal for us is conventional. I don't even love products starting in natural, to be honest with you. I think it's a hard barrier to break out of. I would be, and now that you have the Walmarts of the world, Costco's, Target's, you know, you name it, the really big players in club and conventional interested in bringing emerging brands on their floor, it's much easier to get involved in mainstream.

47:48And so mainstream's where the money's at. Let's not be wrong. That's where volume lives. Do you want to take a product to Airwond? Sure. But it's a marketing expense. that you're in Air One and it's like a flagship deal for the brand and you can say you're there. Same with Whole Foods. I look at Whole Foods as a marketing expense, right? It's great to say your product is in Whole Foods, not going to make the business. And so we like conventional, we like club, we even like food service. We like anywhere the average American is consistently buying product. And I don't think they can afford to shop in Whole Foods on a daily basis.

48:28That's very helpful. Thank you. How also, because like, you know, we've seen to your original point in terms of how you think about white space or opportunity and on the distribution side, if you're able to kind of acquire customers or you have an edge on the distribution side, you're able to acquire customers for a lot cheaper because maybe there's already, you already have a following or you already have some level of, of, of influence, whether you build that yourself or whether it comes from, you know, other ways. we've seen a number and in terms of the other way side of that we've seen like celebrities launch brands right um we we've seen some be successful we see some some not be successful how do you kind of analyze if there is actually like a celebrity on board in a brand whether you actually want to get involved with it or not authenticity uh first and foremost i think um every now and then you can pair a celebrity with a brand post-launch and have it be the perfect fit and have it feel very authentic to the consumer.

49:26But oftentimes the consumers aren't stupid, right? They know what this person has been passionate about for years. And now that we have social media and everything is like burned in everyone's brains for the, you know, for the test of time, basically, you know, if that person has cared about this or was passionate about this for a long, long time, you want to support people's passions and people's knowledge bases. And so I think that's the first thing is like, is there an authentic story here? And is pairing this celebrity with these products actually adding something to the category? If it's not, you're just slapping a name on it.

50:06We got a problem. Look at Ryan Reynolds. He's one of the most successful storytellers of all time, in my opinion, in terms of the things that he's put his name on, what he gets behind and get involved in. He's not going to stick his name on a product that he doesn't truly, truly utilize in his daily life and is willing to scream at the top of the mountains for, right? Consumers feel that from him. David Chang, right? We got interested in Mama Fuku because David is a passionate dude who literally has a massive, massive following. Not because everybody can afford to eat at Mama Fuku's restaurants.

50:45They can't. There's not even a Mama Fuku in every single city around the country, right? Maybe people go to New York City and visit Noodle Bar once, but like they're not loving David because they're paying money to Mama Fuku restaurants all the time. They're loving David because he's authentic and real and is going to tell you what it's all about and desperately has a passion of delivering Asian inspired cuisine to people who don't yet have not yet experienced, you know, that, that level of flavor profile. I mean, those are, those are really great examples. I actually love David's podcast. I think he's fantastic.

51:25Well, check out this week's cause I was just on it. Oh, awesome. Awesome. Awesome. I will do. I will do. So what's one book that's inspired you personally and one book that's inspired you professionally? I'm going to use the same book. I was going to say good to great on the professional side, but that's actually not accurate. It did inspire me professionally. But the truth is, Rich Dad, Poor Dad is the book that inspired me across the board. I have read that book a handful of times. My dad first gave it to me when I was 18, and I remember throwing it out my car door while I was driving down the road.

52:01Like, who the hell needs this? Why is my dad giving me this? I didn't even read it except the back of the book, right? I went and picked it up later in my 20s and it meant something to me. But, you know, every time I read it as my life advanced on the journey, it meant more and more. Why is that fundamentally rooted in both my personal and professional growth? Because it gave me the first insight of someone being willing to kind of grab you by the collar through the book and say, wake up to the kind of life you want to have. If you want to control your own destiny, you've got to go build it. it's not going to get built for you.

52:41And it's not going to get built for you running somebody else's destiny. If you want to run someone else's destiny and that's the life you want to have, totally cool. There's so many people in the world who are amazing workers and employees and spend their time in the middle of the day focused on their business and the rest of their time focused on their family or activities or hobbies, right? Then there's another subset of people who want to start things, who are entrepreneurs, who have this like internal fire that that's what motivates them. That's what is, um, um, um, uh, kind of aspirational for them.

53:18I happen to fall in that category. And it was the first, um, it was really the first experience I ever had of being able to look at myself and say, I'm never going to have the life I want to have if I don't go and test these boundaries. And so that's why it shaped me personally. And obviously professionally, I then had to create businesses that allowed me to do that. Amazing. No, I mean, that's a phenomenal book. Rich Ad Portnette also really enjoyed reading it. And Good to Great. We've had other people mention as well, Good to Great and loving that book. So that's great. That's awesome. What is maybe one suggestion or piece of advice, shared learning that you have for founders?

54:02That's a broad question because there's a lot of pockets I can give there. Really, I think no matter what you're looking to do, whether it's fundraise, whether it's make a new product line, whether it's start a company or anything in between, I have found that there's a commonality with a lot of founders, not the very top tier, by the way, the top tier do what I'm about to suggest, but a lot of founders who go and ask a hundred people their opinion on something. And they get a hundred different answers. And it spins them in circles, really similarly to what we shared at the beginning of this, which was like, you have the consumer tell you it's too salty.

54:45And so you immediately try and go back and formulate, right? Everyone giving you an opinion is coming from a certain place in their life. So it's a biased opinion based on their own experience. So the best advice I'm able to give people, especially in hard times, is get a network, but the network doesn't have to be the same for every topic. So don't go ask more than five people their opinion on something. But if you want it on fundraising, go find the founders who raised the most successful rounds. Go find the investors who have funded the businesses that you want to become. Go find people who you want to emulate.

55:26And those are the five people that you ask about fundraising. Don't ask anybody else, right? Now you have employee problems. You probably don't go and ask those five people who've just gone on successful fundraising journeys. You go and ask the five leaders who've been dubbed some of the best CEOs in town. You go and ask the people folks want to always work for. You go and ask the people who, you know, someone's always talking about and saying, hey, did you talk to so-and-so? They always have great advice. I'd love to be part of their community. Those are the people you ask about that. So make your network of folks that you are sourcing information of select, literally procure it per topic and don't go and ask this huge community because you're gonna spin yourself in circles.

56:17Cool. Melissa, thank you so much for your time. This was a lot of fun. Thank you. I know I talk a lot. Thanks for giving me that platform. I couldn't shut up. So really appreciate the insightful questions. And there you have it. It was a pleasure chatting with Melissa. Melissa, thanks again so much for coming on the podcast. Gabriel, thank you for joining me today. How are you? Yeah, really great. Thanks for having me, Mike. No, it's a really appreciate it. So what do you feel like, you know, maybe only the SPV side things and also on the emerging managers side, what do you think that they maybe struggle or have like a hard time with?

56:54Yeah. So I think with the angel side, you know, a lot of angels will be investing directly. And, you know, some are unfamiliar with the concept of an SPV. You know, syndicating is a concept that's used in the financial markets, whether, you know, you're a bank syndicating loans or a bank syndicating investments. It's a really good way to share your network, deal flow with your network, get into those really competitive deals by having those higher minimum tickets, pulling those funds together. So I think for angels, the concept of SPVs and syndicating is relatively still new. And there's a large market where I think they would significantly benefit.

57:42You're able to also monetize off that deal flow as well. So you can charge carry, which is, you know, a portion of the profits upon an exit scenario, or you can charge fees. So, you know, finding an opportunity trying to fundraise for the deal is a lot of hard work. And sometimes being compensated for that does definitely help incentivize the deal. So for emerging fund managers, it's a really great way to start building your track record. So, you know, when you're talking to LPs or, you know, investors, one of their strategies is, you know, how do I get some co-investment opportunities or direct investments?

58:22And so building that relationship, showing your deal flow allows you to build those relationships with those LPs to ultimately invest into your funds. Additionally, it's a really good way to kind of show, you know, your track record of, you know, the companies that you've invested, where the ability to fundraise, getting access to those top deals, and then going out to the market and, you know, showing a track record of, you know, your resume. So it definitely paints a better picture than, you know, saying, you know, one day I want to be a VC fund manager and not having anything to back it up with.

58:53I appreciate that. Yeah. And for anyone that's listening that doesn't quite understand what an SPV is, how I think about it as well is that you're almost raising a VC fund, but on like one deal. So you raise it from other people, but it's just solely on one deal. So you get like maybe an allocation from a company. Let's say it's like a 200K allocation. Maybe you put up 20K in that 200K allocation. And then it's your job to go out and to actually fulfill the rest of the round with other investors. And then as Gabriel said, you can charge a carry from it. So that's like a percentage of the profits.

59:30So that typically is around like 20%. Is that roughly right? Yeah, that's exactly right. So SPVs or a special purpose vehicle is a legal entity that's incorporated. In venture, it's predominantly used to pool funds together, invest into a single asset or a company. and with that you have the functionalities of commercializing some of that the legal entities so you know as you mentioned earning some carry earning some upfront fees and really compensating your hard work for you know fundraising again if you're enjoying the show i highly recommend subscribing to the consumer vc newsletter at the consumer vc.com where you'll receive all new episodes straight to your inbox and a weekly recap of all the deals that are happening thanks for listening

1:00:22I'll see you next time.