The Fusion of Past & Future Shopping Experiences, Insights from Brand Capital Fund's Consumer VC Benchmarks Report with Diana Melencio at XRC Ventures

0:00Malls growing up as a kid of the 90s was really seen as like a community center. You walked around, tried to see what people were wearing, you tried to meet other people there. Because the future of the store is everywhere. That's actually an area that we're spending a lot of time on XRC. So what can they do that actually brings people to the mall? We're also looking at ways to take advantage of this unused or less productive retail space. You know, figuring out ways and technologies that can optimize some of the pain points that we're seeing from mall operators and retailers. Because I do think people are still going to go, people still want to interact with products in store.

0:40So it's not going away. It's just how they do the transaction that differs. Hello, I'm your host, Mike Gelb, and this is the Consumer VC Podcast brought to you by Propeller Industries, the leading strategic finance and accounting partner for venture stage companies. On this show, we discuss the intersection of venture capital and consumer innovation. And if you're enjoying the show, please subscribe on YouTube or whichever platform that you're viewing this content. And if you're really liking the show, I highly recommend checking out the newsletter at theconsumerbc.com. You'll receive, you'll know when every new episode drops for this podcast.

1:15You'll also know the latest fundraising updates and all the consumer deals that are happening over the past week. All continent episodes are for informational and entertainment purposes only and is not investment advice. Our guest today is Diana Malencio from XRC Ventures. Diana manages the entire XRC Ventures investment process across three different investment vehicles. They're Accelerator Fund, Brand Capital Fund, and Opportunity. Some of their investments include Solar Wave, Naked Sundays, and Build. they recently released their brand capital benchmark report in beauty and personal care from pre-seed to series a which we talk about on this podcast and as well as we talk about different opportunities within beauty personal care and in and within the future of retail so if you're interested in those either two categories i highly recommend this one without further ado here's diana

2:14Diana, thank you so much for coming on this podcast. How are you doing? I'm doing well. Thank you for having me. Thank you so much for being here. And this is going to be a lot of fun. I know we've been meaning to do this for some time. I know. You know, I've heard you speak on a number of other different shows and read as well. some of the articles that you've been featured in. And one thing that really stuck out was your thoughts around what the future of the mall is and what the future of retail is. And what I wonder, could you paint us a picture maybe of what a mall you think that would be successful in this kind of new digital era where yes, people are maybe going back to stores in a post COVID environment, but at the same time, the mall isn't quite maybe what it used to be in terms of, um, maybe like the place to hang out or the place to kind of come together as it once was when you, when you like envision of what a mall would look like in the future that you think would work, um, from like a, um, from like a financial business perspective, um, in terms of the type of stores that are offering.

3:29Um, and as well as, you know, kind of bringing back, you know, some of the, maybe the coolness factor um well i guess that if it's working from business as point then it's probably working from a from as well that as point too since you're driving people i've gained a lot more in-store traffic or through traffic there but what's your what's your kind of take on what the future of the mall are like or or picture of of what the mall will look like in the future yeah i mean i think malls growing up as a kid of the 90s um was really seen as like a community center. You know, you, you walked around, you tried to see what people were wearing.

4:07You tried to, you know, as teenagers or kids, you tried to, you tried to meet other people there. And I think it's really going to be an effort on mall operators and retailers and brands to find ways to bring that community aspect back because, you know, there's all sorts of digital communities. You know, Consumer VC is an example of one, but what is something that you want to or have to experience in person, such as the touch and feel of clothing or seeing what a blush looks like in real life or tasting a beverage in real life before purchasing it online. So I do think there needs to be an effort to be made around to answer the question, how can we bring communities together again in the mall?

5:10Because the future of the store is everywhere. It's the ability to, when you're at a coffee shop, drinking out of a cup that you can purchase that cup either through like a QR code or there's retail media networks that are proliferating everywhere. That's actually an area that we're spending a lot of time on at XRC. So what can they do that actually brings people to the mall? So when I think about a traditional mall, you have kind of like your anchors, right? You have like your big department stores in like the different areas. Growing up, I was also a 90s kid growing up for us. It was like Hex, if you remember Hex, you know, JCPenney, Nordstrom, kind of like those.

6:04Those were kind of like our, I think, three. Or like Sears. Sears had everything. It had the tire center. it had a photo store and then it also had clothes and shoes i mean it had it had everything but now we can get that on amazon exactly sears great great example um uh also like old navy comes to mind too for some reason um but like you have these like big like kind of like department stores um or some ways you know like sears maybe like an everything store right um uh but how do you think about maybe the future of malls when you have these like big kind of stores big anchor stores and then you have you know maybe smaller stores because um you know i know that that a lot of people are taught have talked about this digitalization as well and maybe um of commerce and how we're trying to like put together and i imagine this is where um you and and you spend a lot of time in a number of areas and relating to retail whether it's brands or what kind of future retail but how how do you think about store size overall in terms of do do you think that we're going to see like a lot smaller stores um in the future that's really kind of focus on optimizing per every square foot and seeing how we can actually like and and really and really thinking about it from that perspective less department stores or or are we still going to have in terms of like the overall structure it it being quite similar but maybe it will be a few like immersive experiences here or a you know like a museum of ice cream or something like that um a concept that's like in the stall it that's in the mall what are you seeing in terms of like just overall are we going to see like malls that have a lot more stores um or is it going to be maybe similar but there's going to be some like innovation when it comes to different stores actually help drive that through traffic to people through the door?

8:00Yeah, I think it's all of the above. So I think for the past decade or more now, there's too much retail square footage out there in the US. As a result of that, retailers, mall operators are finding ways to optimize revenue for that excess square footage, whether that's shrinking the actual stores that customers interact with and making room for kiosks that do buy online, pick up in store. Or like a happy returns or something like that. Exactly right. Or like the Amazon lockers, all of those things. So I do agree that there is too much square footage. Perhaps there's, you know, I think the mall of the future is really more showrooms of the future where you can interact with the products online.

9:06Maybe they stock some inventory there, but a lot of it is really more from an interaction perspective because when you watch people actually shop in stores, they have their phones in their hands, typically price comparing or for some doing some research. So I do think that brands and retailers alike will have to be more creative about how they use that space. If you do an analysis of the most productive stores in a mall, it is actually the way that those mini kiosks, the productivity levels in those kiosks is very high, higher than the average retailer and brand in those malls. That's really, really interesting.

10:03I mean, just from like an inventory perspective, I think you kind of touched on there and it reminds me a little bit about Bonobos and their story with the guide shop model, like the guide shop model, right? Where you go into the store, you can go and try on all their products, but they don't actually hold inventory, right? You actually have to go and you actually buy it online, which is very innovative. And I mean, could you imagine where you actually go into malls just to buy on products, but you actually walk out of there with no bags. You literally go in, buy, like try on products, but you actually do the transaction in the mall.

10:40You actually make the purchases, but it's all kind of shipped to your, but it's actually shipped towards to your home and you actually transact online still in store rather than actually holding out an inventory or yeah. Yeah, we're already seeing that, right? Like Monobos is one, but there are several others that are doing just that where it's more like the car showroom model. Like you can't get a Tesla off the lot. You have to, you can test drive it, but then it will be delivered to your home. So I do think to optimize for margins, for space, for the fact that more people are, particularly the younger generation, prefers to shop online and have things delivered directly to them.

11:22There will have to be some adjustments to how products get to the consumer. As an investor, when you think about the future of the shop, the future of retail, the future of retail, probably like a physical location experience. What then do you look for when it comes to opportunities? What to you then becomes kind of interesting when you're looking about what the future of the mall could look like? What, for example, or like the future of the store, how does it actually relate or then become, okay, like maybe a thesis that then actually turns into what investment opportunities are that could bring you, you know, knock on wood, hopefully venture-like returns.

12:18That's interesting. I mean, those are different answers depending on if you're talking about consumer product investments versus what you're really asking is tech-enabled investments. Is that? Tech-enabled investments. Yeah. Yeah. Tech-enabled investments. I'm looking for asset light models that don't require a ton of CapEx that can maximize revenue for these retailers and for these consumer brands. Retail media networks, which we touched on earlier, is a great example. So it's retailers optimizing the current assets that they already have in place, emails, TV screens, their own website to bring attention to the brands that they carry through these retail media networks.

13:05So that's an area where we're spending a lot of time and deploying capital towards. We're also looking at ways to take advantage of this unused or less productive retail space. We have a company called Philogic that does middle mile logistics, specifically taking advantage of unused spaces in malls. And so it's, you know, figuring out ways and technologies that can optimize some of the pain points that we're seeing from mall operators and retailers. Because I do think people are still going to go, people still want to interact with products in store. So it's not going away. It's just how they do the transaction that differs.

14:08Yeah. No, that makes a ton of sense. I would say when you look, do you look towards examples? Like, is there a mall that you see that you're like, oh my gosh, like what they're doing, the types of stores or products that they're in, or even the technology companies that maybe have partnered with retailers to create different experiences, that is pretty interesting. And maybe that type of model of a mall might come to others. Is there any particular mall that maybe stands out? Or are we still pretty early in all this where not so much? Or even a mall, or even like a mall itself that you think has done a really good job like embracing um in in your mind maybe what what the future of a mall could look like like hey this actually maybe might be a recipe that that maybe others doesn't have to be like the exact same source for example but um uh but you know maybe maybe some of their stores are um are are using um in terms of uh transacting maybe you can uh transact digitally for example or really easily in the store when you actually like something, or you can learn a lot more about products more easily in the mall.

15:29This is more in historic is more connected, or maybe you find that the kind of anchor, the anchor retailers are doing a much better job. And maybe the mall is, I don't know, helping them do a much better job in terms of like, how can we actually utilize space where it actually gets more people through the door and better foot traffic that, and that you see maybe all that all this kind of evolves into is maybe you see since we're both 90s kids it evolves like wow there's really kind of this real like community that's being built around this mall people actually want to actually attend this mall per se and hey maybe this mall maybe this is actually maybe other malls could take you know some of the ideas that are that have gone to this one or not i'm just kind of curious if you've seen like an example of like wow that mall like i actually really enjoy the experience and there's definitely maybe a bit of a buzz around it?

16:18Because there really just isn't buzz around malls these days. So I'm just kind of just curious. Yeah, I don't know if I feel a buzz. But as a young, as a young mother, there are two that come that come that come to mind. One is the Westfield Century City Mall, and the other one is the Grove. There's a there's a few reasons why I really like those malls and why they are highly trafficked by other young families. One is they have a family room, and two is they also have playgrounds. So they make it easy and desirable for, I'll just use the young family demographic as an example, for young families to want to come and spend time there because there's something for everyone.

17:04They also have, they've also been doing, and this is less tech oriented and more of that community building aspect. They're also building in community events. Like at the Grove, there was a, a mother's and baby yoga class in the morning or at the Century City Mall during the holiday season. They had those, I don't know if you, if you went to the Century City Mall during the holiday season, but they had performances. They cleared out the middle and they had live performances. And then there's also within that mall specifically, there's also like breakout areas and fast Wi-Fi where people can come and congregate.

17:52It's also helpful that they have a multitude of restaurants at varying price points and a movie center and a grocery store and Equinox. So it's really like a one-stop shop. They also have Bumo Works, which is a kind of like a WeWork for working parents where they have sitters on site. So you could drop off your little one and then work there. There's also a camp. So you could also drop off if you have more like elementary school, drop them off and get all your stuff done. So I think they do a really good job of finding ways to foster community and draw, draw parents there as a, as a way to make, you know, whatever it is they have to do, whether that's working out or, um, or grocery shopping or buying things they, they need in one place.

18:50Yeah. I feel like as well, and maybe I'm wrong just from the malls that I visit. I feel like there's more gyms now as well in in malls too um which make make a ton of sense um which makes a ton of sense um do you do you feel because we you know both grew up in the 90s and like i'm just thinking about the movie mall rats um uh and um and you know and also maybe being a bit of a mall rat as well um do you do you think that the community and that experience i know it's looking very, very different now than what that experience was as we're talking what it was in the 90s. But in the 90s, you didn't have the competition of e-commerce.

19:31You didn't have competition of other ways to actually buy products. You almost needed the mall. The mall was... Necessity might be a strong word, but it was just one of the habits or activities that you did. Do you see that the community aspect coming back in that kind of scale or format that it was in the 90s? Or do you think that, hey, there's already way too much competition here with e-commerce or being other ways to purchase products? And I don't think maybe so many people maybe are focused on that experience outside of e-commerce per se, that it's never going to be quite like it was. That's a great question.

20:16I don't know that it'll ever be quite like it was, but I do think that the retailers and the brands that will win in the future of the mall are making it easier for people to do what they need to do, meaning find and buy the items that they need and then check out as quickly as possible. while maybe participating in some of the activities that are happening in the mall. So an example would be, have you ever been to the Uniqlo store in New York City? I have not, no. Okay. So basically you shop around, there's lots of interactive displays. And then when you're done, you have this, you carry around this bag.

21:09you drop it into this bin um it automatically calculates what you have in the bag and then you pay with your phone and you just walk out you just you just drop and then you go and then and then you go and then everything is pretty well labeled in that this section is for men this section is for kids so if you didn't want to interact with a human and you just wanted to get in and out you can you can do that wow that's that's really that's really interesting i mean i'm also really curious about the future of those types of things as well just because i know like at least on the grocery side this is different but i know on the grocery side like amazon is like cut back on on doing that um yes but that's because their model was extremely expensive like to run one of those stores so part of my part of your job is to go to go shopping so so i did i think it's in Sherman Oaks or since the Studio City Whole Foods is like operated by an Amazon Go model.

22:13So you take a cart, you do all the, you know, you do all your shopping and then you leave. It's mostly pretty, it's mostly pretty seamless, but they require, you know, cameras and a check-in system. There are technologies that make it easy for retailers to do easier to do that type of sort of Amazon Go models, such as the carts or attachments that go into pre-existing carts. really I think what's preventing a lot of retail is the high capex necessary to create that level of ease of use for the customer. It's hard for them. It's a huge upfront investment. And then there's a bit of an education process.

23:08But if you do it with existing assets in the store, um you know i i think that makes it significantly easier for for retailers so like a reader like a cart reader that attaches to a cart versus spending money on cameras or spending money on buying a whole set of carts um for the amount of customers that come through the door versus ones that you could just you know put on existing carts and that's what we that's the type of business model that we really like at XRC is an asset light model. That's really helpful. Well, I know we've talked a lot about retail. I know as well, you all focus so much as well on brands too.

23:53And I know that you recently released your Q1 report about beauty and personal care. Can you focus on, well, first of all, I know that you released these reports quarterly. Why, where do these, what's the history of generating these reports? um first of all and secondly what has been some of the biggest differences that you found in 2024 versus 2023 when it comes to um investing in beauty personal care from like the you know uh pre-seed um area to series a like what do you what have you seen from like from the macro from like a macro uh perspective um in in the investment landscape okay there's multiple question.

24:38So I'm going to start with a history, which is that XRC got its start as an accelerator program, even though now we have multiple venture funds that we deploy capital from. But as a result of our beginnings, we invested in a lot of pre-seed founders that had questions around, well, what do I need to accelerate to to get venture funding? And so prior to these consumer-focused benchmarks report, we had run just a general one where we did have two columns that split between enterprise SaaS and sort of like tech-enabled D2C. And we found that our product founders weren't seeing that line up with VCs in real time, that there's a large difference between the check sizes, the valuations, the metrics required, not even just, not even like with enterprise software, but with like DTC apps or direct consumer services.

25:56And so, and because we heard from founders that that benchmark report was so helpful and since we launched our brand capital fund, we decided we're going to run one just for consumer. And then as we started to think about the landscape of the type of companies that we invest in beauty and personal care is one but we've invested in consumer hardware we invested in terra cafe we've invested in a nootropics company called thesis and the the sort of sales assumptions year-over-year growth the multiplies and the multiples excuse me applied to those companies the valuations the check sizes the investors they were all so nuanced that we decided to release these consumer reports quarterly and focus on subcategories.

26:47I mean, there's even nuance within beauty and personal care, but that's too much work. So, you know, we've made several investments in this space. And so as a result, we've fostered a lot of great relationships, like our mutual friend, Odile, at Fab Crow Creation Lab, who participated in this survey. So we decided to focus on beauty and personal care first. Also, because we were seeing so much M &A activity within the space, it just felt very relevant to start with that. Talk to me a little bit about what the aspects to why you like beauty and personal care. What are the aspects of the business that you find particularly interesting, where it make sense to invest in and, and, and, and also what ideally in an ideal world when you're, when you're doing your, when you're modeling, modeling out your investments, what the ideal return is from like, from like money in money out perspective.

27:54Why is beauty personal care so interesting from a venture perspective? So the answer to that is, so it has some of the highest multiples in CPG. So from an exit multiple perspective, it's usually in the mid to high single digits, sometimes even low teens, very rarely, but sometimes. While most CPG, if you take the average of the past decade of investment return. That's multiple based off revenue, right? Yes, multiple based on, call it trailing 12 months revenue. Trailing 12 months revenue. All right, cool. Thank you. Yeah, yeah, yeah. Whereas if you take just general CPG, which includes food and beverage, among other things, the average CPG sales exit multiple is three.

28:51And so that's why it is so attractive. One, the exit multiples and that B, actually there's multiple factors, but the top two is really those exit multiples. And the second is the M &A activity in the space. the strategics are very active in acquiring new brands largely because they haven't done so they haven't been successful launching their own internal brands and that consumers in the beauty and personal care space demand newness and there's also just you the science just, just involves, if you look at some of the more, um, successful exits and by successful, I mean, just like higher, higher multiples, they really have like a biotech component, K18, Olaplex.

29:50Um, so it's more of this, like, it's more of these like beauty and personal care bounds that are, that are grounded in science that are grounded in clinical results. how then do you think about since some of the biggest performing exits in beauty personal care has been companies as you say that has that are kind of science-backed or even founded by scientists what how do you think about founder profile when it comes to beauty personal care is it um are you more inclined to invest in founders in beauty personal care that maybe come from a science background and they're they're the product has some type of innovation um um that is um uh that um given like the founder's background um if if the founder wasn't was in science or or vice versa maybe you and and not to say this could be both but um uh or you know um a founder that maybe is a incredible marketer um or maybe you know is how maybe it's a talent-led business where you actually um and again this can be these are not mutually exclusive things but i'm making them mutually exclusive for the for the purposes of this conversation but or or companies that um is much more maybe talent-led um uh or maybe it's a type of product that's appealing to a demographic that maybe is underserved.

31:33How do you kind of, because it seems like on the surface, and again, I'm an observer, I'm not an investor, but it seems like on the surface, it seems like there has been a bit of a shift when it comes to what type of founders to back in that right now, it seems very kind of heavily like science focused in terms of that they want maybe some type of science background there. And I'm just kind of curious when you think about the aspects of founders that to you sound maybe particularly interesting within beauty and personal care. Yeah, so that's a great question. I don't think what I look for is necessarily dissimilar from that of an enterprise software company investment in that the ideal founding team would have someone that understands how to make the product or knows the pain point really well.

32:21So can communicate what they want to see, what kind of product they want built, and then someone that knows how to sell it. I think those two people, it could be one, but those two skill sets have to exist in the founding team. And I think the lean towards science-based founders perhaps as a result of that a lot of the acquirers in beauty and personal care mandate a lot of IP or... substantial differentiation in order to acquire a company. And that's important because the majority of, I mean, consumer products in general, but particularly beauty and personal care, the majority of the liquidity events when you realize your return is through these strategic acquisitions.

33:31um and and i think um you know all of these conglomerates um i won't name them because i work with some of them um but think about the these big beauty and personal care conglomerates all of them have a lot of them have bulked up their their r &d their r &d teams so for an incumbent brand or um excuse me an emerging brand to come up with a new and novel technology that their head of R &D can't go, oh, I can do that. We can do that. That's a cool sun care brand, but this brand has a sun care angle. I think more and more they're mandating that

34:17because IP is so important to strategic acquirers. For me, I think if you are leading with science-backed, it would be good to have a science-backed founder or team member. But to your point, if you're addressing a pain point of an underserved market, like people with darker skin tones, as an example, then that's what you want in the founding team, not necessarily a scientist. That would be great if you had all of the above. right how something that i keep kind of going over is um and i'm just i'm really just curious how you how you diligence companies because you might have companies that say that they're you know science backed and they have you know um you try our product and uh voila um it's um it's it's incredible.

35:16Um, it's something like that that you maybe had, have, have seen before on the market. Um, at the same time, you know, you also don't want to mislead, you know, consumers in your marketing. And I know that there's like a, um, like one of the, one of the big, um, and I'm sure that they all do. Um, I'm sure that in the, um, uh, the big kind of, um, uh, uh, acquires, are also looking to make sure that what, for the Science Pack one, that what they actually preach is actually what happens, right? So how do you think about diligently in a company where, yes, you want them to be innovative and they want the product to be amazing, but at the same time, not kind of overstepping that line too when it comes to like their marketing and maybe they have a really good person that's able to sell the product, but at the same time, not being too outlandish when it comes to what actually, if you use our product, that's actually what happens.

36:15Yeah. So we do have, you know, our R &D experts that we diligence the products with, pay very close attention to clinicals if they have them, studies if they have them, customer surveys if they have them, and benchmark them against, you know, results and research and reports that we have on hand. We're also very outbound focus. So we identify sort of, these are the largest growing consumer product categories. These are white spaces within strategic acquires brand of portfolios. And then it's sort of like the middle of that Venn diagram that we're like, okay, so we should look at, for example, beauty devices, the at-home beauty device category is the fastest, fun fact, it's the fastest growing consumer product category, just like period.

37:20And our portfolio company, Solowave, is the fastest growing company in that category. And it wasn't solo wave approaching us. We were doing a deep dive into that market, talking to strategic acquirers, and then outbound looking for companies that were in this specific category. Similarly, for our investment in Naked Sundays, we spoke with, I can't even tell you how many sun care companies, to figure out which one that we wanted to invest And both of those companies are doing extraordinarily well. How do you break down what companies that you actually want to invest in? Like, for example, you mentioned just previously that at-home beauty devices, it's like the fastest growing sector within beauty and personal care.