What is a Cult Brand? With Sarah Woelfel, Co-Founder & Partner at Cult Capital

0:00Our goal is... What if a brand was exclusive? You're going in on bottom shelf. You're not getting top shelf steak. Most beauty companies have anywhere between a 50 to 70 % gross margin. Versus, you know, looking at a food or beverage company, they're running in the kind of 30 % gross margin. Are you finding that there are specific categories that you like? Everything always goes back to the product. How does it actually change the market as well? and beauty and food and anything. Like it comes down to they had a cult following.

0:41Hello, 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 joining the show, please subscribe on YouTube or whichever platform that you're viewing this content. And if you're really, really enjoying the show and you want to stay in the loop, I highly recommend subscribing to my newsletter at theconsumervc.com. You'll receive all new episodes right when they're released and as well as fundraising updates weekly of all the consumer deals that are happening.

1:16All content and episodes are for informational and entertainment purposes only. It is not investment advice. Our guest today is Sarah Wolfel, who is a co-founder and managing partner at Cult Capital. Cult Capital helps catapult merging cult favorites to mainstream success with truth and authenticity. Some of their investments include Supergoop, Babo Botanicals, and Lawless Beauty. We focus this conversation primarily on investing in emerging beauty and personal care brands, which we don't cover nearly as much as we should on this show. What are cult brands? We cover that as well. And the ideal outcome when investing in brands problem investors' perspective, and how she thinks and approaches portfolio construction.

1:58Without further ado, here's Sarah.

2:09Sarah, thank you so much for joining me here today. How are you? I'm great. Thanks, Mike. Thank you so much for having me. Thanks for taking the time. Thanks for taking the time. So since you are Colt Capital, I got to ask, what makes a Colt brand? It's a great question. It's interesting because when we initially launched the firm, John and I, back in, let's see, it was 2015, late 2015, we initially named it after his initials, JMK. and after three years or so of looking at potential investments together, we developed this notion of investing in cult brands and we would always say like, what is this brand doing that's actually different, that's actually doing something that is changing consumers' lives for the better?

3:02And we would kind of always go back to that question as our touchstone. And we realized that the commonality amongst all of the brands that we had invested in or were interested in was that they had a cult following and a community of, you know, organic followers who were very passionate about the brand and very passionate about the brand's vision, mission and values. And of course, the product itself and the product product itself was life changing for the consumer. So a year or so after we we renamed Colt to Colt Capital and we then kind of took the name a step further and actually defined what a Colt brand is.

3:56We have an official Webster dictionary definition for it. And we say that it's a brand that changes the world by providing a product that otherwise would not exist. And if it didn't exist, the world would be worse off in a meaningful way. And so it's a brand that consumers really can't live without. and as a byproduct has a very loyal following that is very excited about the brand and engages with the brands in a very passionate way, therefore creating this amazing cult community. So that is how Cult Capital defines a cult brand. How do you measure that then when you're looking at brands and thinking of, is this a cult brand versus not a cult brand?

4:52How do you measure that the brand's customers are super passionate about the brand and that it's actually very sticky or that it's making sure that it's organic in terms of maybe how they've grown, not that they can't acquire a Viapaid or what have you, but how do you put all these things together? Yeah, it's another great question. And we've spent a lot of time and invested a lot of time in building our team to have, you know, very specific metrics that we're looking at. We analyze both qualitative and quantitative data to really ascertain whether something is a cult brand. In terms of, you know, it really is a blend of both qualitative and quantitative at the end of the day.

5:46And I do think that makes capital pretty differentiated within the investing landscape. A lot of investment firms are really, really good at the quantitative, but not necessarily as focused on the qualitative. But we've really kind of drilled deeper on the qualitative side. On the qualitative side, you know, in the first instance, it's looking at USP, which is, you know, the product's unique selling proposition. So really laying out, whether it be a food brand or beauty brand, what are the exact ingredients and what is the potency of those ingredients and are they clean or are they not clean and how does that compare to all the other brands in the competitive set?

6:33So not just what's the brand's mission or values, but drilling a level deeper to make sure that a true USP really does exist. Another thing we look at, obviously, is product market fit. So how much do customers value the product? A lot of that can be demonstrated through product reviews, which we really go through a lot of times manually to decipher what customers are actually saying about the product. And when we're doing that, we look for indicators that it is, for example, replacing something in their routine or, quote, change their lives or never going back. So really words that kind of speak to it's doing something that no other product has done for them.

7:28Community engagement. We look at social media metrics. Um, obviously now those, those are pretty widely available. So we're looking at engagement rates, um, across the all social media platforms to really understand how relative to peers, um, the brand is resonating with consumers. We look at one of the more interesting things that we look at is when kind of deciding whether a brand is interesting or not. How are consumers learning about the brand? A really good indicator of a cult brand is when you see a high percentage of consumers learning about it through word of mouth. That really means that there's this evangelical following.

8:19So those are on the qualitative side. On the quantitative side, we're looking at a lot of the metrics that speak to loyalty and repeat purchase behavior, doing cohort analyses, looking at loyalty programs and tiers, understanding what products are resonating specifically with customers and why. So looking at sell in and sell through by product, by retailer, evaluating unit economics, and then really blending both the quantitative and the qualitative together to understand the story behind the numbers and kind of bring all the pieces together. So that's a little snippet into the diligence process for us.

9:05I appreciate that. How do you think as well about category and what category is interesting to you? I mean, looking at your portfolio, I know it seems a lot in mostly, I would say, in the beauty and personal care space. But are you finding that there are specific categories that you like and it's a bit more kind of top down and you and your team are kind of doing research in terms of what are the new trends in that specific category? or is it a little bit more bottoms up, would you say, in that you kind of want the founder to kind of bring you like a unique insight or something that maybe you haven't thought about before

9:43where this could be the direction that particular category is headed into? That's a really great question and something that we're constantly evaluating, quite honestly, and kind of revisiting. We think of it in particular, you know we have always thought of it and continue to think of it as a blend of both of those things Mike so we're looking kind of bottoms up and our sourcing model is based on you know just what are the companies out there and what's interesting and we're constantly surfacing new companies across all the verticals that we look at which are food, beverage, beauty, personal care, fashion, apparel, accessories, household, pet, leisure.

10:29So, you know, it is a wide variety of categories. When we think about what has resonated and what has been most interesting to us, a lot of it has been in the beauty space. We're really looking for like mission-driven visionaries, like I said, who are looking to change the world for the better. I think the other Another thing that is prevalent in the beauty space is just higher margins. So return on investment tends to be better in the beauty space. You know, most beauty companies have anywhere between a 50 to 70 % gross margin versus, you know, looking at a food or beverage company, they're running in the kind of 30 % gross margin zone to 40 % gross margin zone.

11:20Um, so when we think about, you know, what needs to be the case, um, in order to get excited about an investment in food versus an investment in beauty, the bar is higher for differentiation in food, just because there's less money for marketing and team building and those types of operating expense buckets versus in beauty, because the margins are higher, there's more room on the P &L to kind of invest in marketing, invest in team, invest in different channels. So that's to date how we've thought about it and how kind of we've landed where we have landed, which is investing the majority of our capital in the beauty space.

12:08Got it. Got it. So beauty and personal care has been attracted to you, obviously, from a gross margin perspective. I mean, in terms of like comparing it to Food & Bev, there's obviously trade-offs here. I know we're speaking kind of broadly when it comes to different categories, but even though Food & Bev obviously has less margin, you're probably gonna have, if a customer loves your product, and of course, if you have a cold brand, your repeat rates will be higher in the Food & Bev categories because of course, you're obviously consuming those categories within one sitting, whereas in Beauty and Personal Care, you're not, right?

12:39And so, yes, you do obviously have like gross margin of the, that benefits, but at the same time, in terms of the repeat rate for personal care, it also is going to be less than, than food in bed. Yeah. And I think, you know, it's category dependent as well. I think in food, when you think about like meal goes creamery, like someone's coming back and buying vegan cheese or butter, you know, once, once every other week. When you think about the subcategories within beauty, hair care, the purchase frequency is maybe quarterly, skincare is monthly, cosmetics varies widely. A lot of those products are one-time purchase items like palettes and specialty things like that.

13:26Mascara is something maybe someone purchases a couple times a year. So it definitely varies by category. And we take all of those things into consideration as we think about, you know, what is the bar for this brand and does it clear our investment hurdle? Is there a sweet spot when it comes to when a person would actually repeat that you like, like whether it's like a monthly purchase, for example, or like quarterly, or if it's something that's within like two weeks? Again, I think it's category dependent. I think if we look at a brand and see that over 30 % of customers come back and purchase within the first three months or so, I think that's a really good sign of cold adult adoption.

14:14But again, it really does vary by category. And we've had brands that we've invested in that, you know, we've kind of helped develop that repeat purchase as part of the investment. You know, it does require, you know, a strategy to really be able to bring back the customer over and over again in an investment. So at what stage do you typically get involved with in the company from like a revenue standpoint? Yeah. So we are, you know, getting involved pretty early. Our minimum threshold is last 12 months revenue of 2 million. So anywhere, you know, companies are typically anywhere between that LTM 2 million to 10 million mark at the time of our initial investment.

15:03And usually our goal is to scale the business to somewhere between 50 million of revenue to 100 million of revenue over a five to seven year period. And we're investing in the series A typically or series B rounds. We're doing all minority investments and really looking to collaborate deeply with founders and their executive teams to help them grow and scale. I'd say most often the things that we're working on initially are building out a senior leadership executive team. So most of the time when we initially invest, there might be the founder slash CEO and one other senior person and a lot of junior people.

15:55So what we're really specializing in is helping companies grow that team and then develop systems and processes under sales and marketing and expanding distribution channels for the brand. Well, speaking about distribution channels, when you do invest or look at a brand and the brand is and we're kind of availing of, and a brand is attractive to you or could be, could be attractive to you. Um, do they have to have like a varied, um, like a couple different like sales channels, for example, like, for example, do they have to be in retail? Um, can they only be online or, or, um, or how, how are you thinking about it from a sales sales channels perspective, or does it not as much matter?

16:45For us, it doesn't necessarily matter. We like to see the desire to be omnichannel and the goal to be omnichannel. So we want that to be the end goal. But a lot of the brands, I mean, where we typically are investing is between, I'd say three to five million of revenue is probably the average of where we've started investing with brands. And in many cases, you see that they've grown predominantly with one specific channel slash retailer, whether that be through Sephora or direct-to-consumer. Acton Acre is a good example of a hair care brand we've partnered with that was exclusively, you know, basically direct-to-consumer at the time of our investment.

17:30And so it's not critical to show proof points. But what we do, it does make the bar higher for performance in that channel. So if you are exclusively direct to consumer, you know, we're really doing a lot of diligence to understand the strategy there, make sure the unit economics makes sense and want to see, you know, that that channel specifically is viable as a, you know, 40 to 50 million dollar revenue channel. Yeah, that's what I've heard from some folks more like the private equity sphere, where you might have a very compelling DTC brand, or rather brand that is only DTC or only selling through the website.

18:18And there's not enough margin for them to actually go into wholesale. Um, but, but, but so, so, um, like how do you identify, I guess, apart from margin, um, what do you kind of identify in terms of will a brand actually work that is maybe doing really well DTC if that brand will actually be, be a compelling brand in wholesale? Since of course, the majority of spend for, uh, consumables happen in, in, in wholesale, um, retail. Yeah, I think a lot of it goes back to that brand love. When we think about, for example, someone like Acton Acre, we invested in them. They had not launched in Sephora.

19:05Now they have launched in Sephora. They're on.com and they're in 250 doors. They're on the next big thing wall in hair care. and I you know we had a lot of confidence going into that brand I think some of like the big picture things when we looked at it and were like this is a great brand and this is going to be successful is a the product they were taking a revolutionary approach in hair care so looking at the scalp they have very in a way innovative ways of thinking about the scalp as you know skin care for your head because your scalp is essentially an extension of the skin on your body. The founder herself is a celebrity hairstylist and also a trichologist, so has a lot of knowledge about hair care and could really speak to the ingredients and the formulas and the quality.

20:00And then we look at sort of, you know, I think for beauty in particular, the PR strategy is really important. So one of the things that Sephora really gets excited about with brands is if they have a really amazing PR strategy. Because if you're thinking about it from Sephora's perspective, to bring in a new brand and to give shelf space to a new brand, they want to bring new consumer. They want that brand to be able to bring new consumers to Sephora, right? Right. So that's that's a lot of, you know, what we focused on for that brand. For example, I don't think there's a playbook per se, but it's putting together, you know, what are the three or four tenets that make this brand really compelling for retail?

20:49What if a brand was exclusive in Sephora or exclusive on a particular channel? Is that a vote of confidence for you? Or is it also at the same time, okay, maybe this is somewhat limiting as well? Yeah. So we've dealt with exclusivity quite a bit with our brand. So Supergoop was exclusive to Sephora for a large part of our investment in that brand. They were, I think, exclusive since the time we invested in 2015 to right before Blackstone bought a majority. So that was around six years. And then, you know, we're also invested and partnered with Lawless Beauty in the clean cosmetic space. That's a brand that has, you know, dabbled in exclusivity with Sephora.

21:44So it's a very common ask from Sephora. and we are, you know, we're very comfortable with it. It's a vote of confidence from Sephora. We do, you know, they don't make it totally exclusive. So you can sell through other smaller volume marketing channels and you can sell direct to consumer. And, you know, So there are places that you can also sell through QVC, which both Supergoop and Lawless sold through QVC as well. So there are other ways to really get the brand and brand message to consumers. So we view it, you know, largely as a positive. But going back to just, you know, how convicted we need to be heading into an investment like that.

22:42you know, we had a lot of confidence in Supergoop at the time of our investment and a lot of confidence in Lawless at the time of our investment. Yeah, no, that's really helpful. I mean, well, how do you overall like think about, I guess, specifically within beauty and personal care, you know, trends or innovation within the space? I know that's like a very broad question to ask because there's so many different kind of avenues within beauty and personal care. But for example, like, I mean, I listened to, um, uh, I listened to Holly, uh, from super goops, um, podcast on how I built this. And I guess the insight, part of the insight there, um, apart from having like a, you know, incredible product, I'm a, I, I love the product.

23:27I'm a, I'm a super goop, uh, fan. Um, and also, um, and also, um, wear it, um, uh, quite often, but the insight that, But the insight, I remember her saying that was really interesting, was that when you go to elementary schools or you go to schools, they actually should have sunscreen for kids because you're out in the sun all day. And that's going to deteriorate your skin, is not so great for your skin. So you should really be having sunscreen every single moment of the day on pretty much. It should be part of your daily routine and kind of incorporate with it. which apart from having like a superior product, if of course the customer is buying, is using Subscreen way more often, then of course, you know, that's fantastic.

24:16But so how, so that's one example and I applaud you for obviously making that investment there. But how are you thinking about like innovation in like today for like other types of categories? Yeah, so it is a multi-pronged, answer. So what I would say at the highest level, when you think about a product and a brand and what it's providing, we look and say like, what is this company trying to do? So are they, is their innovation, is it growing the market size in a case like Supergoop? So Supergoop was actually the mission was to change consumers daily usage patterns for sunscreen and get them to wear it every day so in addition to taking market share from from existing players in the market the goal was also to expand the market right and make the the total addressable market for sunscreen larger.

25:24When we look at a company like Lawless Beauty as a great example, you know, that company is providing clean cosmetics for consumers who want artistry-driven products. So products that have very high efficacy. A lot of clean brands prior to Lawless were focused on more of a minimalist makeup look that was more of a natural makeup look. And Annie said, hey, I actually, I like my face to look like I, you know, a magazine ad. And I like makeup that wears and performs and looks amazing. I like glitter. And so I want to create a makeup brand and clean that does that. So if you look at a company like Lawless, that's more of a pure market share play, not necessarily growing the total addressable market for cosmetics, but really trying to take market share away from other players in the space like NARS and MAC and a lot of the big players that aren't clean today.

26:37So the innovation bar really starts there around what is the goal of the company and why? So what do we need to be focused on? And in the case of Supergoop, you know, one of the great innovations was the unseen sunscreen, which is literally something that can be applied every day. You don't feel it on your face. It feels weightless. It's clear. You can wear it if you're a male, female, under makeup, over makeup. You know, you can really wear it any which way. So that was a huge innovation for that brand. A huge innovation for Lawless has been in lip. And that's been, you know, a growing category within cosmetics in particular over the last year or two.

27:24and she created a really innovative lip plumping formula that is, it's called Forget the Filler, which is a very catchy name, but really meant to, you know, act like, you know, a traditional lip plumper, but doesn't have the sting that's typically associated with it. And it's a beautiful, shiny finish lip formula. So, you know, it starts with what the brand's trying to achieve, goes down to product. And then I think, you know, the key really is innovation is really important, especially in beauty, but really across the board, it's important in food as well. Like, I think in a world where everything is so crowded, there's so many investors, there's so many companies being started every day in consumer.

28:21And there's a lot of fast following. Social media has driven a culture, has driven a dupe culture. People are duplicating innovation quickly. Co-manufacturers are duplicating trends and back-solving for formulas quickly. So I think the key is to have a well-oiled machine in innovation. So you need an innovation lead and people who are really developing and planning out the pipeline on a daily basis. You know, it's like marketing. It's like sales. It's like any other function within the company. NPD and innovation is an area where, you know, people need to be spending time daily as a team. And everything that is, you know, decided and done should be rooted in the company's vision and mission and what the ultimate goal of the brand is.

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29:48Some of the brands that they've worked with are Liquid Death, Olipop, Hems, Farmer's Dog, Away, MoviePass, and Giphy. Propeller also provides specialized support for fundraising and M &A with transaction advisory services. Propeller's TA team of former investment bankers and investors can step in on more of a project basis when pursuing full-scale financing and M &A. There's a link to Propeller Industries in the show notes if you want to learn more information um i i really appreciate that response what i what i kind of my takeaway there is that it it starts with the product and it also with the product how does it actually change the market as well so in the fact with like super super goop you know the fact that it was um it was um a sunscreen that was really easy to put on you can put it on you know under makeup you you can put it on you know anytime it's just very, very, um, it's not really that it's not really thick, right.

30:44It's, um, uh, just very, very easy to put on. Well, okay. And also promoting the fact that, Hey, you should have on sunscreen every day. Um, it shouldn't just be, it should just be like, when do you go to the beach? It should also be, you know, um, if you're going outside at all the day, which hopefully, um, hopefully you are at some point, um, that, that you should have it on. Okay. Like, how does it actually change the market? And I liked your response about how, um, it actually grew like, like the TAM of the market in terms of who would actually wear sunscreen, but also like frequency too, since you also, we put it on it daily rather than maybe only on the weekend where maybe you're outside for a lot more time than during the week.

31:27And so how does it also change the market? And also is it, are you trying to take away market share? Or are you expanding the market where, hey, maybe it actually doesn't matter as much if we actually take market share or not because there's the, the market is so wide open than we even thought it was. So, um, but, but, but again, that like all stems kind of back to the product, right? Everything always goes back to the product. Um, and, and, and, and most importantly, the mission, right? Like Holly, that was the origin of her mission. Unfortunately, the kids piece was too hard because it's, you know, it's a regulated product product and schools can't bring in, you know, Tasty-related products.