Why He Invests in the Factories, Not Just the Brands with Jared Stein, Co-Founder of Monogram Capital

26:36And so we like that flexibility and that capability set more often than not to live in-house. There are industries, though, where, you know, Olipop, for example, and Soda, the scale and the capital investment required to both build a sales and marketing machine and build a CapEx, you know, kind of factory equivalent to go with that growth would just be an astronomical bet. and you're probably taking on due risk. And so in that space, what we like is it's outsourced, but Alipop is doing a very difficult to replicate formula with a ton of efficaciousness and science. So human clinicals would back this up and they are keeping that piece of their formula proprietary.

27:23So like that gets shipped in pre-batched into the Coman. And so that's almost like in my mind, it's a hybrid model, right? Where like, you're not paying for the CapEx, but you're keeping the very hard part of your product sacred so that other people, including the commands can't just replicate that at large.

27:43Jared Stein:Since part of your portfolio are is manufacturers, and I'd love to dive in, um, into that part of the folio, but focusing, but first focusing on the brand side, Do you find opportunities from the manufacturers into brands due to who their customers are? And what's typically that, you know, how do those insights kind of come about? What's your kind of process in terms of identifying those opportunities? Yeah. Whenever we assess a subsector within a market, say food and beverage, we are doing that from both sides of the lens. be that brand and then be that call it pick and shovel supply chain and services.

28:25And so to your point, insights bubble up from both sides. From the branded side, you know, we're looking at syndicated data and we're assessing who's winning. How are they turning on shelves in terms of their productivity? How much remaining white space is there? And that's informing, you know, a thesis and where we want to spend time. From the manufacturing side, oftentimes we're talking to these producers and they're saying, yeah, you know, we just turned on a dedicated line for x brand because they continue to eat up our whole production schedule we don't have enough capacity to keep up with them like that's a great tip to say like all right this thing is really working and these guys specialize in a sub-setter so they're producing for a bunch of different competitors and there's one that they're going all in on in terms of their equipment bets, that's pretty great data for us.

29:16And so those insights do bubble up and originate from both sides of the ecosystem.

29:23Jared Stein:Is there an example of a company that's in your portfolio, like a brand in your portfolio where actually that happened? That's how you discovered them? Yeah. I mean, Alipop is one of those where early on, they were with much smaller commands. And so So, you know, we kept hearing before I even started the dialogue, which was really early with Ben and David, the two founders, you know, as a million dollar revenue business, when we first took a toehold investment, which is anomalous for us. We never start that early. But part of that was that trifecta of retailers saying like, holy cow, you know, we put this on our shelf in our local store and it's flying.

30:06the consumer saying like, man, I tried this, this liquid, it's incredible. And like, I can't believe it's got these functional benefits. And then, you know, the third piece was this manufacturing network saying like, we might need to add another line for this. Like this is, you know, today we're doing things pretty manually, but like, we want to keep these guys because it's flying. And so we need to start to automate and invest behind it. And so when you hear signal from all of those three sources generally there's something there got it yeah no that makes um wow that's incredible

30:46Jared Stein:that you invest that early that's amazing um uh how um talk to me a little bit about all the manufacturing side um i know that um it uh in terms of the structure how you think about manufacturing. Also, if you can dive deeper a little bit into when you're looking at a new space or new sector, maybe making the choice, does it make sense to partner with a manufacturer or does it make sense to actually partner with a brand? Some of your decision-making through that, that'd be great. Yeah. Maybe starting with the last question first. So, So brand versus manufacturer supply chain. Oftentimes we're starting focused on the brand.

31:35We're saying, all right, we love what's going on in protein. Let's go look at the bar space. And there we're saying, all right, how ubiquitous is that production process? Or is there anything truly sacred and differentiated around the way that bars are made? And there have been exceptions to this. And there's always sort of a market leader like kind as they came out that is doing things differently that hit resonance and then take off. But generally speaking, you know, my consumer experience as you walk down that aisle is, wow, it's a sea of, you know, a lot of product. And so that's one where like, you know, just candidly, we've been of the mindset of like, we're just not smart enough to kind of pick the next, the next bar winner.

32:21Would we look at the manufacturing? potentially. And so then we're asking ourselves the question of, all right, how complicated is this to do? And therefore, how many viable other alternatives are there in the market for production under the theory that like, if there's 30, 40, 50 commands that are all able to produce similar product, you're eventually going to have price competitiveness that might be a race to the bottom. And so, you know, typically, we're going through that type of thought reasoning on every single sub-vertical and category to assess where in the supply chain or brand side we want to play.

32:59I'd say the best examples in our portfolio have actually been this round-trip, sort of full-cycle approach where, for example, we own a large-scale, low-acid aseptic beverage manufacturer called Mountaintop, which we stood up as a de novo platform. What is that? Because that's pretty specific and esoteric. It basically is just a hyper-specialized manufacturing process, so it's quite difficult, where you lock in shelf life for all sorts of beverage from milk to plant-based dairy to protein, coffee, tea, et cetera. And it was a thesis that we landed on because every single brand we talked to that were in those respective verticals, which have been the fastest growing parts of Beverage, was saying, we're growing 50 or 100 % a year, and we can't get our hands on enough product from these commands to keep pace with the market demand.

34:02And the capital investment to actually build one of them or to internalize it yourself was prohibitive. And so we said, okay, let's go see what's out on the map in terms of the available commands to buy. It turns out there's only six or seven of scale for various reasons. None of those aligned. And so we ended up spinning a management team out of one of the largest players in the space. And they went out and signed almost 800 million of long term contracted revenue. And we stood up, you know, a de novo platform from the ground up with them. And so that just gives you a sense like it often originates from this insight of there's a ton of growth and tailwind in a category, but the supply side is lagging.

34:50And there's a structural reason, in this case, human capital training on this process technology and capital intensity, but largely that human capital piece that's holding it back. And therefore, you know, if you can kind of build around that capability set, you're going to have tremendous white space ahead of you.

35:07Jared Stein:So if I'm understanding correctly, you saw how there was still limited capacity.

35:20Jared Stein:Limited capacity, the six main players in the manufacturing space, it wasn't a great fit. So you built your own platform and actually built up your own manufacturing capabilities? Yeah. Or leverages? Okay. Yeah, we went to management and we said, look, we can't do a true startup, but if you can go sign enough contracted volume such that the day we open this facility, it's at least break even if not profitable, then we'll leg in capital across a couple of tranches based on those milestones. And to their credit, which both validated the thesis, but really also validated these operators and their reputation in this space, they went out and signed that$800 million of long-term cumulative volume without a factory to tour customers around.

36:11You know, the vast majority of that volume was before we had broken ground on the facility. And so, you know, long story short, we ended up standing up a 330 ,000 square foot facility. You know, fast forward a number of years. So that opened in mid-2023. We're now fully out of capacity in that building. We're about to green light another 250 ,000 square feet. And so it's been just an amazing partnership with our management team. But all of that originated from the insights you just mentioned.

36:50Jared Stein:Got it. And so a lot of the insights that... And the insights, they typically come that route in terms of from the brand perspective and talking to brands in a space and then kind of back channeling that into manufacturing unless you feel like there maybe is an opportunity on the brand side. Spot on. Yeah. And the precursor to that even is us scraping through syndicated data and saying, wow, there's a lot of growth in this protein beverage space. Let's diagnose where that's coming from. Let's talk to the key brands. And then they're all saying, yeah, the only thing holding me back right now is line time.

37:25Great. Like, now let's go really spend time. We know exactly where to go spend time. It makes a lot of sense.

37:34Jared Stein:Um, we haven't, as you know, we haven't really spent a lot of time covering manufacturing on this show. It's usually about brands and about, um, also consumer tech. Can you walk me through a little bit about from the manufacturing point when you, um, own a manufacturer or are partners with a, with a, uh, uh, when you have a manufacturer in your, in your portfolio, what does the payback look like? What's, what's typically the strategy and expected return? Yeah. I mean, there are good paybacks and bad paybacks, obviously. We're trying to solve for the former. I'd say when things go right or if you find the right industries, you know, which have really attractive RICs or return on the investment capital, you know, we're typically targeting if it's a new build, say, three-year paybacks.

38:25But then if it's, you know, a CapEx project, oftentimes those are 12 months. And so what you're really looking at for us, like that starts from this analysis of saying, is there enough scarcity on the supply chain side? This is hard enough to do where brands and maybe even private label, but more often brands are signing three to seven year contracts with these manufacturers because they actually are intended to lock up that capacity in that line time. If we tick the box on that, you then can say, okay, well, what does it take to stand up a new line? How much EBITDA or profitability can you expect from that line?

39:05And how much of that can we finance? Or are we putting in equity? And you quickly get to this calculus, which is, oh man, like, yes, it's a big capital number in aggregate, but we can finance a good portion of it. and the profitability is there for a really long duration contract, that is probably going to pencil out to something that's quite attractive.

39:31Jared Stein:And that's very helpful. Is the goal eventually to sell the manufacturer? This is a rudimentary question. I imagine the goal is eventually to sell the manufacturing facility. How long do you typically, what's the goal in terms of how long you actually want to hold on to the asset? Yeah. I mean, we have held assets from as short as a year because someone came knocking on our door and made us an offer. You couldn't refuse, right? You couldn't refuse, yeah. As trite as that is. to, I'd say on average, most things have, most portfolio positions of ours have been five years. And then we do have businesses where it's, you know, 10 years and counting, and it's just been a really well-functioning, well-performing partnership.

40:24And the space has cooperated, and we built something really special. And so in those cases, we're not trying to kind of exit I'd say one of my biggest learnings as an investor has been the number of A++ assets out there in the market is quite scarce. And so if you have one, don't be so hasty about trying to monetize it, even when you've printed a really phenomenal outcome, because they're just really hard to come by to find the next. And at the end of the day, as our business of compounding capital, I'd much rather have a lot of money. do that behind a proven business and a proven management team that's that's very helpful um

41:08Jared Stein:and that's i mean that's also great as well that it seems like the mandate once again is is fairly flexible for sure um uh which is which is awesome um what what makes a category look good on paper, but in reality could be bad. I think, you know, so often in the world that we both exist in, in consumer, there are these moments in time where it feels like a category is going to take over the world. And it's generally early in the life cycle. And it just feels like, man, there's no sign of slowdown of consumer adoption. And I think for us, we always spend time trying to connect it to the historical analogs to say like, okay, well, how long was the run for this other space that feels like a corollary to this new version that we're now analyzing?

42:08And so I think a lot of it just comes down to durability and duration. And then again, if it's not hard to do, there's enough talent out there in the world that somebody else is going to come right behind you. And we've seen instances where, you know, first mover is really powerful, but we've also seen instances where second mover fast follower is actually the winner. And the difference between those two comes down to execution. And so if you're kind of measuring that delta on a razor's edge, for us, that tends to be a little too difficult to kind of make a bet. We want to see that there's some sort of structural advantage or difficult kind of piece of know-how that's going to provide more tolerance or more of a sustained moat over time.

42:59Jared Stein:Yeah, that's very helpful. That's very helpful.

43:07Jared Stein:What did you learn? Just because it seems quite a different company. I know it's e-commerce in your wheelhouse for sure, but still quite different. What did you learn from investing in Chewy early? Yeah. People love their dogs, first and foremost. It's funny because, you know, you sort of referenced it, but e-com, we don't do a lot of pure play e-com. So almost all of our businesses have some element of e-com. It's a part of their mix. It's an important channel. but pure play e-com we've really stayed away from. And the overarching reason for that is it turns out as we've looked at a ton of different players in the space that are e-com centric, the repeat curve really does tend to attrit more than folks realize.

44:00And then at the same time, customer acquisition just gets more expensive over time as you push further and further out from like your strongest, most loyal customer. And so that equation just becomes tough. You know, we've looked at these businesses where like prior to the 2000s, you would not have said like that's how the consumer wants to buy a beverage is just through e-com, let's say. And the sort of cohort behavior reflects that because like after 12 months, you're down to 5 % of your original cohort. That's going to be a real expensive sort of treadmill to reacquire. what was different about Chewy and it speaks to pet is there are actual GI issues with switching let's say your dog's choice of food and so when once we saw that and then we saw the cohorts sort of back this up which was you know it's a long time ago but from memory call it 49 percent of the business was on auto ship and then 87 or 88 percent was repeat you know repeat volume from repeat customers, that plus a basket size that was, you know, well over 60 bucks on average, that's a powerful combination.

45:14So if you, if you had just one of those large basket, unless it's really big, uh, like furniture and episodic where you make enough money on that first purchase, that's a difficult, you know, fat pattern or the opposite, which is like, hey, you get really high repeat, but it's on an$8 average basket, also really difficult to make those economics work. So Chewy in that regard kind of broke the mold for us and it ended up being a phenomenal investment as a result. Yeah. Yeah.

45:50Jared Stein:Yeah. Because it is funny, right? when, you know, we might get sick of products, right? We might subscribe and then unsubscribe or, you know, what happens with me, I subscribe. I don't then consume all the product that in the month that I'm supposed to. And then I start having a backlog of product. And then one day I click unsubscribe after a few months and then probably resubscribe later on. But, you know, with pets, you give them food every day. It's the appropriate amount. every time. You're not changing any part of their diet. So it's much more consistent than how we function, which of course then turns into a very consistent business with Chewy and obviously skyrocketed.

46:45I'm laughing because I picture my pantry with like every half consumed or not opened item on subscription and eventually you're right. Like more often than not, not always, but the consumer says, you know, that's enough. I got to, I got to at least go dormant for a little while and catch up. And it is just a different dynamic.

47:07Jared Stein:Totally. Totally. And then, and then you get that shipment of the product again, and you already have, you know, three or four bags of it that you haven't touched. You're like, oh my gosh, I forgot to. Yeah. That's where the guilt becomes overwhelming. Unfortunately, at least in my case. Absolutely. Absolutely. Same here. Same here. um uh is there an emerging emerging sector um emerging sector that you're tracking but haven't invested in yet yeah we've been spending a lot of time in the specialty ingredient space so i you know maybe not dissimilar to the dna i've described where you're sort of following the thread and saying like where is their specialty within a value chain.

47:53You know, what we're finding is it can certainly be through the manufacturing lens. It can definitely be through the brand, but it also can be through, you know, the precursor steps in terms of specialty ingredients that inform all of that. And so we've been spending a lot of time there. Our nature is when we have sort of a newer segment of a space that we know well, we still want to move really slowly before that first investment goes out. And so we've looked at a ton of businesses now in this space. We really like the attributes of them. But it's a space that we're still sort of in learning mode on and haven't yet made an investment.

48:34Jared Stein:I know some funds, for example, they want to know the founder before they um uh like if they invest uh in the series a they want to know the founder of the seed before they raise the seed and kind of have that relationship for for a while do you um and i know that you mentioned olipop and how you mentioned them in uh first million so that was obviously very early but do you kind of have the same mindset and there has to be like a certain amount of length of time to kind of get to know the founder, really understand them before you make investment? Or do you find yourself can actually move pretty quickly?

49:17Yeah, that is the extremely strong preference is to have that pre existing relationship, and just a longer duration to see how someone shows up as a person across a multitude of different circumstances, whether that's breakfast, lunch, dinner, whether that's they're stressed at home, You know, there's a lot of different tells, I think, as you're getting to know someone and you're really underwriting the person. And you only get those over time. So we strongly prefer that. I will say on the flip side, and it just raises the bar on the quality of the business. We've had instances where it's like, this is going to go quickly.

49:55We have, for whatever reason, not had a long duration relationship prior. And so we will just then go as strongly as we can, as quickly as we can to get to know the person, to do off-channel references and anything we can to Hogan exam, which we do for all of our business leaders and the investment leads to understand if there's good symmetry there in that pairing. So we will rush when we need to, but it just raises the bar on every other element of the business. And then we are still, we try and be as forensic as possible and understanding who that person is.

50:32Jared Stein:That makes sense. That makes sense. On specialty ingredients, was there like a particular insight that, I know that you've gone deep in the area, but what was kind of the initial insight or reason for going deep into specialty ingredients? Was it the rise of truffle? Was it the rise of a certain ingredient? What was it? I love truffle, but I try and divorce myself from any of those, my preferences from any of our investment decisions. No, the biggest driver was honestly, when you start to look at the cost bar for any finished product, ingredients, especially certain types of specialty ingredients, are a really small piece of that cost bar, but drive a differential impact in terms of the flavor profile, the texture or mouthfeel, all of these components, the sensory components that the consumer really values.

51:25And so that equation for us is often a great predictive indicator of like what's likely going to be a good investment, which is a small piece of the cost bar. So folks aren't as sensitive to the pricing attached to it, but enormous impact. And by the way, back to our true example, you're reticent to play around with these fundamental characteristics of your product. At the end of the day, if you're talking about Archer or Alipop or any of these brands, they're saying, well, what I don't want to do is mess with our flavor profile and have consumers feel like that's inconsistent with the great experience they've had before.

52:04It's the easiest way to lose a customer. And so you're going to have a really loyal counterpart unless you completely screw it up.

52:16Jared Stein:that makes it makes sense um very very helpful

52:26Jared Stein:within excuse me within consumer retail manufacturing what's something that you believe in that most people disagree with look i think we are contrarian and maybe it's changing in the era of AI, but I think we are somewhat contrarian on asset-heavy businesses. I think the market in general has probably moved in the exact opposite direction where everyone's outsourced their supply chains. And I think for us that over the last 12, 13 years now, that's been a core focus. And maybe the market, again, is starting to come back our direction. But generally speaking, there was this whole deconglomeration of these businesses that were saying like we don't want to deal with capex investments anymore we want those off our balance sheets yeah and so that that's played really well to where we spend time and you know i i hope it continues we'll see in the era of of ai yeah i mean what i what i think is in some ways a little bit ironic about ai is what's the most valuable ai company it's a manufacturing company right with NVIDIA.

53:39Jared Stein:Yeah, true. But yes, I do certainly agree with you. Have you seen, so have you seen like other private equity groups, have you seen that actually prices when it comes to on the manufacturing side and what have you, just because they don't want hard assets, they want these lovely, lovely SaaS businesses, and also AI businesses. Have you seen prices come down and or in the past few years? Yeah, I'd say there's always been a value gap there in terms of like really great quality businesses that trade at a heavy discount because they're not the higher sizzle sort of brand, high flying brands of their space.

54:26They're the engine that's powering them. And so that has always been something that we liked about investing in co-manufacturers. I hope it persists. We're at a moment in time where we'll see it. It does feel like some generalists are starting to say like, hey, maybe this asset thing isn't so bad and that maybe there's protection there. I think the nuance, though, that is going to continue to be differentiating for folks targeting that space is, do you truly understand enough about the end markets to know whether something in terms of manufacturing process is differentiated or not? And so I would be curious and we'll see the folks that sort of moonlight in it, but don't make that a core focus of where they spend time, if they can get to the right verticals or if they're sort of, you know, a bit more scattershot in which manufacturers they end up backing.

55:24Jared Stein:When things go wrong, what tends to break first when it comes to investment in the actual operators? If capital, for example, is misaligned. Yeah. I think you said the operative word, which is misalignment. You know, I think where things tend to get challenging is, you know, and we've gotten better and better about this, hopefully over time, which is like, let's align on every key aspect of the value creation plan before we cement a partnership. but innately sometimes a founder will say like, yeah, I'm bought into that. And that makes sense. And I can understand that. And then they are so emotionally invested in what they've built that it's hard for them to, to then scale it out or, you know, take a different approach on a given topic.

56:15And so in those instances, if you don't have full alignment, you know, I think it becomes a much more challenging process to, to get to, to, um, execution. And oftentimes it's not necessarily that you don't get there eventually. It's just, you lose time in that, in that alignment process. And so our best partnerships are where it's like hand in glove and doesn't mean we're not debating things, but it means like you can quickly work through things. Both sides are pragmatic and you just hit the gas together and you join arms through the ups and the downs. Like that tends to be a recipe for, for good outcomes.

56:53Jared Stein:My final question for you, what's one book that's inspired you personally and one book that's inspired you professionally? That is tough. I would say professionally, it is the book from strength to strength, which, you know, I think has caused me, you know, as a as an entrepreneur out of the gates, you sort of by design, put your back up against the wall. And you end up, I think, at least personally, you put your head down because you're fighting for that existential survival in the beginning. And so it's not really a choice of this or that. It's how do I make this work? Over time, I think as you hopefully come out of that stage, you know, it becomes about what choices do you make and how you spend your time and your life and who do you surround yourself with.

57:47And, you know, if you're choosing to take a call at 9 p.m., you are actively choosing not to be there for bedtime for your kids as a very bleak example. Sorry to take this so dark. And so, you know, I think for me that actually bridged the gap between personal and professional because it kind of hit both. It's, you know, it's how do you think about scaling what you're doing? And then how do you think about just being incredibly deliberate about the choices you're making and what you're choosing not to do in making those choices? So at this stage in my career and in my life and with, you know, family, like I spend a lot of time thinking about that and about purpose alongside that.

58:32Jared Stein:I love it. But you're the only person that – I believe you're the only person that brought up Strength and Strength. So really excited to get out of the list. That's great. Yeah, yeah. What do you think is the most common book that's been mentioned? Oof. I would guess there's a lot of, like, Titan fans. So maybe that's one. Or I'm going to guess a Gladwell book. You know, any of those books. Or maybe, like, the – what is it? Seven Habits. I feel like there's a couple of those like tried and true, but I I'm curious. Do you know the answer? Shoe dog by far, by far shoe dog is the most common. Is a good read.

59:14I gotta say.

59:15Jared Stein:Yeah. Yeah. I'd love to be contrarian, but that is a good. Well, Jared, thank you so much for your time. We really do appreciate it. Thank you, Mike. This was a blast. I really appreciate it. This is great. And that's what we got for today. Thank you so much, Jared, for coming on the podcast. Thank you hidden gems for sponsoring this episode. If you're looking for a marketing agency and you don't know where to start, talk to the Hidden Gems team. The Hidden Gems matches founders with vetted boutique agencies at preferred rates for free. Can't get better than that. And if you're loving Consumer VC, I do have a favor.

59:48Jared Stein:Please subscribe to our sub stack at www.theconsumervc.com.