Why Invest in CPG and Tech? Expected Returns and Red Antler's VC Journey with Daniel Faierman, Partner at Habitat Partners

25:47But do you find that, let's say that you have a software company that maybe can deliver on the 100X. Do you find because your portfolio is split and you're investing, if it's evenly split and you're spending$15.5 million on one,$15.5 million on the other, will you actually receive enough allocation when you actually invest in that company for the math to actually work? Yeah, it's a good question. So we're not evenly split. I would say for every dollar in CPG, we're investing$1.50 to$1.75 in software. We have 40 portfolio companies, 25 are SaaS, about 15 are CPG. We realized that on the tech side, we may need to have more pro rata to continue upping our ownership, given that there is big follow on rounds, the valuations are higher, so we're getting less ownership up front.

26:40So we've purposely allocated a little bit more to the software side, probably a 65-35 % ratio from a plan perspective to ensure that like if one is working on the tech side, we really can like double down pretty aggressively. We have one business, for example, called Motion that just raised like a$30 million Series B, and we've invested in that business four separate times. and so I wouldn't say that we're able to have like as aggressive of a pro rata strategy as other funds who may be doing it like 50 50 like we definitely have over allocated a little bit on the sass side compared to the cpg side because the ownership that we're getting within within the cpg side is is much higher than the sass side even though usually the exits are also a bit smaller as well but is it is the same entry point meaning meaning the same the same amount of between the to on the software side, not entry point in terms of valuation.

27:34I'm sure that's quite different to the CPG angle, but in terms of the amount, the first money in, how much you put in, is that roughly similar on the CPG side, but you actually just have a lot more reserves on the primatis side for software? That's right. The last point is right. We probably average a 250K to 500K entry check on the software side, but we're placing more bets, right? I told you out of the 40, we have 25 right out of the 40. On the CPG side, we're placing less bets. The business typically have a little bit more traction and data to go off of when we're investing. And so our check size is often on that side more between like 400 to 750K.

28:16And yeah, that's kind of like the strategy. Again, we're placing a few more bets on the SaaS side. We have a little bit more leftover for reserves. And on the CPG side, yeah, it's a little bit bigger of an entry check where we kind of secure our ownership up front um got it that makes um uh that makes that makes uh that makes sense and and how much on both sides do you do you feel currently that on the sourcing side typically it comes from red antler yeah i would say you know we want to do a post-mortem exercise after fun one where it's like all right where did this come from and like what was the outcome and is Red Antler like outperforming non-Red Antler source deals like that's something on my plate to do once we're a little bit farther into fund one.

29:01I would say my hunch is that 40 % of our deals come through Red Antler. Like I do find myself sourcing usually things on the outside a little more than I do on the Red Antler side but like I've never gone like a six month or like three month period where something hasn't come through on the Red Antler side. um so i would say it's it's probably like 40 60 50 50 but you know it also depends on kind of the state of like the venture markets in general as you can imagine like red antler is not um you know able to avoid a huge venture downturn in that like there's less money flowing into startups then they have less money to spend on red antler right um so red antler's client pipeline also like fluctuates with the strengths of the venture markets as well and they're having a great year but like in years where venture is booming, like I'm going to guess that my ability to source the red ailer is stronger than in years when venture isn't as strong.

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30:25Some 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. What do good metrics look like for consumer brands in the stage that you're investing in? I know it's typically around 100K checks. What traction do you like to see at that stage?

31:03Yeah. So consumer brands were usually like 400k to 750k check um we no it's all good um we focus like pretty heavily on a couple things so like a is gross margins to me that's the most important metric in all of cpg we like to look at all in gross margins so including warehousing and freight subtracted out as well um it also varies a lot per sector so if i'm looking at a skincare business i'm hoping to see at least 70 gross margins i'm looking at a food business my hope is seeing like 40 gross margins um so i always start with gross margin and I always find that like people rarely ever try to show me all in gross margins like I have to get the full P &L to really do my own math there.

31:44We look at retention rates like a lot of our brands are omni-channel or have some kind of D2C business so like hopefully seeing 12-month retention rates over 30 % as a benchmark. I kind of do this other exercise that I don't know a lot of investors are doing it but like within those repeat purchasers how many go on to repeat three times or more. I think like there's this, at least it's my hunch is when you subscribe to something, you buy it once and then you typically let it come to you again a month later. And then that's where you make your decision point. Like if it's the second time you're getting something, you're kind of like, Oh, I forgot I ordered this and it came.

32:19Do I really like this or do I not like that second time? And so I think just like sometimes repeat numbers get kind of overstated if you only just consider to repeat as a whole, because there's so many that churn after the second order. And so what I like to do is I like to look at like how many rang three times, four times, five times, six times, and so on. And like what percent of repeat purchases fall into that versus just like two times repeat. I look at first order profitability. Like I don't think DTC is dead, but if like you can't generate first order profitability with like the unit economics and CAC associated with your DTC business, it is a really tough environment.

32:52So that's something we also look for. Like retail, we look at velocity data. we do like to see like businesses going head to head with like the incumbent competitor at like at least 50 to 75 percent of the unit per store per week that the category incumbent is achieving and then the last thing is just cash flow from operations I don't have a specific number but essentially like I like businesses that kind of come to me in a position of power where like there's they're not burning so much that like they have extensive runway where even if I didn't invest like the company is going to be a going concern for at least 12 months The worst thing that could like happen to me as an investor is I send out my Q &A update to my LPs about how excited I am to invest in this new business.

33:33And then by Q3 or Q4, I'm writing to my LPs saying the business went on it. And so I'm always like hyper cautious on not funding businesses that are like about to run out of money. I like to like go to businesses that are like in a stable place, don't actually need my money necessarily, but see the value of partnering. I've heard that, um, that, you know, the best businesses typically are the, the, that you should invest in are the ones that actually don't need your money. That's right. Then if you're not in the position of power and the business in the position of power, how, what's your negotiation strategy in order to get allocation or even to get on their equity table when, when they actually don't, we actually maybe don't need your money or, or maybe, or maybe it's a really hot deal.

34:14Maybe they do need money, but, but, but, you know, you, you obviously want them to go with you. Well, first and foremost, I'll just say, I think I have found that CPG in general is slightly less competitive than software. Like, almost every software we do feels competitive. Like, it just feels like there's hundreds and hundreds of firms that could like theoretically invest in this business. And so like, I feel like we're always fighting on the software side, whereas like CPG side, like sure, sometimes there's elbows, but at the same time, I feel like it's like one of the most collaborative groups of investors like I could ever imagine.

34:45um so the reason why i was really excited about joining habitat partners was because of this creative angle i wholeheartedly believe that there are very few like institutional investors or private equity investors that actually understand world-class creative and i think what's exciting right now is like obviously in cpg creative is extremely important but i think now even in the b2b sass world like the importance of creative and content is coming to the forefront and a lot of B2B founders are starting to like behave kind of like B2C businesses. They're creating short form content all the time and posting on like different platforms.

35:20They're publishing case studies and blasting it out on LinkedIn with like a long thing as to like why they're an effective business. Like there's just a lot of, I would say B2C-ification of B2B SaaS. And so I think all of a sudden, like B2B SaaS businesses really value having someone that has a creative mind on their cap table to like bring together the entire syndicate. And so, I mean, our pitch is kind of that, like we can be that creative mind. We are experts in UI and UX and we are experts in branding. And that is really important for B2B businesses. And like thinking back to one of our best investments before we launched the fund, which is Ramp.

35:55I believe that part of the reason why Ramp is so successful is because it has tremendous design, it has tremendous user experience. It's very easy. It's sleek. It looks good in your wallet. And Red Antler did all that work. And so I'm bullish on our ability to add unique value as creatives within both CPG businesses and software businesses. And that's a big part of our pitch. Yeah. I mean, marketing to SMBs, which I think a lot of B2B businesses, that is their core target market. It looks a lot more... I mean, obviously, there's product-like growth, which obviously ties into that. But from that, SMBs might look a bit more like you're almost targeting a consumer as opposed to these very, very long sales cycles that are kind of come with enterprise SaaS.

36:43That couldn't be more true. I will say we do do enterprise SaaS also. So like we are trying to, we are trying to like hit enterprise as well. We've done a couple enterprise SaaS deals this year, but you know, for the ones that like are selling into CPGs, like B2B SaaS businesses, we can obviously be incredible business partners. Like my goal is to always fuel more air than our check size. And then on the enterprise enterprise SaaS side, a lot of times we're investing in marketing tech. We come from an agency. We have a really good feel for like why marketing tech might work or not work. And so I think we can be really, really valuable partners in marketing tech, especially in the enterprise SaaS environment as well.

37:21Because I know that your entry point to FUNABEV or Venture was through health and wellness. Has it been difficult to also manage a portfolio when it comes to B2B SaaS or on the software side? Because that wasn't maybe like the initial reason why you wanted to go into Venture? Really good question. So I'll just say this, and I feel like it's sometimes a controversial topic, like go get an MBA or don't get an MBA, they're stupid. I take no offense to people who think MBAs are stupid, truly, like it's fine. I think there's great things about them and stupid things about them. Um, for me, like my reason for going to Stanford for MBA was because like, I wanted to inundate myself and like the software ecosystem.

38:04And I didn't think there was like a better school to like do that at. And so when I spent two years in Silicon Valley, I was networking a ton with like tech VCs. I was taking classes on how to scale SaaS organizations. I took classes on product market fit. So like, I kind of felt like I got a two year, like really strong education on like SaaS and really like, kind of like ate the soup there. and so coming out of b-school I already felt like I could be like somewhat dangerous with a business and especially because most of the business businesses we're investing in are tied to brands in some way it hasn't been like that part of a transition and I think from a diligence perspective right like there's a lot of overlap in the metrics like MRR growth burn ratio net revenue retention customer churn and retention customer concentration like those are a few of the things we're looking at on the SaaS side.

38:53And they're not like that complex. I think if I was going to go be like a PE tech investor, that might be like a bit of a stretch for me. But like doing early stage tech where there's usually less than a million in ARR, like the diligence from a quantitative perspective is pretty like straightforward. And at the end of the day, it ends up being more about access to the founder and the idea anyways. So it honestly hasn't been that deep of a transition, in all honesty. Well, I know that you remarked earlier, which is kind of what gets thrown around in the ecosystem that DTC is dead and all that, which I totally agree with you.

39:32It's not dead. It's just a sales channel. And that's been kind of covered repeatedly on this podcast, as well as a lot of other places by people who are way smarter than me. But is SaaS dead? Because I've also heard this kind of remark coming around. I know that you invest in SaaS, so maybe it's not dead. But the idea that you can actually build a large SaaS company where you actually do have real moats, is that a thing of the past? God, it's a good question. Look, I think, I don't want to use the word AI like a hundred times in this response, but I - Well, you haven't used AI yet, so you can't.

40:16I know, I won the entire podcast. We went 38 minutes without talking about AI. This is amazing. I know, consumer brands are so boring. Like, what the hell? No, what I'll say is, I feel like if you are not embedding like AI infrastructure, like into your software business in order to make like, at least the product experience, optimize the ability to like acquire customer optimize. Like, I'm not saying that like, you can't build a pure SaaS business in the future. But I think businesses that like don't embrace AI on top of their core SaaS business are going to be left behind. And like, like to give an example of like, a business that like, I think has evolved to embrace AI really well.

40:59There have been a ton of tools for financial planning and analysis, SaaS tools, that have had success over the last 10 years servicing brands. And we invested in this business called Zenlytic that just raised a Series A from M13. Zenlytic is an FP &A tool, but it has this entire AI infrastructure layer where essentially you can type in a prompt, hey, show me my best performing ROAS marketing channels over the last six months, it's automatically API already into like all of your data systems. And it uses this like AI agent to then create that like visual business analytics answer to your question.

41:37And so like, that's the new way, in my opinion, of doing FP &A and it involves AI, but I wouldn't like classify Zenlytic as like an AI machine learning model company, right? It's like an FP &A tool that has an AI infrastructure layer. And so I think like looking into the future, I do think it's going to be really hard to build those kind of SaaS tools without having some kind of like focus on AI as like an enabler. So again, I don't think SaaS is dead. I think SaaS that is ignorant to how AI can supercharge the core product is probably going to be dead or not able to scale. So what do you invest in a software company?

42:14Does it have to have an AI component? It doesn't have to, but I haven't really come across a lot lately that like isn't in some way embedding AI into like the development process, the product, the acquisition process, the customer experience. Like it's just hard to find it these days because if you're not like using it, you're probably being less efficient than you can be. And I feel like the quality of founders we're talking to are just like, it's an obvious thing for them to be thinking about when they're building their product. Well, I mean, I would say, would you invest in a company that was a software company that had no AI capabilities?

42:49these? Yeah, I mean, I haven't, I don't feel like we've like thinking of our last four investments, like they all have had on the SaaS side, some kind of AI component. But I'm not saying we wouldn't, I just haven't really like seen any lately. Truthfully, like, I don't think I've seen a SaaS business that isn't embedding AI in some way that we've looked at, like seriously. I think the word AI gets stretched, like, we will not invest in foundational, like machine learning model businesses, like we do not, like, they're too capital intensive, our check size is too small, the valuations are too high.

43:19We don't understand how to diligence them. But it's just hard these days to imagine someone not at least embedding AI somewhere into their infrastructure in terms of their process of building a SaaS tool. So we would, I just haven't really seen it lately, to be totally honest. When you, shifting gears a little bit, do you care more, when you talk to founders and you're mean founders, you mean teams, early teams. Do you care more about how exceptional and off the charts the founder CEO is? Maybe they just completely blow you away? Or do you care more about the overall founding team and how special they might be?

44:00Yeah. I mean, I would say most businesses that we come into on the tech side, which are pre-seed or seed, like have barely built a founding team like it's usually two of them max um it's usually a cto and a founder um and so like we usually have deep conversations with both of those stakeholders but like i haven't really been in that many situations where like it's a five person team already like typically that's when you're at at least like a million in error at least from my experience um so i i would say like i just haven't really been exposed to that many huge teams during a diligence process quite yet.

44:39Is there a revenue threshold when it comes to product market fit? Or how do you even think about product market fit? It's a great question. I took a class on this, and I also have anecdotal thoughts on it. The most important metric for product market fit is organic virality, by far, in my opinion. And what starts to happen when organic virality is really taking place is as you scale, instead of it becoming marginally more difficult to acquire your next user or customer or business, it becomes easier. So as you scale, CAC inherently starts to go down. So for me, like I'm always looking for signs of that in like the early days.

45:18Like, is there something that's working here where like customer acquisition seems to become easier over time? I think in like CPG, like typically if you think about a subscription business, like once you've tapped out of a core audience that might love your product, like acquiring that end next customer becomes really hard. But certain businesses have such strong organic virality and network effects and word of mouth and reviews that like they're able to over time scale their cap way down. And so that's kind of like organic virality to me if there are signs of it is like the biggest kind of signifier that there's potential for product market fit.

45:50In terms of your allocation, do you also end up leading rounds and stay on boards or not so much? Not so much. um hopefully for fun too if we're able to actually raise it in the future we'll do if we'll do more board seats um right now we typically do not lead there are a few situations where we brand a business on the red antler side because of access we end up being the only institutional capital into the business in the pre-seed so you would call that i guess leading because we are kind of deciding with the founder on like the cap on a safe um but we are not we're not like leading price rounds.

46:25And yeah, it's just not really, uh, not really set up to do that quite yet. And what's the, what's, you might've already mentioned this, but of, of the two, I guess, sectors in the fund, what are kind of the goals in terms of, um, once all the capital is deployed in terms of number of companies that you're in? Yeah, I think we've probably got 10 more left. We're at 40. So I think we'll be, I think we'll probably hit 50. I'm going to try something new, Daniel. I've never done this before, but we're going to do a lightning round if that's okay. it's going to be a quick round where I ask you a question or a comment and you say the first thing that comes to mind all right what is the biggest consumer trend to watch this year god you can't not say like weight loss with GLP ones I'll say protein consumption and weight loss as like they're kind of connected um together what consumer trend are you most bearish on or you don't believe in?

47:17Or maybe that you think it's a fad. I think supplements are overrated, truthfully. From a venture perspective, I just very quickly will say, I think there's going to be a lot of challenges from an exit perspective with supplements. I won't go into why, but I am bearish on supplements compared to most investors who love to see 80 % gross margins and hyper growth. But overall, I think there's a lot of issues with them. If you weren't a venture capital, what would you be doing? I would be trying to become a professional tennis player and definitely failing. No, you would not be failing. Not be failing.

47:55Your favorite consumer product innovation in the last five years. Wow. Oh, I don't want to pick like a portfolio company. I'll pick an angel investment because that's like less political. um midday squares is like my go-to i've had cookie dough in my fridge forever um i love the way they're approaching content uh building the business for the long haul and yeah they're some of my favorite people so midday squares with adventure what's the biggest thing you've changed your mind about yeah i mean i think when i stepped in i thought it was like all about founder and product and I was like all right if there's a great founder and this product is amazing whether it's like a sticky software business or a great tasting chocolate bar um I kind of thought like that was enough assuming all the other stuff on like the quantitative diligence like lines up what I've realized over time is that go to market is the most like if not like the most important thing when it comes to like having successful startup scale um I think if you look at like Facebook, meta, Google, and like the power they have over so many consumers in their base user, in their user base, when they roll out new products, they tend to be like very successful because they can really skip the challenge of going to zero one on go to market, right?

49:19Like they can get in front of millions of consumers super quickly. They have huge marketing budgets to like push go to market. And so I think the hardest thing for a founder is just like go to market and kind of like executing go to market to get from zero to one and then one to 10. And so I try to really like find ways when I'm like diligencing businesses and founders to understand like why they have a unique go to market that's going to like work compared to like other competitive products in the space. So I think I overlooked like the importance of go to market when I was first starting venture.

49:49And I think it's extremely important. What's the biggest myth about venture capital? you know what this is a little dark um and pessimistic but i think like when i was first investing i was purely focused on cpg right and i met all these great people and i was just kind of like oh like this everyone is so kind and everyone wants to do deals together and it's it's like green and collaborative um and now that i'm doing a lot of software on top of cpg like i wouldn't just say that like that's the case i feel like you know it is extremely competitive um not everyone is collaborative not everyone is like sharing deals with each other i try to be as collaborative as possible but i think like i was under the belief that like everyone wanted to co-invest together based off my experience with cpg and like within like you know a year of investing in software i found out the dynamics are just a little bit different um so i wouldn't say that venture is always collaborative i think that is a myth unfortunately i wish it was more collaborative i certainly agree that there is a difference between um investing cbg or consumer brands that ecosystem verse for for software not that there are amazing software investors and of course many of them have come on yeah but um but yeah um that makes it makes it um yeah that's that's a good point breaking down like the like the different kind of qualities of what makes a great venture capitalist you have you obviously there's um there's obviously sourcing companies there's picking the right companies, there's getting internal approval to invest in a company, there's negotiating a term sheet, there's also, of course, advising, working with portfolio companies.

51:29What do you think you're best at? And what do you think that they need to work on the most? Yeah, I think like, on the diligence side, and like reading people, like I'm pretty strong. Weirdly, like I was a psychology major in college. And I just, I feel like I can vary like quickly within one conversation. Like if there's, I can get like this one sense that there's like an from a founder, like very easily. Um, and I'll immediately pass. So I feel like I'm good at reading people. I'm generally by like textbook standards, good at diligence. I think I have like operational skills that I took for me from like CPG that add value, but like, I would love to have like a wider aperture of value add skillsets that I can bring to any founder that I partner with, like I have no technical experience in engineering from a software side.

52:17So like when it comes to product, like my ability to help the software business is very limited. Like I'm all about go to market. I would love to be a better resource for like thinking about product. Obviously I can be a user of the product and give like anecdotal feedback, but I feel like I'm a little limited there. And then like on the CPG set, I was thinking about this the other day. Like I used to build within big CPG, I would build the presentations that they were bringing to the buyers, the retail buyers, but I was never actually selling to the buyers. And so I never developed like relationships with like the head Kroger buyer, the head Whole Foods buyer.

52:51And so I would love to, you know, as a skillset development area, build more relationships in traditional retail. So when I can, you know, it comes time to help my founders get into retail, I have more ability to put them in front of the right people. So I think it's just incremental skillsets that I can use to add value to my portfolio companies that I just haven't quite, you know, captured yet. What's one book that's inspired you professionally and one book that's inspired you personally? It's a great question. I remember you always ask this and I love it. So personally, I mean, this is funny.

53:24I read this book in high school, but I'm such a psychology nerd. Outliers, Malcolm Gladwell. He has a bunch of really great books that like kind of go into psychology, David and Goliath, Tipping Point. Love, love Malcolm Gladwell kind of taught me that like at the end of the day, grit outweighs talent. And if you put enough hours into like perfecting your craft, it doesn't matter if you like lack the initial talent, you can often achieve kind of what you want to achieve. And my last one is Secrets of Sandhill Road. Like I didn't when I knew nothing about venture. This was the first book I read, thought it was really like simple, but like powerful.

53:58And I ended up when I got to Stanford taking a class taught by Scott Cooper, which is pretty cool, like full circle moment. So yeah, that would be the book professionally that I really enjoyed. I appreciate that. Thank you so much. Daniel, this has been so great to have you on the show. Thanks again for your time. So fun. Really appreciate the time and look forward to seeing you in LA in the future. And there you have it. It was great having Daniel on the podcast. Daniel, thanks again so much for coming on the show. And special thanks to Propeller Industries for sponsoring this episode. If you're enjoying the show, check out the consumerBC.com and click subscribe to be in the know of all the fundraising and venture capital news, and as well as being the first to know when we actually have a new episode.

54:42Sincerely, thank you so much for listening.

54:59Thank you.