E129: Confessions of a Consumer Banker

24:36Right. So you have an abundant amount of capital out there. The problem is the cycle has sort of slowed down and stopped. the return of capital to investors has degraded, which has made it harder for private equity firms to raise money, for founders to get liquidity, for all those things to sort of occur. But it's nothing like it was in 08, because in 08, you had credit spreads go crazy. You had the stock market obviously fall by massive amounts. You had a stoppage of activity. So I think what's happening now is not a stoppage, anything like 08. It is a heavy slowdown, but it's also a flight to quality because people are scared about what the consumer sentiment is.

25:18Consumers, you think about interest rates now, mortgages at 6, 7%, inflation where it is, partly due to the money that was injected in the economy during COVID. And so I think what's happening is the consumer is stretched. They're not able to spend as much on discretionary, which is why over and over and over again, And guys like Sean and other people that we know who are in products businesses who are doing well, you're like a unicorn. If you're in a products business, clothing, shoes, jewelry, wallets, whatever, and you're doing well today, you are ultra rare. Many investors have gone out of that business, have said, no, thanks.

25:55We don't want products. Give me services. Give me tech. Give me tech enabled stuff. And so the mindset of the investors has shifted because consumers are stretched and they're not able to purchase in the same way like they did in 2021 and kind of coming out of COVID. Yeah, Raj, it's good to hear this because, look, we always debate this internally. It's like, is the consumer stretched? Is it not? Like, we look at HexCloud data. We look at, you know, my data, whatever. We only have a small cohort sample size. But you just look at way more deals than anybody else, right? Your full-time job is to look at data.

26:31And we're just in the pursuit of truth here. If the customer is good, it doesn't change my business. If the customer is bad, it doesn't change my business. My numbers are what they are. But you said three out of 10 companies you're looking at right now look awesome. What's the sample size? Who are you looking at? And without giving names, what are the characteristics of winners? and what's the characteristics of a struggling company right now? That's a good question. I think my sample size, Sean, since we started the company, we've been around for about a couple of years. We've probably spoken at 200 companies or so.

27:09So not infinite, but also not small. But also, I think the sample size is larger than that number would indicate because we also, for every founder like you we speak to, we also ask them about the people they know and what else they're seeing. So the sample size is magnified because of those kind of conversations. I think the elements of a winner today are a number of things. If you're a DTC company, it is going back to LTV to CAC. What is that ratio? What does that look like after three years? Our benchmark for that is about 3x after three years. And so if you have an LTV to CAC of 3x after three years, for us, that represents a pretty strong indication.

27:50Now, of course, that's not the only factor. What we like to do is look at the P &L from top to bottom. You look at, first of all, the gross margin, the product margin, not including any selling, fulfillment expenses, anything else. If you don't have a gross margin that's at least in the 70s and ideally mid to high 70s, if not low 80s, it's going to be very hard to make money. Why? Because great companies look like this. They have 80-ish percent gross margin. You then spend about 15 % to 20 % to get to contribution margin, which is deducting from the gross margin, the selling, the administrative, the warehousing, all the logistics fees before you get to your marketing and SG &A.

28:30By the time you get to contribution margin, you need to be in the 50s or 60s, ideally 60, in order to have any hope of making money. Why? Because now you're at 60 % contribution margin. If you're a younger company and you're still scaling up, you may be spending as much as 35 % to 40 % of your net sales on marketing. If you're lucky, you're spending 20, maybe 25, and that's more of a steady state. So then you're at 60, you spend 25 to 30 % on marketing, and then you have your SG &A, and then you have to get to profitability. So I think it all starts at that gross margin. And for us, gross margin is also an indication of willingness to pay.

29:07If you can't sell at a high enough price in order to get that gross margin, your brand may not be what you think it is. And you have to think about that as well. So what does that mean? A lot of companies we speak to are they're at a 50%, 60 % gross margin. And there is no hope of ever getting to that 70, 80%. And therefore, profitability is going to be diminished. So that gross margin is an ultra important indicator of long-term health and profitability. And that's something that investors will look at. And yes, let me pause there. Go ahead. Yeah. I was just going to say, so that's like the blood work, right?

29:44So before we even see a patient like, or, you know, a client in this, in this case, you're looking at the blood work and you're like, oh my God, your gross margin's good. Not good. Like I've immediately identified the problem. Like I just don't think there's going to be a buyer out there because there's underlying health issues. Right. Um, but what, what was point number two, Arash? I hate to interrupt you. No. So I'll rattle off a few more. I think your analogy is fantastic. The blood work is exactly the way to look at it. The other things I would say are indicative of, of really attractive companies.

30:12Obviously, your points of differentiation. Can you be replicated? Are there Chinese knockoffs? How do you fight back against that? What do you do in that situation? What is your return rate? What is your repeat rate? Working with a company right now that's a durable business, it's a high AOV,$6 ,000 to$10 ,000 AOV. The customer acquisition cost is low. It's about$500. So your LTV to CAC is massive. But once you spend$5 ,000,$10 ,000, is the customer coming back? And how consumable is it? What is the propensity of that customer to come back? So these are all the sort of things that we look at in order to judge the health of the company and how attractive they're going to be to an investor.

30:55It's not everything, but it's just a short sample. Yeah, I'm still interested in that cohort of 200, right? Because there's also some self-selection bias there. If you're looking to do a deal or you're talking to a banker, you've already cleared some sort of hurdle, right? If you're staring down bankruptcy, you probably aren't calling up bankers trying to get strategic acquisitions, right? Maybe you are, but those calls don't go very good, right? So, I mean, how has the cohort changed over the past couple of years, right? So, like 2021, every consumer brand was a unicorn. Every deal was amazing.

31:29People wanted billions of dollars for everything. People were paying, right? Right. 2022 was kind of like the consumer 2008. Right. I mean, a very mini version of it. Things locked up. Deals fell off a cliff. A couple of things got done, but not really. I mean, was 2023, 2024 better than 2025 or has it just been like a slow study, slight increase in quality and deal flow and everything like that? So if you look at consumer 2022, 2600 consumer retail deals announced and then 23 and 24 were roughly even with about 2 ,200. So there was a drop in the number of deals relative to 2022. And I think 2025 has actually shown some signs of growth.

32:08So Q2 was actually not bad. The value in Q2 surged by about 200%, but the number of deals went down. So going back to what I said about fewer deals, but much larger valuations. I think what we're seeing today versus 2022-23, I think back then when you can get a double-digit multiple pretty consistently, if you were a DDC company with the characteristics that I just talked about, I think getting a double-digit multiple was fairly easy, relatively guaranteed. I think today, if you're a DDC company that looks like that, you may be looking at high single digits, maybe low double digits. So I think the era of 15x, 17x, EBITDA multiples, I think that's gone.

32:56Maybe for a few select companies out there that we know of. But I think for the most part, if you're a founder and you've got those characteristics, depending on whether it's strategic or private equity, you're probably looking at a 7 to 8x at the bottom, maybe 10 or 11x at the top in terms of what kind of multiple you're going to get. Yeah, that's a bombshell that people kind of have to come to realize. If your business doubles from 2022 till now, right? But the multiple compression is 15x to 7x, your valuation's flat. You're worth less. Well, you're worth less if you go from 15 to 7x. And that's crushing, like the idea that your business would double, but that it might be worth less.

33:44And I think part of it, though, is you got to remember in 2021, what were the reasons why we had that massive bubble? You had cryptomania, which is still coming back now, thanks to the Trump administration. You had interest rates at near zero levels. And you had a mass amount of M &A activity that propelled the market to all-time highs. You really don't have the same kind of inputs to reach that kind of resurgence. I'm not sure we're going to get there for a while. and you also had by the way a situation where you were encouraged mostly by vc to spend as much on ticket market share and on marketing and profitability didn't matter and even today we speak to founders who are asking me i'm i'm doubling my revenue my profitability is just a few like three three to five percent of net sales what should i do and my answer is don't double your revenue, grow it 70%, 60%, increase your profitability as much as you can.

34:41That's going to make a big difference. And that's something that you wouldn't have heard from people a few years ago. Okay. It's no secret that margins are getting squeezed and profitability is a challenge for brands in 2025. Not a secret. That is where Northbeam's profitability benchmarks come. It's a new feature. You could check it out. This is a tool from Northbeam that tells you the exact targets that you need to hit to get to profit inside of Northbeam. So no more guessing, no more month-end financial surprises. Hitting these targets helps you ensure that your ad campaigns are actually driving the right behaviors to make your business profitable.

35:13That is wonderful. The brands that track this stuff probably already do in Google Sheets. I know I do. I'm going to be checking out this Northbeam new feature. And Northbeam is kind of a big level up from this. And here's what sets kind of what I have seen. Here's what sets profitability benchmarks apart. So instantly you get to quantify your goals into clear benchmarks. Every ad gets measured against those targets right inside of Northbeam. That's kind of cool, actually. And you see and you can kind of at a glance see which ads are doing well, which needs to go against profitability benchmarks, not just ROAS or whatever else you're using right now.

35:46You scale up the winners, you cut the losers, you know the drill. It is hard to argue that this is not great for brands. Profitability benchmarks from Northbeam is like having a speedometer in all your channels. campaigns ads you can kind of see everything at a glance against profitability not something else so stop leaving money on the table fuel your creative performance make every ad dollar count and every channel hold them all to the same standard if you want to reach out to north beam just let them know the operator sent you and they will take good care of you so it's actually interesting you you reference it so it's worth talking about here this uh i don't know if it was an executive order or what it was that trump signed but he signed something that basically allows for personal retirement accounts, 401ks, that kind of thing, to hold a wider variety of asset types than in the past.

36:37And so this now can include things like crypto and private equity, if I understand this right. And so some of the speculation I looked at was that this would actually lead to a lot more money coming into private equity in addition to, obviously, we've seen crypto prices go kind of bananas in the short term. What's your view on that? Will this impact the market in any way? The fact that now you've got a lot of funds that typically couldn't be invested in this asset class that now can be. I think for the last 10 years, Mike, there's been a big move led by private equity. Blackstone and Apollo were two of the first to do this.

37:15Apollo bought Athene, an insurance company, and Blackstone has been working very diligently with wealth managers to get wealthy, high net worth individuals into their funds. So I think this has been going on for quite some time. And yes, now, you know, if you're a retirement account, you are allowed to invest. There are some intricacies to the rule, but you're allowed to invest through an IRA or a self-directed IRA, you know, in crypto and in private equity. I think my fear is, though, that the average American doesn't know as much about alternative assets. And I think that there needs to be some sort of standard bearer or some filter because private equity is fantastic, but not all of it ends well.

37:54And I think if you're investing in the stock market, you're putting the S &P or something great, that's gonna be fantastic, like Warren Buffett has said over and over again. But I think if you're investing in private equity and even in crypto in particular, you gotta be very careful. So I think it's great that there's access and exposure to those asset classes, but I think there needs to be some kind of regulation to protect investors. Well, and dry powder is not the problem, right? We just said there's$2.5 trillion in dry powder. The problem is the public market isn't valuing the opportunities the way the private market did, right?

38:30It's that we're talking about private equity groups closing up shop or doing smaller funds and less deals because there's just not that many good deals to be done, right? And we're talking about these businesses like, you know, like you said, seven out of 10 companies are zombie companies. Do you want to kind of expand on that a little bit? Yeah, explain what a zombie company is. We're familiar with it, but the average listener might not be. Yeah, I want to be careful, though. I don't want to say seven out of 10 are zombie companies. What I am saying is I think one third of the companies we see are companies that are guaranteed sales, must have assets, no problem getting the deal done.

39:08I think there's probably another third where you can get a deal done with a lot of handholding, a lot of education of the investors, and through a lot of hand-to-hand combat, that deal would get done. I think about a third of the companies are, let's talk about the zombie company. These are companies that were high flyers, were doing extremely well, had infinite amounts of capital, had venture capital, calling them left and right, and were being valued at multiples of revenue, two, three, four, five times revenue just a few years ago. And what happened is they didn't know how to invest with discipline.

39:42You asked them about ROAS or CAC guardrails, they really didn't know what you're talking about or they just disregarded all of that completely. And so what happened is the capital dried up, interest rates went up, private equity said, you know what, profitability is way more important. You're not able to make money and I don't want you to spend your way to just buy revenue and have it be inefficient. We're going to look at all of these metrics, the ROAS, the CAC, the LTR over time, and so on. And now that stuff has become way more important. So these zombie companies are the ones where they couldn't do anything wrong a few years ago.

40:19They had infinite amounts of capital, and they spent like a drunken sailor. But today, they don't have access to the marketing budgets, nor do they have the discipline, even if they did, in order to rectify the situation and right the ship. And the problem is an investor is going to look at a company like that and they're going to value it much, much lower if they even invest in it relative to a company that was doing its homework, doing things properly from day one and was profitable and had those guardrails right out of the gate. So out of curiosity, like let's say you find yourself running a company that is in more of that group.

40:57Like you really couldn't. It's very hard to get a deal done. You're running it. You own it. You work in a high position at one of these companies. What do you do? It's a great question. I mean, I think what some people try to do is they try to merge a lot of DDC companies under one roof, right? And try to synergize the backend and let them be the front end and let them run. That hasn't worked out very well. We know of a number of companies, obviously, that raise hundreds of millions. And I think that experiment didn't end very well for many people. I think what you have to do is you've got to be very cost conscious and you're probably going to attract a different set of investors.

41:32For example, the El Caterdins or the TSGs or the Prelude Growth Partners or those, right? The people in the Vanguard, there's many out there. I just gave a few. They're not going to be your investor set. What do you do? You're probably going to attract a more value-oriented investor, a family office, someone with a more long-term focus. You're not going to get the valuation you want, but you have to bet on the upside. You have to bet on a few years down the road. So if you must do a transaction, I think a lot of these guys do, you're just going to be open to a different set of investor base that's more value oriented that may not give you the valuation you want today.

42:08But with a little bit of patience and tenacity, you'll get the jackpot you're looking for probably just five years out from now. Yeah. And let's talk about the core problem here is just that valuations have fallen. So if you're a zombie company or you're in the messy middle, we're going to remove the third of companies that can do whatever they want whenever they want. But because valuations have fallen, if you have somebody else who set a high valuation mark, it's down. So you're never going to clear that hurdle unless the business has more than doubled since 2021 or 2022. And it's hard to say that.

42:45And this is why it's industry-specific recessions when you have NVIDIA at$4 trillion or whatever. The market's at all-time highs. But it's like, you're not them. It's a whole different world where 7X trailing 12-month EBITDA for a consumer goods company is probably pretty good. It's like, that's the reality. I mean, best in class public consumer businesses are trading for that, right? That's what Yeti trades for. Or, you know, Gap trades for, I mean, like a quarter of sales revenue, right? Crocs trades for a quarter of sales revenue. Callaway, which owns Topgolf and Callaway Brands and Travis Matthew is worth like a billion dollars in the public market today, right?

43:27With five billion in revenue, right? The reality is that the public market has already reset our comps. And it's like, look, 7X trailing 12 month EBITDA is probably pretty good for your business. but we have a lot of just gunk in our arteries we have to clean out, right? And that is the past couple of years. And that is people who expect a 15 or a 20, right? And they can happen. Road, just sold. It was like a 20X or whatever, right? Like it was a 5X sales deal. If your name's not Haley Bieber, okay, I just don't think it's going to happen for you. So - Yeah. I think it's almost like unhelpful for people to hear those deals because that is not normative in any case.

44:10You know, like that is, and all it does is set expectations that are unrealistic. I just think what people, and especially business owners forget sometimes, is that if you're going to sell your business at a number, you got to have a path for that person buying it at that number is going to get that amount of value out of it. And so like, I get it that people don't think that way, but that's how you get to like thinking your business can get 15 times earnings and numbers like that, right? Like it's not realistic, especially as you mentioned that like in consumer, in consumer, it hasn't particularly been a very good track record of being able to return cash to shareholders from the business.

44:52And that's part of the problem. These tech companies do a great job of, I mean, they just spit off cash like crazy, but consumer doesn't. And we're in a year where I think it's really in stark kind of contrast where at any point tariffs can go up and all of a sudden you got to have way more working capital in the business. So for us, a lot of this year's free cash flow got tied up in working capital increases because of tariffs. And so the investor class looks at that and they're like, why would I mess with that when these cloud companies are basically just printing money over here? like and and so there you go that's why you get these massively different multiples and i think to take it a step further mike we've heard of companies like yours that have that i have they don't even have the money to get the goods off the boat so you you let you're i guess you're in a better position some companies we've heard of they can't afford a 10 million dollar bill for the tariff so that the goods are going to get stuck in a warehouse somewhere until they can until they can pay that bill.

45:54So that's a, that's a massive problem. Very few companies actually have the ability to sustain a material change in working capital needs that happens very quickly. Like if you haven't planned for it, you know, and all of a sudden you need 30 % more working capital, like there's very few companies that actually have that kind of, that amount of cushion in their business to actually make that work. Yeah. I want to go back to something that Sean said as well about the 7X and why that's the new norm. You look at these public companies. First of all, in the DDC world, I would say half, if not two thirds of the companies that are trading publicly have negative EBITDA.

46:35And so people don't always realize, yeah, you can be public, but it's not so glamorous because they're not even making money. And so what you have is a lot of people come to us and they're like, well, I want to trade for 12, 15, 17 times EBITDA. and you're like, well, the Yetis of the world are at eight and a half X or eight and a half times EBITDA, one and a half times revenue. So how does a large publicly traded multi-billion dollar company trade for this and you wanna be two X that? It just doesn't make any sense. So I think that reality hasn't yet crept into some of the founder psyche and I think that's gonna take some time for that to happen.

47:10Yeah, and that's like the fundamental issue, right? Because if we reset founder expectations, you could do a hundred deals. You know what I mean? Like it's, it's the bid-ass spread is the problem. Right. And this is like the biggest argument for being bootstrapped because like, I don't have to do anything. Right. Like I have no investors on my board. Like I have no mark. I want to clear if I want to sell my business tomorrow for a hundred million dollars. Well, I could do that deal all fucking day long. You know what I mean? And I could do that because it doesn't matter that I got a$300 million offer three years ago.

47:43It's like, I didn't take it. right? So I can play whatever games on the field, but as soon as you have an investor, you can't do that, right? If it's minority or whatever else. So that's like, if you can, you should bootstrap. And also if you get an offer to sell your business, it's like, there's no guarantee that a higher offer is coming because of multiple contraction. That is like the biggest issue the past couple of years. operators black friday cyber monday is coming up is your sms list ready if not get on postscript they are helping us drive 14 more email signups through their better opt-ins they're helping us get six percent more sms subs every single day because they have perfected the art of pop-ups you need to build your list you have to nurture your list you have to take care of your list postscript is the best at that they're the number one name in sms it's their number one revenue driver.

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49:12Make sure you don't look like an amateur, this BFCM. Use Postscript. Tell them Sean sent you. Tell them the operator sent you. Postscript will audit your SMS program for free and show you how to scale fast before Black Friday Cyber Monday hits. When we talk about list growth, that's what you have to use before, during, and after Black Friday. You want serious gains. You want Postscript. Thank you for supporting the podcast. Thank you for being here. Hey, so that's been the doom and gloom. Let's talk about the third of companies who are absolutely crushing it, right? They have good CAC to LTV ratios.

49:43They have awesome contribution margins. Are they industry specific or are you seeing winners across everything? I don't think it's so industry specific. I mean, I think that we see that across. We've seen it in you know, luggage companies. We've seen it in jewelry. We've seen it in nutrition and wellness and things like that. I do think that the companies that have some of the things that the characteristics, like you talk about Haley Bieber's company, you know, they have the Instagram, the Instagram followers, they have the celebrity backing, the influencers, things like that. That definitely helps them crush it and get to that high LTV to CAC and so on.

50:24But no, I don't think it's any one specific sub-industry. We've seen it across the board within consumer. Okay, but outside of financial metrics, like these companies are all doing great. Is there a couple key best practices that you're seeing across everything? It's like, look, celebrity can work. Being polished on Instagram can work. Is there something that you're like, oh, the X factor I've seen in three or four deals that like people need to know about? Or is it just good financial health, good marketing, whatever? That's a great question. Look, I think the X factor that we see across brands is a cult following.

50:57I think it is the ability to connect and resonate with your consumer in a way that gets them so excited about your brand that they engage in cultish behavior. Now, this is an extreme example, but you see people tattooing brands on their arms and legs. You see Facebook groups dedicated to discussion about that community or Reddit or whatever. So I think the X factor is, whether it's through influencers, whether it's through promotional marketing, whether it's through in-person appearances, whether it's through creative Instagram ads, whatever, it is embedding in your consumer this incessant, obsessive desire to resonate with that brand and to exhibit cultish behavior.

51:42and that is ultimately what gets investors excited. Of course, it's great for sales and great for profitability, but if you can get to that point and there's no easy way to do that, that is what we found to be the X factor for the brands that we work with. No, dude, it totally makes sense, right? Direct-to-consumer is all about the consumer. I think we forgot that for a while, right? With like the ease and omninity that the internet provides, right? What's up, Mike? Well, I was just gonna jump in and say, I think that the reason for that, kind of explaining the reason why what you said is so true is because that points at two things that you already mentioned that are important.

52:19When you have high stickiness and kind of high kind of cult following with your people, it means that you're going to be able to charge the prices you need to charge. One of my favorite quotes ever about product market fit is that the number one sign of product market fit is the ability to raise price. And then it also points to what percentage of revenue are you going to have to spend on marketing to get people to come back? and this is like the problem with D2C that we found. It's like, oh, you have a direct relationship with the customer. This is great. And it's like, it's great if they're crazy about your brand and via just email and SMS, you can get them to come back.

52:55But if you're gonna have to go out there and spend meta dollars to reacquire customers, if you're going to have to, even once you have that relationship, spend a lot of money getting people to come back and purchase from you, then it's not really an advantage. And so anyway, I think that's why what you just said is true to give the kind of qualitative, quantitative combo. When customers are just crazy about your product and like the way we measure this internally in non-financial ways is we look at things like net promoter score. Net promoter score typically ties really well to like, OK, how much kind of cultish following does your brain have?

53:32How passionate are people about your brand? Then it really points towards future financial health or sickness. I think you summed it up very well. And I hate to bring it back to numbers or investment bank, but everything I talked about in terms of the blood work, Sean and Mike, the way you get there is exactly what Mike talked about, which is to create that behavior and that resonance so that you drive CACs down over time if you can with high repeat rates and so on. So all that, I think, ties it all well together. The net promoter score is important. And I think if you had to pick my favorite example, my best case study is Bombas, because Bombas had every single thing in 2017 that we talked about.

54:13High product margin, high contribution margin, high profitability, a willingness for consumers to pay$27 for a pair of socks. And they just nailed it every step of the way. And they had a high net promoter score and so on. So I think that's a good example for companies to follow. And of course, they had the give back policy as well. So that's a great case study. Someone wants to understand what does it take to succeed? A company like Bombas will succeed in any kind of environment. It's interesting we have the similar kind of give back initiative and kind of a sneaky way that that's helpful to run a very profitable and valuable company is it really forces you to think about building in margin early on.

54:53That's right. A lot of these companies are like, well, we can run, you know, break even or we can run at a deficit. When you run a company where you're like, hey, giving is going to be part of our mission and purpose. You can't give if there's no margin. Right. And so, like, even in our first couple of years, when we weren't making very much money at all and we didn't have a lot of free cash flow, we still were like, we want to write some checks. which force that discipline of having some margin that could be, it's not returning it to shareholders, but it's kind of like a returning to shareholders like behavior of writing a check to a charity.

55:27And so we built that discipline, I think really early and it was helpful for us, not just on the missional side, but also on like growing a profitable business side. I think that's an excellent point. Well said. And I think it also taps into, you know, getting back to the X factor, Sean, it's not just the things we talked about, but it's also an awareness of current trends. The deals that are getting done right now, Dr. Squatch, Poppy, Alani New, Road, and all that, there is a common thread around them that's better for you, healthy, scientifically backed products. And so that's another element I think that's important.

56:01And so, Mike, you talked about giving back, and I think that's something else that Gen Z in particular is looking for. And so keeping your finger on the pulse of where the puck is going, that's why a lot of these companies are succeeding because they know what tugs at a consumer's heartstring and they've done that well, which is why they're so attractive to their strategic acquirers. So you brought up that you've done the MeUndies deal and the Bombas deal. Both of those deals were fantastic and they're also DTC 1.0 darlings, right? So why did those companies work out and something like an Allbirds didn't, right?

56:36Was it just because they avoided venture capital? Was it just because they avoided the 20x revenue markups or the companies are run better? How come things that look so similar could have such different outcomes? Well, I'll speak about MeUndies and Bombas first. And then Allbirds, I think, is a unique case study as well, which we'll talk about. I think both of those companies had a number of things in common. They had great management teams. They had the financials. I won't repeat what I talked about, but they had very good margins. They had great profitability. MeUndies was unique because they got people to subscribe to underwear.

57:14Of all the things in your life to subscribe to, nutraceuticals or cable TV, which many of us don't do anymore anyway. But who would have thought that you can subscribe and get a pair of underwear in your mail every month? And they made underwear, which by the way, no one even sees what you're wearing unless it's a spouse or significant other. But they made that resonant with the consumer, tied it in with Star Wars and other movies and other things like that. So they did a great job of tapping into that consumer psyche. And ultimately, what is a membership? A membership is just a high repeat rate because your customer is repeating over and over again.

57:51So both had high profitability. They had great consumer resonance. They had an ultra comfortable, ultra technologically innovative for apparel products. They had amazing management teams. I remember the CMO of Bombas was unbelievable, not to say anything about the CEO and so on. So they had fantastic teams and they spent on the infrastructure, they spent on the teams. They didn't scrimp by having a five-person team thinking that's going to make them more attractive. Paradoxically, private equity wants you to have the infrastructure. They want you to have the foundation. They want you to have a proper CFO and a proper CMO.

58:31Because guess what? If you don't, they're just going to have a negative ad back and implement one for you if you don't have it when they acquire you. The other things I would say, they had great relationship with their suppliers. Bombas actually worked with their suppliers to retool machinery to create the right SOC. They spent so much in R &D and development. So these are the few things that I think stood out in those situations. Allbirds is a more complicated case study. I mean, I think, you know, they, in 2021, they were almost at 300 million in sales and they were, they were almost profitable, but not quite.

59:05Now they're at 170 million in sales and they're at negative 76 million in EBITDA. And so they're still having trouble, I think really riding the ship. And so part of it is their gross margin. Go back to my favorite topic, about a 40 % gross margin. you're not going to make money at 40%. So there are a lot of other things there to the story, but if you can't right the ship with the proper gross margin profitability, you're just never going to make it. Yeah. So look, a third of people don't need any advice. They're killing it. A third of people are battling it out. And the advice to them is probably just accept lower multiples.

59:44It's like the world is what it is. And if you come into a deal being like, well, look, I know everyone else is getting 8X, but I need 15. It's like, look, it's not going to happen. And then a third of the businesses, I think, just need to be restructured, right? If you're in Albert or whatever, it's like revenue needs to fall by 50 % and you have to cut team by 90%. It's like, it's just a different business at this phase in your life. And it's like, do you have the guts to get that done, right? If you're in the public market, you probably don't. Because as soon as you start doing that, if your guidance is we're going to drop revenue 50 % and we're going to get rid of every employee who works here, it's like, you'll get delisted right like this is where i think management and shareholders start to get you know out of alignment like if you're the all birds management like firing all of ourselves is not necessarily at the top of your list of solutions like you're going to want to paint a picture of like hey we can turn this around we can create growth or whatever and like so i don't know like i think we've seen this that this happens a lot actually that management and shareholders are on different pages.

1:00:50I mean, there's some famous cases like, you know, Evan Spiegel basically has complete control of Snapchat, even though it's a publicly traded company, like nobody else can do anything like these kind of special classes of shares that tech founders have found that they can do where they really maintain control of the company and they can dilute the shareholder as much as they want because they're functionally in control. But then also when things start to go really bad, like the management doesn't have any incentive to go the austerity route because it means they're losing their job. In the last 90 days, my brands, Pila and Lomi, have doubled our support capacity without adding a single new hire.

1:01:31And that is because we moved to RichPanel. Our CSATs are at an all-time high. I think we're in the 90s now. 50 % of our tickets are fully automated, which means the team can basically handle two times the volume without burning out or adding more people. And with a Trustpilot integration, both brands went from a two-star to a four-star plus, actually, I think four and a half, in like 90 days. And the migration was probably the easiest part. I was surprised. RichPanel handled everything, data migration, automation setup, training. We were live in just 14 days. That's insane. And the guarantee you'll cut at least 30 % of your tickets in the first 60 days, or you get your money back.

1:02:06Not bad. So if you want to be ready for Black Friday without scrambling to add extra agents, because, you know, I'm recording this and Black Friday's around the corner, you should just head to richpanel.com slash demo. Tell them Matt from operators or Sean or anybody. We all use this thing. That's why we're promoting it. Tell them that we sent you and they will take very good care of you. That's it. Let's get back to the show. Yeah, man. I mean, well, Snapchat, great ag platform, horrible stock to own. I've been caught in that trap left and right. So not financial advice. Jeremy got me in trouble on that one.

1:02:38Our friend Jeremy, who has great stock picking acumen, and he told the group, you got to buy it before earnings a couple quarters ago. And I got burned on that. But I'll ride or die with Jeremy's stock tips anytime. Yeah, we'll believe his name. We won't dox him. Yeah, so look, I just think a third of all companies that are struggling right now just need to do the really, really hard thing. and they're like, but Sean, the past four years have been so hard, right? And it really just comes down to resetting expectations. But like, you know, valuations aren't what they are and you just have to live with this new normal.

1:03:13And I always bring up that, you know, it took a decade before Amazon reached its like a dot-com peak, right? There was like, you know, there was a moment in 1999 where they were worth whatever. It was, you know, 50 bucks a share. I don't remember the actual number. And it took like a literal decade to get back there. So they were underwater for a decade. All those investors were underwater, but it's still a great business. And if you have a 20 or 30 year vision for it, I mean, you end up having a multi-trillion dollar business, right? The company got better every single year, but investors took a long time to get back to where they were.

1:03:45And that's, I think, where we are with consumer, right? I've often said that we are in our dot-com bubble, right? It burst in 2001. And for us, it burst in 2021. So, all right, Arash. Now, we're going to pivot the conversation slightly. We talked about the good stuff happening, the bad stuff happening. Let's talk about the future. Where is AI going in the world of bankers? The reason why I ask, bankers are some of the most highly paid people on a deal, right? Maybe talk about how banker competition works real quick, because it's very feast or famine. I don't think people really know. And then maybe how AI is going to change that.

1:04:22Yeah. So bankers have different levels. When you start out of college, you're an analyst, then you're an associate. after two or three years, then you're an associate for four years or so, then you're a VP for about four years or so, and then SVP and then director and managing director. I think base compensation for an analyst coming out of college is low six figures. That's the base. And then you get a bonus that is typically half or one X your base. So a compensation is great coming out of college. And of course, it gets better every single year with seniority. The problem with banking is if you don't close deals, you don't make any money.

1:04:57And although we get a retainer, the retainer just keeps the lights on, allows us to pay for databases and little things like that. You don't really make any money to bring home. And so if you're in banking and you're just getting retainer money, it's not a good situation to be in. You must, must, must close deals. I think that, so that's a little bit of how banking works, how the compensation structure works in terms of what's happening. Now, AI, I think, has started to change the game, but I think we're not even the first inning. I'm reading about, and this is something we're very, very focused on because we're trying to automate the out of everything we do.

1:05:35When we hire people, our first analyst, we didn't look for a finance jock who we can teach computer programming to. We hired a computer programmer to whom we taught finance. Computer programming, Python, R, all that is really critical. And so we only hire people with that skill set. That's very, very important for us. So whether it is finding buyer lists, whether it is putting together a sim, whether it is putting together building a model, model is going to get harder because that actually requires a lot of manual work. But I think AI is going to dramatically revolutionize banking. And I even heard about one AI bank, investment bank, that's 100 % AI focused.

1:06:18I'm still reading about them. I want to get to know them. But I think we're just in the early innings. And there's a lot about AI because there's so much manual, repetitive rote behavior in banking that's ripe for disruption that is going to get heavily AI disrupted. I think we're just in those early stages. What does the job of a banker look like in whatever four years? Because you bring up it's feast or famine. There's only a couple of jobs in America where you can make a million dollars a year as an employee. So it's like you could be a surgeon in a rural hospital. You can be a partner at a big law firm.

1:06:55You could be a banker. I don't think there's very many other besides like, you know, NBA superstar or race car driver, I mean, actor, right? Like it's up there. It's one of the few jobs where you can make millions of dollars a year. Are they going to be able to keep those salaries in the world of AI? I think you can keep the salaries. You're just going to be fewer of them. Look at your own businesses. I'm guessing that you're not hiring as many people as you used to. You're using AI much more often. So I think relationships are going to matter. Knowing people and building out your networks, that's going to be the critical thing.

1:07:28That's what AI cannot disrupt. But all of the other elements, building a monitor, writing a SIN, putting together a buyer's list, all that is going to be heavily AI influenced and a human is going to oversee it and make sure that it's correct. I think that's the way that I experience it from the other side. I mean, one of the things that we've seen, even in the last couple of weeks, there's some really good Excel tools that are now coming to market, like these AI-infused programs that can basically, like one of them, they gave a set of test problems to a bunch of investment bank analysts, and they gave them like 10 hours, and then they gave it to their program and gave it 30 minutes, and the program just destroyed the Wall Street analysts.

1:08:11And so I think what's good about the AI piece is that it can be more dispassionate and probably company valuations. It's going to be easier and easier to understand what your company's really worth, that you're going to be able to go, like right now you have to kind of go out and engage people and you get kind of fed a line of crap by people because they want you to go with them. And then they tell you the real story once you like, you get, they get your expectations up here and then they tell you the real story. But I think that people are going to have a clear understanding of like, Hey, what's my company probably worth and a lot of the analysis and stuff.

1:08:44But I think you nailed it. Like ultimately, when it comes to selecting a banker, it is it's a relationship business and it's about it's about trust and a bunch of kind of qualitative soft skills that the AI like even if everybody has these AI infused processes to gather all the data and collate all the data and come up with evaluations and everything else, convincing a founder that you're the person they should go with and selling their company or that you're the person they should take money from. Like that part is all relationship, all soft skills. So I've actually spent a lot of time thinking about this of like, what are the skills that you want to really develop in an AI world?

1:09:23And I think the soft skills are just going to become even more valuable than they are today because the hard skills, the ability to get into a spreadsheet and really crunch numbers or, you know, whatever like that is, I don't want to say training to zero, but it's kind of going that way. Yeah, I think it's great. And I agree with what you said. I think there is going to be a Zillowification, if I could coin that term in terms of valuations. But even today, even before AI really takes hold, if you want to know what your business is worth, you can use the right tools and sort of figure it out. But yes, it will become easier.

1:09:58I do think, though, that no matter what role AI plays, no matter what human it removes out of the equation, sitting in front of a founder. If I bring you a presentation that's AI generated, you're still going to want me to talk to you about it and want to have a normal human conversation. So I think it's going to speed up velocity. It's going to make our lives a lot easier. But at the end of the day, those human relationships and human contacts and insightful thinking is really what's going to matter and carry the day. Right, but dude, but if you can do more deals, the value per deal is just going to go down, right?

1:10:32That's a tale as old as time, right? Right. Well, what he said earlier, I think also is simultaneously true that the reality is that technology, like the most predictable thing about technology, I don't understand exactly how AI is going to play out any more than anybody else does. But the most predictable thing is that it's power law that and that the as the technology gets better, actually, the power laws are getting bigger, that the winners win bigger than we've ever seen winners win. And that the gap between the winners and everybody else, it's a 90 10, 99 one, you know, like power law. So the perfect example that's come out in the last week, like if you take the S &P 500 and you split it into like the top 10 companies and the other 490, the other 490 are growing earnings at like 2 % this year.

1:11:17And then the top 10 are just printing. You know, they basically have money printing machines. I think that's kind of, you know, in some ways exactly what you're talking about happening in the private markets, that it's like the few companies that are really crushing it, that there's going to be so much competition for those deals. And they're going to be encouraged to take more and more money and stay private longer and longer because of the glut of money that wants to go to them. And then it probably will be harder and harder for companies that aren't top 1%, 5%, 10 % to get any interest. And that's an unfortunate thing about technology that I don't know that any of us have figured out what to do with.

1:11:55But the winners are going to win big. And it's only going to get more extreme probably under AI, not less. Yeah, I think that's fair. And I think, Sean, back to your point, though, there are elements of a process that you can speed up, like getting the marketing materials ready and going to market. But I think there's other elements like the management meetings and the discussion need to take place and certain of the soft skills, Mike, as you were talking about, that are still going to be relevant in a transaction. And so I think maybe you can speed up a transaction by a few months, but it's not like you can get an M &A transaction done in a month, right?

1:12:27Yeah, well, look, dude, so you're saying that the most important thing for a banker to have as a podcast. So we're going to see more bankers come on the Operators podcast, man. This is great. I think the future looks interesting. Mike, you brought up the point about being public and probably staying private longer. That's played out in tech and it's the biggest complaint of the tech industry is that all of these mega, deca, super corns, the SpaceX's of the world, angels worth$100 billion, none of them are going public. I don't think there's actually a future where consumer brands should go public.

1:13:02It's like the cost of being public is so high. And like our businesses are like being public this year with tariffs sounds horrible. It's like you have to suspend guidance. And then when you suspend guidance, you take a 30%, you know, punch in the nose, right? We saw that happen. Further, why would you go public? And if you're already running a consumer company, the way that we're talking about, like the best consumer companies are able to return cash to shareholders at a regular clip. They're profitable. They're growing the bottom line. Once you have a company that's doing that, the attractiveness of going public is reduced because all you're doing is pulling forward cash flows, right?

1:13:40You're going to get valued at those cash flows. And so, yeah, you can go public and you can pull some of that forward. But other than that, so like that's my situation with Simple Modern is it's like if my alternatives are hold this asset, cash flow it, or sell this asset and pull forward seven years of earnings, it's not really that attractive. And the other reason why, in my opinion, it's not very attractive is that it's very clear that the governments, the worldwide governments have understood, we want to spend more than we have and that the way that we've got to do that is taxing people. But when we directly tax people, they kind of freak out.

1:14:19And so we'll just indirectly tax them by printing money. And if you view the market that way, that all of the governments have kind of figured out we're going to indirectly tax by inflating our money supply, then you realize you sell an asset and you're now trading that for a depreciating asset in fiat of some kind. The thing that's great about owning a company is that you can raise prices and you can float with whatever the government does. So we go through another 2020 where the government prints, you know, trillions of dollars, then you can just raise prices and you don't get hit. You don't lose the value of that taxation, that inflation once you sell.

1:14:58So anyway, the point being, if I sold Simple Modern, immediately I have a different problem, which is I've got to reinvest that money in another asset. So what's better, me having an asset that's cash flowing that I control that I have 100 % insight into or taking that and putting that into an asset I don't control where I'm not getting as good a cash returns and I have less clarity and less control. So anyway, I think that's why it is that once you actually get to these markers that make it an investment that investors would happily pay 7x, 10x earnings for, you start looking at it and you're like, well, I would be happy to own this investment.

1:15:40And that makes you not want to go public. Right, dude. And at the end of the day, it's like companies are worth what they sell for. So if you don't want to sell your business, then it's worth infinite to you. The big thing you give up, I think, is leverage, right? Like, Mike, you've launched a new business this year that'll do eight figures in year one, right? Already had a neat figure, I'm right. Yeah, you do that because you own the asset that can support the other asset. And I'm following your footsteps. I'm going to launch a second brand in Q4 of this year. And it's because I'm like, yeah, I can do whatever I want because I don't have investors or a board to answer to.

1:16:15Sure. And you're not going to get blindsided by some kind of like accounting fraud at this asset or some kind of, you know, executive departure that you weren't expecting or a bad court outcome. And, you know, even with public companies, that's there's information, right? It's asymmetric information risk. And so anyway, all that to say, like, it makes sense why companies stay private longer and it makes sense why some companies don't want to go public anymore because it is very attractive to be private if you're profitable and you're cash flowing. And so, like, we had this little window of time where you could make a lot of money with a company that wasn't profitable and cash flowing by kind of cashing out, taking it public, taking investor funds.

1:16:59But that's not the world we're going to live in based on the whole conversation today. So, it's like we've always said, if you want to sell your company, the best way to sell your company someday is to build a company you wouldn't want to sell. And that you can't optimize for just selling. You have to build an asset that you'd be happy to hang on to forever. And ironically, that's exactly the type of asset that somebody might come along and make an offer that you're willing to consider. We tell our clients the same advice. Run your company as if you're not trying to sell. Run your company in the normal course, what's best for the company, and good things will happen.

1:17:34So we have that same exact mantra. Yeah, Warren Buffett used to have like a euphemism, euphemism is not like a piece of advice or like an instruction that he would give to all of his CEOs and manager class, which is I want you to run your business unit like it's the only stock you could own for the next 30 years that you could not sell any of it. I want you to run your business unit that way. And it's like if you run your company that way, it's like, OK, this is equity that I own that there's no way I can sell it. then also ironically, that's the one thing that makes the equity go up in value and makes it possible if you do want to sell it that you could someday.

1:18:11Damn. Okay. Full circle. We talked to everything D to C, banking, consumer, talked about 2008. Arash, parting words of wisdom, anything you want people to know and then plug away, how can people reach you if they want more good advice? Parting words of wisdom. I would say don't panic. The world is not as bad as the stats will say. I think that we kind of focused on some of the doom and gloom on this podcast, but I think it's important to note that there's still a lot of hope out there. A lot of companies are still doing well. There's a path to recovery. And I think that if you focus on what your consumers are looking for, stay close to your customer, build that culture behavior, work on improving your margins, spend marketing money wisely, aim for profitability, and get help when you need it, you'll be just fine.

1:18:57There will be those that will need a lifeline and a rescue, a boat, but that's okay. That's been happening since the beginning of time. Beautiful, dude. Well said. And Arash, if people want to find you, how can they find you? What do you do? So our website is centerstonecapital.com. You can reach me in my email, afarin, at centerstonecapital.com. Our number is on our website. You can call us. Sean knows how to get ahold of me. You can LinkedIn me. There are many ways to get us. So hopefully those are enough ways out there to reach out to us. All right, man. Call the guy who answers anytime. If you have any question about D2C, the Bombastil, whatever else he's done.

1:19:38Rosh, I appreciate you being here. I think it was a good episode. I think we covered a lot of good stuff. As always, thank you for listening to the Operators Podcast. Thank you, Northbeam, Fulfill, PostScript, Rich Panel, Saris Analytics, five softwares that I'm paying for right now. and we have a collaboration with ECF. So we had a Slack group. We shut it down. Go join ECF, e-commerce fuel. Great community over there helping each other every single day. We have a newsletter. We have more shows coming out. Thank you for being here. Thank you, Mike. Sorry, Matt dropped off. And Arash, thank you for being here.

1:20:10Goodbye. Thanks, guys. Bye.