How Private Equity Approaches Ecommerce

0:00VCs tend to be standoffish. They don't really roll their sleeves up from our experience. Us, it's not a case of we want one of those businesses to really fast track and make us 10 times. We want a stable, consistent return from each of the businesses. Hey everyone, welcome to Shopify Masters, your companion for starting and building a business. I'm your host, Shuang Esther Shan. Private equity firms sometimes play a huge role in scaling businesses and making them industry leaders. If you are a consumer brand looking for investment in the UK, Piper is the private equity firm to know. Our guest today is Leon Hughes.

0:46He's a partner at Piper and he's helped build brands like Barking Hez, Ancient and Brave, Proper Corn, and Wattbike. Leon has been a Shopify enthusiast for years, and he runs Shopify Geek Meets in London. Leon, thank you so much for coming on to the show. Thank you for having me. I love chatting with people in private equity and investing, just because I think there is a bit of mystique and people want to understand so many things about fundraising. So I want to kick off the show to ask you about what are some common misconceptions about private equity that you like to talk about? Yeah, back in 2004, I was a recipient of investment.

1:34So actually from the business I work in now. So I fully understand as an entrepreneur what it's like to have private equity. So Piper invested in 2004, exited in 2007. And then we had private equity from another UK private equity house. So two tranches went through those processes. So I fully understand the misconceptions, having lived and breathed it myself. The one thing I should say, the reason why I do work at Piper private equity is we're very different. but hopefully it'll give you a good idea of how we work. And that is the business is kind of split into two. We've got the traditional investment account directors, and then the other half is added value.

2:29And that's the camp that I sit. What I mean by that is it's not just about the cash that you get invested into the business, the growth capital. you also get expertise and advice. It's not a case of we invest and then kind of sit back. We have internal expertise within brand, digital and talent, where we advise, help, and we like to say grow the business as partners. So I'd say we're very unique. however there are private equity institutions out there that offer different levels of support it's key for any entrepreneur any brand to really do their research speak to existing and past portfolio companies to really find what what is their specific niche because there's one one great thing getting the cash it's even better if you get the expertise to fast track your business It sounds like the biggest misconception you want to address is the fact that private equity is not just getting an injection of funding or cash.

3:44You're actually getting a partner that will help you grow and scale in the way that you want. And obviously, you're listening to loads of pitches. When you're listening to those pitches, what are you looking for? Yeah, I think it's worth me pointing out that at Piper, our typical investment is anything from 5 to 25 million. We have an investment fund of around 100 million. So typically brands are turning over anything from 5 million upwards. Saying that, we do get pitches from startups that actually want to position themselves for a Piper investment down the line. so I think I'll come up with misconceptions in a moment but one thing I would recommend for any any startup that is considering investment later down the line is worth getting to know and even pitching your idea to private equity such as ourselves right from the offset because basically a will attribute value to it because we want to stay in contact with with the brand But equally, you can get wealth of knowledge so that when it comes to that time, we can tell you what we're looking for in a brand and what would tip the boxes with regards to investment, not just the money that we're going to be putting in.

5:07The key considerations is we invest only in consumer brands. So it's got to be a consumer first business. It's got to show you've got to have traction with regards to good acquisition costs. great retention, but at the very heart of it, it's got to be all led by the consumer. Most of the businesses that we invest in, we're actually consumers of, because we live and breathe it from a consumer perspective. So the key criteria is you've got to be and have a fantastic consumer proposition. There's loads of other facets around there, but that is really key to us. The second is a founder management team that we can generally invest in and back.

6:03As I said earlier, it's all about partnership for us. We want to make sure that not only do we invest the cash, but the founder of the team want our expertise to grow a bigger, better business. So I think that that's the two key important aspects. ESG, B Corp, you know, we're B Corp, female founded businesses. We're encouraging. It's high up on our agenda. And those are the two real key focuses for us. So you're definitely investing in a good product, but you're also considering the founders and the team. They're both equally important. So I guess the question here is, do you expect the businesses to have a plan for scaling?

6:54Or is that something you work together once the agreement has been signed? That's a pretty good question. We are investors. We back people with a plan. saying that majority of the time we help uh build that plan so it's ready for investment um but at the end of the day you know we've got to step back and the assets got to remain within within the business um so so a plan an idea a vision for the business really needs to be laid out and supporting that, you know, market size. So we know what share of market that we have at the moment, how it's going to grow, a kind of route to market, you know, what channel, has it been proven?

7:42Have you got statistics in place, cohorts? That's demonstrating, you know, the CAC is under control. the CAC to LTV. We want to have demonstrated retention from the consumers so that we can see that where's the volatility in the CAC? Where can we keep spending knowing that a consumer over a period of time is going to generate a sizable contribution? Yeah. It's very interesting. And I love the fact that you highlighted your history, the fact that you were running Maxim Muscle back in the day, a very well-known protein brand here in the UK. And you were someone who was operating at a consumer brand and you decided that, hey, actually taking private equity investment was the right move.

8:34So I guess like from the founder's perspective, when they're looking at different funding options, how do they know that I should actually consider private equity and it's something that I should explore. Yeah. I mean, if I use this as an example, first of all, there's different levels of investment. We were looking to raise 6 million above. So A, that's going to rule out quite a lot of angels, maybe crowdfunding, and also venture capitalists, VCs that generally come in below that level. We say kind of one to three million, anything above kind of the five, you're looking more in the private equity camp.

9:22I suppose the nuances, the differences when it comes to VC and also angel institutions, you tend to be one of a number. So, you know, over a year, we invest in one to three brands. we don't invest in 10 or 20 and because of that what you normally see is when you when you invest in many um you can't really add the value and help build the business because you'd be diluted so much so vcs tend to be standoffish and they don't really roll their sleeves up from our experience and you know what out of the 10 or 20 they kind of only need one brand to really work for their payback us and i would say as representative private equity much smaller more focused uh um view um it's not case of we want one of those businesses to really fast track and make us 10 times, we want a stable, consistent return from each of the businesses.

10:36For us, as an example, over the last 40 years, we've invested in over 50 brands. We've successfully exited the majority of those, and we're still invested in about 15 at the moment. So I think that there's different nuances. and the key thing for any brand or entrepreneur is actually do their research. They can pick up a phone to any VC, any PE house and ask those questions. There's lots of nuances with regards to deal structure, term sheets, et cetera, which I won't go into. Now, all quite straightforward. At the end of the day, you can have that conversation upfront. I get contacted. I love speaking to startups.

11:22and giving them advice. And you know what, sometimes we're not the right fit for some brands. We might be later down the line, but we can certainly help and we can certainly put brands, individuals in contact with the right people. Yeah. Economic landscape is very different from five or even 10 years ago. Founders are having a harder time getting investments. From your perspective, when you're looking out for the new year. What do you expect for 2025? I'll give you opinions from both buy side and actually sell side. And it's just like a house, right? Yeah. It's highs and lows. It's all a cycle at the end of the day.

12:06It's interesting that because Piper has actually been going for 40 years, we've seen a lot of downturns. So the global financial crisis, the dot-com bubble burst, numerous over decades. And we've actually mapped it out where we've been investing and divesting. What's really interesting is we've exited more strategics during a downturn. And what that says to me is much bigger corporates have a much longer view in the market and on the world, whereby they continue to invest throughout the period. But you're absolutely right. You know, Since 2020, we've had an absolute rollercoaster, which has definitely impacted the market.

12:59COVID, war, energy prices, especially in the UK, inflation. It's just been a whirlwind of hurdles, obstacles. I do believe, however, there's a bit more consistency bedding in. There's a lot of cash buildup. The reason why people are not investing is because of nervousness on where the markets are going to go. Now, we've had a lot of nervousness. You know, the government, not only in the UK, but in the US, that's bedded in, right? We've made the choice. So, tick. That's done. inflation is under control it's more kind of consistency we're living with it i think with that in mind 2025 is we're going to start seeing some green shoots um as piper investment we've just made a large investment in a travel business which we're super proud of inside asia our kind of opportunities going into the new year are really strong actually so we see it trickle down to startups i also think that there are ways to combat investment during the downturn and that that's knowing and speaking to the right people um on who they should specifically be targeting because brands have been receiving investment through the whole period.

14:37I know many high networks that are still investing under government schemes like SEIS, EIS. So private individuals have continued to invest through the period. I think it's larger institutions, certainly in the UK, who have exited the UK or diversified away from consumer into energy, finance, tech. We've been consistent. We only invest in consumer brands. So I think, again, it sounds like a bit of a stuck record, but the best thing you can do is actually go and seek advice, kind of speak to myself, others, and kind of navigate this tricky period. Because as I said, it is like the housing market.

15:18It's a terrible time to exit business, terrible time to sell the house. Actually, it's a great time to buy a house and invest in the brand. Yeah, I think especially because this period is so competitive for companies to get investment, it forces them to be profitable. They can't just pitch on potential. They actually have to showcase profitability. I guess from that perspective, how can new businesses prep themselves and get their financials in line so that they do look great for investors during this time? Yeah, it's a great question. And that has been the case, just to validate that. Certainly over the last 24 to 36 months, the pendulum has kind of swung in favor of profitability.

16:11previously it was all a multiple on revenue and that was driven by a lot of us vcs coming into the market and actually valuing businesses um of revenue at a high much high uh enterprise value that we would invest and we missed out on quite a lot of opportunities because we just couldn't reach the valuation. We value off EBITDA, off net profit. We always have done for 40 years. I think it all comes down to consumer proposition. You know, if there's enough consumer pull, you can generate and keep that returning customer to help generate cash. I think during the boom years I would say there was a reliance on meta Google and meta in combo whereby you could source a product you could fire up a Shopify site very quickly and you've got your market sewn up with meta and Google but then as you expand you realise the overheads there's costs that come in and actually it's not a sustainable growth.

17:29So if I was advising any businesses right now, and I am advising quite a few startups, mentoring a few brands, I would advise them to avoid Met and Google at all costs in the early stages. Go to events, get out there, sell hard, learn about the product, make sure that it is fit for purpose and people are coming back. The proposition you can't get right from day one, but going to events going to you know it's a pet brand i'm helping at the moment and that you know they're in every farmer's market every weekend uh they're going to as many events as they can not just to sell the product but also to learn from from other brands um never spent a penny yeah they've been going for about uh 12 months um they're itching to spend some money but what we want to make sure it is the unit economics justify any investment in paid media from day one.

18:31Now, yeah, that could be bittersweet because it could prove that actually it's not the right proposition. It's not working. There isn't consumer pull, but it's best to know now rather than spend hundreds of thousands on paid media where you're not going to get any payback. Yeah, that's such an interesting take, especially given your background with digital, which I'm so excited to get more into. Before we get there, I just wanted to take a moment to thank our listeners for tuning into the show. We also have a YouTube channel where you can watch some of our favorite in-person interviews. So subscribe for more Shopify Masters.

19:13Speaking to your digital background, you were very scrappy. you built sites yourself, you invested in digital ads, and you kind of found your way into Shopify and you get a lot of the businesses you invest in to be on our platform. Yeah. Tell us how you found us in the early days and why you're still sticking with Shopify. Yeah. I was building e-commerce websites um since 97 1997 so actually hunkoed in whereas we didn't have a luxury of a shopify or any other platform at the time there was a um a kind of engine called intershop and i was building e-commerce websites from 97 until 2001 when the bubble burst and actually all my work dried up i was fortunate enough to meet self eisenberg at maximussell who invited me to um build the d2c arm of the business um so coded the website coded the warehouse management systems automated a lot of the crm marketing um because there was just myself and then we grew the teams out so i remember putting google adwords on my credit card i remember uh following the success we had on google facebook inviting us to be on their beta program and they were launching one of the first new audiences in the UK.

20:40And as you said, it was scrappy. There wasn't any kind of case study you could learn from. But what that meant is we did everything in the best interest of the consumer. We didn't have the tools. So we didn't shoehorn or make our offering generic. We built it. I wouldn't encourage anyone to do that right now. But actually, there is some merit in not going along with the norm or any kind of cookie cutter marketing plan. When we sold Max Muscle to GSK in 2010, I became global head of e-commerce at Consumer Health at GSK. And I realized very soon my passion is helping grow businesses from zero to 100 million.

21:32um it's then when i joined piper and my remit to begin with is to go meet all the fantastic brands we've invested in and offer my uh expertise with regards to anything from search to doorstep to word of mouth that's the way i kind of explain it so that's all the digital marketing tech stack know how i'm mentoring what happened so this was probably about 2012 what happened when i came to the business. I thought I had a blueprint of success. I just needed to replicate that. And then I just found businesses doing things so much smarter, so much quicker, that I made it my job to really continue to learn.

22:14And I still do to this day when I meet some amazing brands, tools, people, agencies. I'm just a bit of a sponge. And I suppose in the early days the one thing that impressed me the most but god it saved me it would save me a fortune if i was back at max muscle was shopify so i was a massive advocate of why you reinvent the wheel and this is this is you know over 10 years ago um and what i was impressed was i started to meet not only uh early days of uh shopify developers but the potential of kind of the open source the apps that could be developed, etc. on the back of it. It was completely new compared to the likes of BigCommerce, Magento, all the others that are out-demand with, and we were using them all.

23:00And I just found it just beautifully simple.

23:06I found myself very much in the early days building Shopify sites myself as an investor just to prove how simple it is. And I think, you know, certainly 10 years ago, it doesn't apply now, brands wanted a lot at the platform, whereas what I was advising them to do is scale. Every five years, we would contemplate upcycling a platform or a complete rebuild. It was a case of start with Shopify and grow with it. And actually what I've been most impressed by is those that actually went down that route. Shopify has grown as well. And, you know, the latest additions was testament of what you guys have brought.

23:57And, you know, majority of our businesses, large and small, are all benefiting from Shopify Plus. And, you know, when I look at my tech stack over a decade at Maximus, So I look at some of the tech stacks now with Shopify, Clavio, Octane, Recharge for subscription. It's beautifully simple. And, you know, going back to your point about brand seeking investment. You know, when we do due diligence, it's a massive tick. If we know that a consumer brand, whatever size, has got a simple tech stack, you know, my due diligence is covered and capable. for, you know, from security, robustness, scalability, integration, people that you can hire who have knowledge of the platform.

24:51And also knowing that as you grow in the future, you can scale. We always say we're agnostic. So people, platforms, the tools, however, I've got to say Shopify is my go-to every single time. Yeah. Yeah, it's so great to hear. And I also love the fact that you've already listed out some tools and apps that help to scale up Shopify's platform even more. The fact that you mentioned Klaviyo for email, Recharge for subscriptions and things of that sort. Have there been other tools or features that you've enjoyed and kept an eye on over the years? I mentioned Octane, but I love Octane. I love the flexibility of the quiz, but then also feeding the information back into Clavio for performance marketing as well.

25:49I suppose I like the tool, but I also like what it generates. And that is for a brand to know everything about their consumer is really valuable. You know, being able to say to a potential strategic buyer that we know everything about our consumer and it informs our NPD, it's really quite powerful. And that actually adds value. So Octane for me is a great tool, but it means a lot to businesses that I probably don't realize. I know with Omnicommerce as an example, when we're doing due diligence on specifically Shopify brands, all we ask is for access. We plug Omnicommerce in and it gives me all my due diligence cohort analysis.

26:44So, you know, new customers over time, CAT, if we can plug into Meta, Google, the cohorts are the cohorts worth by month, by year, forecast. plug and play. So no, I think the whole ecosystem now of having a accessible, scalable, robust tech stack that's all centered around Shopify Plus is a huge benefit and asset to the business. Yeah. Well, it sounds like there's so many metrics you look at and just to get an understanding of how businesses are at that point and also how scaling is going. I guess, like, are there specific metrics that you look at very often? Talk to us about that. Absolutely.

27:36So no particular order. You know, the key thing, visits. I mean, the basic metric, it gives you a take on how many, how substantial the traffic is coming to your website uh conversion uh obviously um but then uh before we go into the deeper metrics um we look at how many emails that your uh uh subscribers you're generating not just from the order page but in general so you have x thousand visitors how many people are shaking your hand and allowing you to communicate to them because I think as you heard me say earlier, you know, we try and encourage brands not to overcommit on meta and Google. One way of doing that is by converting the existing traffic to build your CRM pod.

28:29So emails and the growth of emails, new customers. Now, I know there's a seasonality element to it, but as a brand, we would want to make sure, especially in startup, that month-on-month, there's just continuous consumer growth. Again, that helps us support the thesis, the size of the market, the address of the market size. And you can map all of this out, which gives us great belief that, you know, the business is growing and consumers are stickier than ever. Yeah. It's fascinating to hear because you are so hands-on and also in the weeds of understanding how growth is happening and how scaling could be achieved.

29:15On the flip side of it, you also helped start the Shopify Geek Meets to be still hands-on and in the weeds. So talk to us about those meetups and why it's so impactful for you. Yeah. Well, as I mentioned earlier, when I finished Maximus and I joined Piper, I started meeting some amazing businesses, founders doing things much easier and quicker than we did at Maxi. So I wanted to keep learning. Part of that was I started a small group of individuals. I got them together and said, could we share some insights from each of our brands? And initially there was four brands.

30:01I asked them to sit around the table and just shared our day-to-day stories, you know, What platform are you on? Which agencies would you advise me meet in? Which agencies would you avoid? And it was just a great download, insight sharing, whereby I said, look, can we do exactly the same thing, but I'll bring all of my brands around the table. So we actually replicated it two weeks later. And something that should have lasted an hour and a half went on for five hours. We'd actually kicked out of the offices. and carried on down the pub and it was just so insightful. I've continued to do that every quarter.

30:46So if you look at the website, every quarter we conduct a geek meet and also what we call now a founders collective. So the geek meet is a little bit more technical, happens online because there's a much broader base and international. So again, a lot of people going in from the States. founders collective is more as it said for founders within businesses large and small we select topics that we think will help very topical but will help business uh to fast track as a result every year we conduct a special editions geek meet whereby we have the team at Shopify, TPA and engineering, et cetera, the head of CoLabs this particular time, to almost be a panel to run through, you know, some high-level updates on what additions bring, but then an opportunity for our brands to ask questions.

31:46And, you know, they were quite deep. And I'd say 50 % of them were really great challenges to Shopify would already start in beta and gave us deadlines of when certain tools, developments will be rolled out. And it was incredible because I think a lot of the brands that were there that were already considering or going down a route of development actually put the brakes on knowing that Shopify will be launching it. It sounds like an amazing opportunity to cross collaborate and learn from each other and also such a great impactful community that you're building as well. Yeah, to close off the show, what are you looking forward to just scale Piper even more?

32:31Going back to the question you had earlier about, you know, 2025, I think it is an exciting one for us. We're going to be celebrating our 40th year, which is a massive accolade and testament to the founders who are still in the business today. And we've got some fantastic consumer brands that we've invested in. So for me, it's more of the same. We've got some fantastic businesses. We've just been signing off budget. So looking forward to supporting the brands to achieve their goals and being part of their journey. So I think, you know, I would want to invest in at least another two or three businesses.

33:20And I'm really excited to know what they will be because it's a great journey for us, being part of a brand story. Our mission is to create brand legends. And each year that goes past that we are helping to achieve that. It's a little chapter of their kind of book we're super proud to be part of. Yeah, amazing. Well, we look forward to seeing all of the new ways that Piper will grow and scale in the new year. Thank you so much. Lovely. Thank you. That's Leon Hughes, partner at Piper. Shopify Masters is produced by Megan Coyle and Gogo Zoger. Our engineers are Miku Betlam and Nash Shorts. Our managing producer is Benjamin Gottlieb, and I'm your host, Schwang Esther Shan.

34:07Check out our YouTube channel for more interviews. The link is in our episode description, and we'll see you next time.

34:23Thank you.