Why Celebrity Brands Must Survive Without the Celebrity | Daniel Farman, Habitat Partners

0:00I would love to see like an analysis that basically proves that celebrity brands exit on more premium multiples than non-celebrity brands. because I think the fundamental problem in the equation here is like, I understand why someone might like want to pay up in theory for a celebrity brand because obviously the 0 to 1, 1 to 10 story is accelerated and there's inherent distribution built in. But if you're not going to get a premium multiple at exit, I'm not sure why you should be willing to pay a premium multiple at entry. Welcome to the Hot Start VC podcast, the show where we break down how celebrities and creators build billion dollar brands.

0:32In today's episode, I'm joined by Daniel Fairman, investor at Habitat Partners, an early stage venture firm based in New York City. Daniel has already backed several celebrity and creative founded companies, including AO by Molly Bass, Sincerely Yours by Salis Mather, and Elm Biosciences by Martha Stewart. In this episode, we talk about why celebrity and creative founded brands are compelling investment opportunities, why Daniel is still skeptical about many of them, how investors should think about doing due diligence on these kind of companies, and more. So without further ado, let's get into the conversation.

1:03Daniel, I'm super excited to have you on the show. Thank you so much for being here. Yeah, thanks for inviting me. Excited to chat. All right. So before we talk about investing in celebrity and creative founder brands, I would love to learn more about your background and how you eventually became a venture capitalist. Absolutely. So I started my career really as a consumer enthusiast. I was a college tennis player and was really just passionate about the different products that I was using on a daily basis to try to optimize my performance. And that led to a passion for the consumer kind of products space more broadly.

1:35So I actually spent the first five years of my career operating at three of the biggest consumer product companies in the world. PepsiCo really with a focus on finance, then moved over to Danone, where I was really managing a water P &L for a business called Evian that most people have probably heard of. And then in my last operating role, I was at AB InBev, the beer giant, really with a pretty cross-functional focus. I was working on our global brand portfolio, which consisted of Budweiser, Corona, Stella, McLeod Ultra, really concept to commercialization across kind of global brand portfolio from an innovation perspective.

2:09And I was also doing a lot of brand strategy work and just kind of reached a point where, you know, it wasn't that I was like super sick of being in big CPG, but just wanted to really go after the startup ecosystem in some capacity. It's really novel ways of bringing products to market and scaling them that are pretty disruptive to the traditional CPG model and wanted to play some kind of role in that kind of business model ecosystem. and had the opportunity to work for a solo GP named Kiva Dickinson, who is really also dedicated to investing in consumer products with a thesis surrounding health and wellness for about a year and a half while I was applying for my MBA.

2:41And that was a great experience. Led an investment into a coffee business called Javi, as well as several others. And then from there, went into an MBA at Stanford, where I was doubling down really on the venture world, whether that was through education, but also just through like the network that kind of came with being in Silicon Valley. continued to really like focus on consumer but also really started to think more deeply about b2b software just being in the valley and there's so much tech excitement and enthusiasm both on campus and at all these bc funds on sandhill road at that time i was also leading my own spvs my own angel investments directly into startups both on the consumer and b2b software side and yeah then like coming out of business school was definitely interested in potentially joining a fund that was doing both consumer and b2b software given that i'd kind of straddled both sides of the coin And definitely didn't want to be a pure tech investor, like always have loved CPG and really found a home at Habitat Partners a couple of years back.

3:31Given our portfolio construction is very much a nice split between consumer products and technology. Yeah, that's that's kind of my journey into venture, I guess I would say. Yeah, I love that. And there's definitely a lot of a lot of funds out there that actually have that split focus. So it's nice that you're able to find a nice home for yourself. So can you tell me more about Habitat Partners, the fund that you're working for? Yeah, absolutely. Very unique kind of inception story. I'm actually today in Red Antler's office here in West Village, New York. But yeah, Red Antler is this creative agency that was founded in 07, really with the goal of being the leading creative agency for the startup ecosystem.

4:06For those who are familiar with the agency model, for the most part, agencies were working with enterprise-scale businesses because obviously they could charge huge seven-figure retainers annually. And it was also a very stable client-based service, given most enterprise companies continue to exist perpetually. But JB and Emily, who co-founded Red Antler, had this vision of really doubling down on the startup ecosystem, even though it was a little bit riskier and a harder model to make work. And in many cases, you know, the early days, they would take equity for in lieu of services if the startup couldn't afford like a pure cash payment kind of solution.

4:39They worked their first client was Behance, which I think went on to exit. But, you know, fast forward, they were working with Chime, Casper, Pros, Hinge, Allbirds, et cetera, et cetera. And so just kind of hit it out of the park in terms of some of the early clients that they serviced and kind of help brand, for better words. And so then fast forward, it became interesting for Red Antler to start becoming a little bit more deliberate in terms of the way they were taking balance sheet positions into some of these startups. Again, it was really equity for services at inception. Over time, began writing 50 to 100K super angel checks out of Red Antler into predominantly at first Red Antler clients.

5:13But over time, I think we had built such connectivity with VCs who were sending us businesses to potentially run on the Red Antler side that when they heard we were investing, they also just wanted us to be on the cap table of many of their companies, whether or not the company ended up being a Red Antler client or not. And this 50 to 100K Super Angel strategy ran from like 2019 to 2021. A few of the notable investments that my partners did, one was Ramp, which is an expense management software that I think most people know, branded the business and did that one quite early. And another one was Archer Aviation, which is an eBitol business that went public through a SPAC several years back.

5:50But yeah, fast forward, goal is always to spin out a permanent pool of capital with outside LPs, leveraging the equity for services and super angel track record that we had developed over time. And in 2021, while I was actually just entering business school at the time, Blake, JB and Emily spun out Habitat Partners, which is our debut fund, which is a$31 million vehicle really dedicated to investing in the consumer and B2B software ecosystems. Happy to break down kind of our strategy if that's helpful. We're definitely pre-seed seed investors. I would say 75 % seed, 25 % pre-seed. We focus kind of on three different strategies under one roof is what I like to say.

6:27We invest in consumer products so that predominantly has been food, beauty, personal care. We also will look at beverage, but we've kind of tried to focus on high gross margin categories inherently. That's just our style. And all of us have extensive operating experience in the CPG world as both operators and investors. We invest in B2B software that often ties to consumer brands. Usually that is marketing tech, design tech, retail tech, commerce tech, insights tech, or supply chain tech in some capacities. So a lot of times we can, through the Red Antler pipeline of historical and current clients, as well as the Habitat portfolio, just fuel tons of business development for these kind of companies that are looking to sell to consumer brands, ultimately, or consumer enterprises.

7:05And so that's the second kind of focus area. And then we have a third area that we refer to as frontier tech, which really is synonymous with opportunistic technology, in which case we may meet a founder that we're candidly just obsessed with and believe in. And perhaps that founder came through Red Antler and we want to partner with them on the Habitat side. And while we may not have perfect, you know, domain expertise, there's some way that we think we can be helpful to the company. And so we also will take like an opportunistic bet in a climate tech company or robotics company or a fintech company that we have some kind of special connectivity to.

7:38So we've kind of built a portfolio now of 26 technology companies that sit between the B2B software and opportunistic tech side, and then about 20 consumer brand investments on the CPG side. Yeah, very interesting. What do you think it takes to be successful as a venture firm in today's competitive ecosystem? Yeah, it's a great question. Look, I think there's kind of like three elements of VC and they're all important. And I think, in our opinion, one is the most important, but I'll kind of take you through them. So I think obviously, number one is picking. So you have to pick the right companies.

8:07I think picking comes down to talent and experience. And so that really comes down to team building. And there's not as many, I guess, exogenous or, you know, co-founding variables that you can really control for there. Like that comes down to the human who's making the decision to invest or not. I think what you can, the second variable, what I would call is access. I think access, especially if you're a pre-seed seed investor, is the most important variable by far. And there's like a healthy debate between access versus picking and what matters more. I think that ultimately, unless you're some historic firm like Bessemer or A16 or General Couch, Sequoia that has access to everything just by nature of your brand.

8:43The only way to win is like a pre-seed seed investor in technology and even CPG, right, is to build your own unique access point where you're seeing stuff that most nascent firms would never be able to see because they just haven't been in the market long enough to have the brand recognition. And so that's really the reason we started Habitat Partners, because we feel we genuinely have uniquely positioned, sophisticated access through the ecosystem that we've fueled on the Red Antler side for so many years. And so I'm a big believer that access is the most important thing. If you're not accessing the best things, even if you're a great picker, it doesn't matter.

9:14And so, yeah, it's all about building a unique vantage point to get unique access. And I think we do it in a really unique way. And then, yeah, I think the third variable that matters, but that is, I think, becoming more and more commoditized by a lot of funds is value add. Can you bring a unique vantage point to a cap table that most other investors can't? And I think, you know, on the Red Antler side, we're obviously designing creative experts. So we can definitely weigh in on branding decision, creative directions, consumer insight strategy and all of that stuff. What I think is a unique position to be in.

9:40Yet at the same time, I'm the least creative person in the world. I could barely draw a stick figure. That's what I say to JB and Emily and Blake. And so a lot of my work day to day is more surrounding cash flow planning, fundraising, P &L management, interest to retailers and buyers and customers on the tech side. And so we try to help in a multitude of ways, but I do think we bring a unique kind of vantage point given our inception out of a creative agency to a gap table. So those are the three variables to me that matter that everyone should be thinking about. And I think access being most important value add being also a close second.

10:10And then third, obviously, you need great pickers. But, you know, our goal is always just to has been to just build a unique access point from a vantage perspective. Yeah, I love that. So let's talk about like celebrity and creative founder brands. Like I was looking back to our initial exchange on LinkedIn, which was almost three years ago. And back then, the first message was that you said, like, I'm quite skeptical about celebrity and creative founded brands. And yet in recent months, you have made several investments. So you have invested in A.L. by Molly Bash. You've invested in Sincerely Yours Specialist Matter.

10:39You've invested in Elm Biosciences by Martha Stewart. So is there something that changed your perspective or are you still skeptical about the category in general? I love your question. And I love that you remember that conversation. It just like shows how thoughtful and, you know, how good of a memory you have. Look, like I'm still skeptical of celebrity brands, so I wouldn't say anything has changed. I think the way we approach consumer investing specifically is we're looking for great founders who are solving what we believe is a true consumer need in a white space with the unit economics to scale long term.

11:11I mean, with all three of those investments, and we can obviously talk more about those in detail as we go on here. But, you know, in all three cases, we felt like, you know, product was truly innovative and high quality. There was actually a gap in the market that we felt like each founder and innovator was was solving. And I think like the celebrity angle was kind of the cherry on top for us. Like, I always try to I know you have I think we're going to talk about this later. Like, how do I decide whether to invest in a celebrity brand or not? I really try to picture the celebrity dying tomorrow as dark as that sounds.

11:39And like, what would the brand cease to exist and scale effectively if that celebrity didn't exist? And in all three cases for these investment decisions, we were just blatantly excited about the core fundamentals surrounding the business that matters so much. And, you know, then on top of that, we did feel like all three creators slash celebrities were quite authentic fit to amplify organic awareness in the early days. And so we ended up pulling the trigger. But I wouldn't necessarily say we went out a year ago and we're like, hey, we want to invest in celebrity brands. Let's hit these three and do it.

12:08It was more like, hey, we think the condiment space is really interesting. It's a high margin category within food. Oh, you know, it's innovating in this mayonnaise part of the shelf that's seen very little historical innovation. We love the founder. And then, of course, Molly is a huge piece of it as well. But that's more of the thought process that have kind of gone into each of these investments before really considering the celebrity involvement. Yeah, that's also what I always say. like celebrity is just one of the ingredients the best celebrity brands are never celebrity first they're always product first or whatsoever and i kind of see a change in the industry right now it's like we're kind of moving towards a second wave of celebrity and creative founder brands whereas the first wave i often refer to like another celebrity tequila brand another celebrity skincare brand apparel company but oftentimes it's just a white labeled product and they slap their name on it and now we're moving into that second wave where they're launching inoffensive products and services that solve actual customer problems and where they also have that serve that that specific advantage around product ip science or even technology um so i think that's where kind of where we're moving towards so yeah i'll be very curious to hear like can you walk me through those portfolio companies very briefly and mention what made you so excited about them yeah i'll walk you through each i think another just reaction to your comment because i thought it was a great comment is like i think in a way because these celebrities are accelerating obviously initial traction and you know you can launch on d2c and get to like a couple million pretty quickly because of the celebrity awareness and following i think we're also seeing this interesting pattern where i'm seeing more technology investors come into cpg because these d2c celebrity brands start to look a little bit more like software companies in terms of their initial growth and like their subscriber build and all of that stuff and that's like the other thing that makes me skeptical and makes me feel like it's a bit of a dangerous play like obviously tech investors want to see like rapid returns rapid growth they're more willing to see burn um and i think for like a while they stayed on the sidelines on the cpg side i think there's been some great deal to see brands that have no celebrity involvement that have enticed tech investors come back in but especially i'm seeing like tech investors getting really excited about celebrity rounds because that initial traction reminds them of like some of the hyperscale stuff that they see with ai companies and and some of those comparables.

14:20So yeah, that's just like one random thought I was having. But yeah, I'll tell you. Maybe to respond to that, I also see the other way around. So I see actually that traditionally, a lot of these celebrities and creators, they were launching CPG companies, but nowadays they're also launching tech companies. So like, yeah, there's also kind of a shift going on that like the last two investments that we have made at Hotstar VC have actually been at tech companies founded by creators. Totally. And they have such a good lens on like what really works to support their creator UK system and from a technology perspective.

14:48So in terms of building something that was founder market fit on the tech side, I totally hear you. Yeah, so to talk you through the three we had just mentioned, we had done kind of a deep dive on just like the broader food ecosystem and kind of sectors that we're attracted to versus not attracted to. And as I mentioned earlier in our conversation, I think some investors look at huge categories and are a bit more ignorant on like where gross margin is in the early days and kind of hope that gross margin will kind of figure itself out. We're kind of the opposite. Like we want to believe that the gross margin in place from day one is like pretty close to what it's going to be at scale, even if there are economies of scale to be achieved.

15:24And we obviously also don't believe that celebrities can solve gross margin fundamental issues. So in the case of like condiments, spices, sauces, it tends to be a pretty high margin category. So it's just something we were attracted to off the bat. There's also some pretty solid exit history we had seen with Cholula. Dukes is a mayonnaise company that was bought for a billion dollars recently. So there's some good comps. And then in terms of just like Sir Kensington's another good one. And then in terms of just like innovation within the space, like we had seen a lot of innovation, like Asian sauces and hot sauces, but far less innovation, like traditional condiments like mayonnaise, ketchup and all of that.

15:57So initially we had done kind of some background research and felt like there was an opportunity in this part of like the shelf within the condiment set. And we loved that it was high margin. And then we like, you know, we met David and honestly, we're just blown away by his founder profile. Tremendous experience at Whole Foods to start his career, then was really leading ops at City Capital. and so yeah we really got it comfortable with David's ability to lead the business and then yeah like we heard Molly was involved we had been following Molly personally by nature of just loving what she was doing with food culture and thought that she could be a really organic fit and the cool thing about AO is she was very very involved in the formulations like she was leading the development of the formulations flavor testing all that stuff and so she has the credibility to really like create an actual product herself given her culinary background so putting all those things together like we are really excited about the opportunity to invest and yeah we're fortunate to to be involved about a year and a half ago and in the business has been doing really well is off to a great start nationally and distributed in whole foods it's a tough category in that mayonnaise is just low velocity inherently like people aren't buying three or four units of this per week like it's kind of a one unit per store per week kind of category historically i think the exciting thing we've seen with ao is they're really taking the velocities in the category to a new level because of the unique flavor innovation the ability to use this on so many different products throughout your day whether it be like a salad or dip for chicken or protein beyond obviously just like sandwiches even though that's like the core use case and so yeah that's i'd say that's kind of the background on ao happy to pause there if there's any follow-ups or i can talk a little more about sincerely and elm if that makes sense as well yeah we'd love to tap into sincerely and elm yeah so sincerely it was a similar situation we felt like the gen alpha kind of skincare set was super untapped within Sephora specifically we had even talked to some Sephora personnel who were talking about you know these tweens coming into the store and asking for something that was really safe for their like skin ph and in many cases the merchandisers like didn't know where to point um these teens and thus they were kind of buying products like Drunk Elephant but really like anything that they found was aspirational even if it wasn't truly safe and clean for their skin so we felt like there was this big gap in Gen Alpha skincare off the bat uh and so we were yeah we were really on the hunt and this was i i'd say this is a little different than ao in that ao was like the one of the first condiments that we really went deep on got excited about like we talked to a lot like there were two to three other general for skincare brands that we knew were going to launch within the next year that we talked to and ultimately um again it came down to the founder like we think julia is like amazing she came from sweaty betty and tula both companies that exited she has just an incredible cross-functional operating capacity.

18:35And so she was just a huge part of our decision. We had a lot of confidence in her. And then, yeah, like we, you know, we did a little more work on Gen Alpha, saw how much of a disposable income they make up in terms of just like driving household purchasing and decisions, but as our parents are ultimately heavily influenced by their Gen Alpha kids in terms of how they spend their money. And yeah, putting all of that together alongside an exclusive already in place with Sephora, we are really excited about backing the business and we're fortunate to do so alongside some great investors in Strand Equity.

19:05And yeah, that's kind of the backstory there. I mean, I think it's a huge white space still to this day and there'll be tons more innovation, but we think this is one of the best kind of first movers that we've seen really dedicated to serving Gen Alpha in a safe, aspirational, and authentic way. Were you at the launch event at the American Dream Mall? I did not go. I don't know if I would have fit in well there, honestly, even though I love to see the PR around it because it's obviously an incredible launch event. And then, yeah, like I think the other thing I didn't really talk about was Salish, which is the point of this podcast a little bit.

19:34But yeah, like the engagement that we saw with like Salish's accounts from a social perspective were off the charts. And, you know, I think we've seen celebrity brands launch, you know, they probably get up to 20 ,000, 30 ,000 followers pretty quick. I think they've crossed about 250 ,000 followers on Instagram, which to us is just insane. And it's not surprising because we just did some analysis on these engagement metrics before really deciding on the investment. And Salish and Jordan are off the charts. So again, I think they're a great authentic fit for the brand. Their engagement levels are really high, but I do think this lives far beyond them in the long term and that there's just this huge need for a Gen Alpha solution really recommended by a dermatologist facing a formulator.

20:14And I think they hit all the boxes and yeah, the rest is history on that one so far. Yeah, I love that. And then let's talk about the last one, Elm. Yep. So in a similar vein, we've also felt like for, you know, people who are in the 40 plus age group that there was a bit of a gap on like a really high quality, you know, driven anti-aging solution serum really on that generation of people. And, you know, I wouldn't necessarily say that we believe this product that we've invested in has to only serve 40 plus as a whole anti-aging is just a phenomenon, a mega trend. I'm focused on anti-aging people who are younger and older than me are focused on anti-aging.

20:49And honestly, we didn't have really anything in our portfolio that was focused on capturing this kind of anti-aging consumer trend. Dobble, who we met before we even really knew Martha was involved, the dermatologist who helped formulate Rode with Haley Bieber, just really, truly like one of the greatest scientists like I've ever met. He really is just unbelievable about thinking about all the different actives that are appropriate for a product and bringing it to life. And, you know, he had proven that out with like the formulation quality with Rode. And, you know, when we heard that he was the formulator for this business and was going to be kind of the CMO co-founder, we got really excited because of his involvement as a serial entrepreneur and just a tremendous formulator.

21:27And then of course, like, yes, we are excited to hear that Martha was involved. We believe that her credibility amongst like the older generation is really high. Obviously her brand awareness is, you know, amongst that generation, almost like a hundred percent. And so, yeah. And then I think, you know, the other thing is, um, from a team perspective, we had helped them place Natalie Sperling, who's been an amazing addition to the team. Who's really running the business day to day. She's awesome, extremely communicative and organized and cross-functionally capable. So yeah, putting all those things together, we also decided to back Elm.

21:56And yeah, I mean, it's cool. I feel like we've covered Gen Alpha, but then also like the 40 plus generation with both of these investments. And I feel like so much innovation has been focused on millennials and has been a bit, you know, misallocated in terms of time, effort and investment to Gen Alpha and the 40 plus group. And so, yeah, those were two white spaces that we're excited to now place bets in. Yeah, it was funny because when Elm launched, I created like a LinkedIn post about it. And then actually the team of Martha Stewart reached out and was like, hey, we absolutely love this post.

22:27Martha loves this post. Can you actually publish it on your Instagram so I can actually repost it? And I was like, wow, that's so funny that she's actually reading these posts and wants to learn about it. I loved it. It's funny. Like I was like thinking to myself, I was like, all right, if Scott is posting about like our investments, like he must actually believe that it's a good idea. Because, you know, you could post like, you know, there's 10 of these being launched a week. So I was like, oh, he posted on him. He posted Sincerely Yours. Like he actually believes in these companies as well. So that was a good little validation proof point.

22:58But yeah, I love what you said, too, right? Like there's so much disposable income and wealth amongst the 40 plus generation, you know, boomers, etc. And, you know, their ability to pay up for a high priced kind of serum that is real like formulation IP and like legitimate antioxidant innovation is pretty incredibly strong. And so I think it's nice that from a volume perspective, this isn't the kind of it's kind of like a fragrance in a way. You don't have to sell millions of units to build a big business. You're selling a premium, super high quality product and to an age group that has a pretty high willingness to pay for anti-aging products.

23:32So and I thought that was something you pointed out really nicely in your post as opposed to kind of prestige price millennial focus products that are between 30 to 50 dollars that do require you to move a ton of volume and distribution. So like in European, what do you think make these celebrity and creator founder brands so unique? And what do you think can the celebrity or creator co-founder bring to the table that makes it an interesting investment proposition? I'll try to I think there's a few obvious things that I'll talk about. And I think a lot of your guests on this podcast will probably echo this.

24:00But, you know, obviously, the hardest thing to do in the earliest stages of a brand's life cycle is drive trial and really drive brand awareness, especially when you're extremely limited on capital and budgets and all that stuff. And so, you know, the inherent unlock that a celebrity or creator brings to an early stage business like this is just it's a jumpstart in brand awareness that kind of drives initial trial and velocities on shelf or through D2C. And as a result of not having to pay exorbitant amounts of capital to achieve the awareness and trial and velocity in the early day that you need to stay on shelf or, you know, to have an attractive D2C business, you're kind of seeing a drop in, you know, from a D2C perspective, customer acquisition costs compared to a traditional business.

24:41And if you want to just think about it holistically, a drop in what's called marketing efficiency ratio. So actually an increase, I should say, marketing efficiency ratio, which really defined as revenue divided by marketing spend. You know, if you look at Rhodes P &L, which was just, I think, released in the last earnings after acquisition, they had like a 9x MER ratio, right? For every dollar marketing, they're generating$9, which is just insane, right? Like they're barely having to really spend on paid media compared to how much revenue they're generating. I'd say that's like the inherent obvious advantage that having these celebrities and influencers brings.

25:12I think like a few of the less obvious things and I think one thing that people like some of some people starting celebrity brands don't even realize this. And I think it's a huge thing, but there's a network effects amongst influencers who know other influencers. I think that's a huge thing. Such a big part of a launch plan is influencer gifting, especially if you're a D2C brand. I mean, omni-channel brand as well. The cost of doing this influencer gifting strategy is very expensive. It's hard. You often have to use a third party to manage the influencers, to send the packages, to then get the content, repost the content, et cetera, et cetera.