Investor Spotlight: Founder Investor Fit, Gross Margins, and the KPIs That Actually Drive Consumer Businesses - Rana Taghdisi Argenio, Palette Ventures

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1:17at the early stages these companies are inherently risky like as a venture investor yes We are buying a share of a company, but we're really actually buying an option on a future outcome because the reality is most of these businesses don't make it to exit. I wish they would take advantage of smaller exits, but most of the time they don't make it to exit. And so in our own portfolio constructions as early stage investors, and again, speaking more generally, you're looking at 15 to 20 companies. you're betting on one or more of those companies returning 10 to 100x to offset the losses from those that don't make it.

1:57So if we've raised for example 50 million dollars and I'm targeting 3x returns again for the simplicity of math I need to return 150 million dollars to my investors. Each of those checks on the smaller size are somewhere two to five million dollars and so you have to really have an outstanding outcome for that math to work.

2:21Hannah Dittman:Hey, everybody, I'm Hannah Dittman, operations and finance host of the Startup CPG podcast. And today I'm joined by Rana Argenio from Palette Ventures. Rana brings a rare full stack perspective to consumer investing, spanning finance, operating roles, founding and now investing. At Palette Ventures, she backs emerging consumer brands with a sharp fundamentals driven lens and a deep academic understanding of the broader consumer ecosystem. She's a big picture thinker with incredibly thoughtful insights, but also someone who's grounded in the details, especially when it comes to what actually makes a business work.

2:57Hannah Dittman:On top of that, she's known for being incredibly generous with her time and bringing in a high level of empathy to the founder journey. In this episode, we unpack key lessons learned across her career, what really matters in diligence, and how to think about founder-investor fit from both sides of the table. We also get into what great founders look like, how to evaluate your gross margin in a meaningful way, and the core KPIs that actually drive strong consumer businesses. If you're building, fundraising, or looking to level up your understanding of what great really looks like in today's market, this one is packed with practical, thoughtful insights.

3:30Hannah Dittman:Enjoy!

3:34Hannah Dittman:Hey, everybody. Welcome back to the Startup CPG Podcast. This is Hannah, And today I am so thrilled to be here with Rana Argenio of Pallet Ventures. Rana, welcome to the show. Hi, thank you for having me. Thank you for being here. I'd love to start out with a brief background of your career and the path that led you to Pallet. Sure, absolutely. So I did my undergraduate at Wharton around the same time that Allbirds, Warby Parker, all of those were brewing. I remember taking the first kind of on-campus consumer surveys, took that in the back of my head. And like any good Wharton student, went on to work in investment banking.

4:10I joined Goldman Sachs within their consumer retail and health care team on the debt side of the business. It's actually where I crossed paths with my partner, Nina, for the first time, who also joined Goldman at that time. And I think given the nature of 2010, it was a lot of restructurings, businesses failing at large, gave me an insight of kind of the pitfalls that consumer businesses need to avoid from the earliest stages. and left Goldman, went to business school, and then took over a legacy manufacturing business where a U.S.-based manufacturer of luxury bed, bath, and table linens, where all the fabrics are woven overseas, everything's made on demand locally in the U.S., and sold through a network of 1 ,200-plus partners, ranging from independent retailers to department stores to hospitality in the interior design trade.

5:00So it was really a crash course on the unsexy side of consumer, wholesale, manufacturing, supply chain. And at the same time, I was keeping an eye on the permeation of kind of like the direct-to-consumer brands as they entered into the home space, right? It was like Casper, Parachute, Brooklyn, and was fascinated by the fact that they were bringing brand awareness to a, no pun intended, sleepy category, but ultimately kind of sitting on top of a vertically integrated supply chain, like I didn't find anything truly direct about the business model. So I ended up launching a pure play direct to consumer brand, again, self-funded and bootstrap taking advantage of that vertically integrated supply chain behind me and was selling kind of the same sheet sets that would retail at$2 ,500 through a Neiman Marcus at a competitive price point to those other brands.

5:52Again, bootstrap, so looking at first order profitability, looking at natural retention, business grew profitably, but iOS 14 happened and kind of brand shifted to betting on lifetime value versus forced order profitability. At that same time, I was immersed into the early stage consumer ecosystem that had developed in New York City, just through natural collaborations and partnerships with other brands, kept hearing kind of frustrations from founders from raising from the tech in general as VCs. And We sometimes refer to them as the tech tourists that came into consumer when direct-to-consumer brands were reporting metrics like SaaS companies, not recognizing that economies of scale doesn't fix everything in a consumer business.

6:35Margins don't infinitely grow. And I don't know, having sat on different sides of the ecosystem, from like Goldman to manufacturing to direct-to-consumer, had this perspective of consumer markets are unique. They're fragmented. There's not one winner takes all. So if you build these businesses capital from like a capital efficient perspective from the onset, there's multiple opportunities for exits at different stages and sizes where it doesn't have to be a billion dollars or a zero. Instead, there's opportunities in between and started angel investing. And throughout this period, my path and Nina's path kept intersecting where she had also launched a venture-backed direct-to-consumer startup.

7:12We were living across the street from one another in New York City, almost looking at distant co-founders and angel investing, and naturally progressed to this path where we decided to launch Palette where we saw this white space in the market.

7:24Hannah Dittman:What a masterclass and kind of the ebbs and flows and the shifts that have happened in the consumer landscape from the investor perspective, especially, I think really well said and sheds a lot of color, I think, too, on the mindset that a lot of consumer investors of today are looking at the market with and the lenses. You know, history is such an interesting thing in any industry and ours is no different. The history of how things have unfolded, I think, matter a lot. But I'd love to learn a little bit more about Palette and get an understanding of your guys' positioning, your mandate, your criteria and stage and focus.

8:01Absolutely. So Palette is, we like to call ourselves an operator-led and operator-backed fund because we were looking to really fill that white space. We had invested as angels. Nina had raised from angels. But ultimately, recognizing that the$10 ,000 to$15 ,000 checks that angels were funding wasn't going to move the financial needle very far, very quickly for most companies. And having a little bit more of that institutional rigor and kind of discipline would benefit those early stage companies. So we're an early stage fund focused on pre-seed through Series A, but sweet spot really being seed stage companies, investing in the behavior shifts that really define where we're spending our time, attention, and dollars.

8:43And particularly, we're excited in those innovations that make the everyday healthier, happier, and more accessible for everyone, whether it be a physical product, a digital solution, or a service. And we look along the supply chain because sometimes it's not the consumer-facing brand that's addressing that pain point, but somewhere along the supply chain that we can really address it at scale. We invest$100 ,000 to$500 ,000 checks. We're really collaborators in rounds. We intentionally want to sit outside the boardroom, leaning in on that founder-to-founder support. We always like to say we're a WhatsApp message away.

9:18A lot of our conversations with our founders happen on WhatsApp at 8 to 10 p.m. when kind of their wheels are turning after business hours have shut down. And yeah, it's leaning with that human capital that we wish that we had around when we were building. And we're supported by a strong team of venture partners and fellow operators that are either investors in the fund or just kind of our friends and peers for the past 10 years for more sector level expertise where it falls outside of our domain of experience.

9:48Hannah Dittman:I love the allyship and the thoughtfulness that you've crafted your positioning and your fund around and the intimate knowledge that you have of what it really takes from a partnership standpoint to add value and to be a good fit for another founder. I think that's a big differentiation. And I think I'm sure a lot of the founders listening are eager and wishing that they have that in their 8 to 10 PM. It's no easy feat, as you know. I'd love to kind of dive into a little bit more about what makes a good partner. When you're thinking about the ideal founder-investor relationship, obviously you're shedding a little color on what the day-to-day is like, but what should founders really be looking for as they're thinking on bringing an investment partner into their business?

10:33Yeah, absolutely. I think I like to think about like bringing on a venture partner is like entering into this like 10 to 12 year marriage where you don't have an option of divorce. And a lot of times you're bringing on those venture partners before you have a fully kind of hashed out product business model, not even like a consistent revenue stream. And I wish more founders viewed their investors as partners, as thought partnerships, and filled their cap table with people who have expertise that could help them along the way, being really an extension of that team. A lot of times, and speaking with founders, again, I bootstrapped, and I'm a big advocate for that because I think there's certain points in time where it makes sense to take venture just given the expectations of our business model overall.

11:23But I think some of the questions that founders should be asking their investors is, you know, getting to know their fund dynamics. What is your AUM? What is the fund size? That's kind of a measure of what their exit expectations are. A fund that has$50 million and is looking for 3 to 5x returns is very different than a fund that has a billion dollars and is looking for that same return profile. How many portfolio companies are in each fund and what is the cadence of raising subsequent funds and how many companies are they basically supporting at any point in time? Is your relationship with kind of an associate or is it with a partner themselves who has the ability to drive decisions through and who's consistently going to be there versus someone who's at the risk of leaving?

12:09Do they have other portfolio companies that are directly or indirectly competitive to you? And where do they have experience in helping those businesses to exit? But I think also I'd push your investors to not only make introductions to successful founders in their portfolio, but also those that fail. Like get the truth on where that investor is when things turn sour. It's easy to be supportive when everything's up and to the right. But a lot of times, investors ghost when a portfolio company isn't performing in the way that they expected. We're always very generous with introductions. Again, I think having been in that founder seat and still wearing that operator hat, we're like, who can we introduce you to?

12:54but I think you should push to see who would you introduce me to in the next 48 hours and get a sense of how they're going to roll up their sieves because I think you should expect more than just a financial check and bringing someone onto your cap table. And then there's the whole dynamic of future fundraising needs and whether there's kind of a follow-on strategy or reserves and getting a clear perspective of what that looks like for funds that have a reserve strategy and can follow on into subsequent rounds, what milestones are they looking for? Because I think there's signaling risk of a fund typically follows on, doesn't follow on in your company.

13:29You want to know why. We at Pallet, we're a small first-time fund. We don't have that follow-on strategy. And so push funds like this in terms of how we support in subsequent fundraising rounds, who would we introduce you to? Who do we think are good follow-on investors? And how do we play a role in supporting you in those future fundraising needs.

13:48Hannah Dittman:Rana, so well said and so thoughtfully articulated and thought through in that answer. I'd love to just double click on a few things you said and drive the so what or the explanation a little further. When you're talking about returning a fund, you're talking about making sure you understand the AUM and things like that. Can you explain for us a little bit more what actually happens in tangible terms or why that matters or what insight that knowing those numbers or knowing those things really gives you as a founder? So at the early stages, these companies are inherently risky. Like as a venture investor, yes, we are buying a share of a company, but we're really actually buying an option on a future outcome because the reality is most of these businesses don't make it to exit.

14:39I wish they would take advantage of smaller exits, but most of the time they don't make it to exit. And so in our own portfolio constructions as early stage investors, and again, speaking more generally, you're looking at 15 to 20 companies. You're betting on one or more of those companies returning 10 to 100x to offset the losses from those that don't make it. So if we raise, for example,$50 million and I'm targeting 3x returns, again, for the simplicity of math, I need to return$150 million to my investors. Each of those checks on the smaller size are somewhere$2 to$5 million. And so you have to really have an outstanding outcome for that math to work.

15:24And so that's what investors are really betting on. Look, there's always other sources of capital to support early stage companies. And that's where like angel networks are really valuable. Family offices that have more patient timelines are really valuable. and if you're profitable, debt financing becomes interesting.

15:41Hannah Dittman:That's super helpful. And I think breaking down that math is really insightful for founders that, you know, the investment side isn't their career. This isn't something they're thinking about or maybe fully understand. And when you put that in practical terms for a founder fundraising, you know, the things that they should be then thinking through is, OK, if you believe that you're looking at company evaluation with the expectation that one of these children needs to be a 10x or I'm going to need to get to a certain dollar amount for you to be able to return your fund or a portion of your fund in a way that makes sense for you.

16:18Hannah Dittman:What does that mean for me and this investment and the goalposts that I need to achieve? And how does that actually work as me as the operator? you're essentially giving a founder a mission in a way. And I think the founder has to feel like, of course, I'm sure they're aligned with that mission because having a giant exit sounds so nice to everyone. But I think the reality of like what that actually takes and what that means for your day-to-day, for your personal life, for your business, for the products that you're gonna need to launch, the channels that you're gonna need to enter, the amount of customers that you're gonna need to acquire.

16:54Hannah Dittman:I think asking all of those really tangible questions to yourself and feeling like you're set up for success, not failure. And it's also a path that you want to run as a founder, too, are all really thoughtful, important things to be thinking about in a fundraise process. And I think you explain that in a really insightful way. Consumer sectors are interesting because there's strategic and financial buyers that have appetite at different stages and sizes, again, as long as businesses have like profitable unit economics and rational capital structures. I think in the past, the issue was that companies raised too much and grew to size where they outgrew that kind of exit universe.

17:36And then on top of it, they were vastly unprofitable and so inherently didn't have any underlying value. There were some acquisitions that happened of these massive companies that were operating unprofitably, but they ultimately ended up being failures because it's hard to steer ship at that scale when it's just been built incorrectly from the onset. And so I think us and as well as a lot of the other early stage consumer investors are taking a different perspective and fund sizes. There's a bunch of smaller fund sizes that are able to take advantage of businesses that can exit at the sub$500 million outcome where it still generates really strong venture returns as a result of kind of less capital going into the business throughout that growth period.

18:20Hannah Dittman:super well said and yes i think like that's what you're alluding to earlier and what many people describe as the tech model you know where it's really revenue driven and it's all about arr and getting the revenue super great and when you're thinking about a d2c brand that you know gets to like 200 300 million plus of revenue but isn't thinking through the long-term impact of what that actually means and what's that revenue worth if you don't have an ebda multiple tied to it or things like that. So really well explained. I'd love to think through some reflections on your career. You've obviously had some great perspective across a broad time in consumer, from the operator side, from the investor side, from the ancillary business side.

19:02Hannah Dittman:What lessons learned or key things do you wish other operators knew that you've kind of gathered into your arsenal over the years? I've taken a number of like pivots in my career, and I think at each unique point, maybe it didn't make sense. But then kind of I look back now and the seat that I'm fortunate to occupy now is like this thread that ties them all together. And so I look back at my time at Goldman and it was this like masterclass in professional discipline, right? In my 20s, I was entering into one of the more rigorous institutions out there and you learn time management and you learn fast and make a mistake only once and carrying yourself at a different level.

19:43Then I went into manufacturing, real, unsexy. It wasn't about polished decks or boardroom, but rather around working capital and resourcefulness and like steering a cruise ship. So it's like heavy, it's slow moving, and it's a completely different animal. And then going into a bootstrap startup, it's really about survival, like learning how to fail fast, iterate under pressure. And those are all takeaways that I think puts me in a position now where I'm like, Like, okay, every step has been this learning opportunity, but also gives me a lot of empathy. And it's this toolkit that you get to lead on at different points in time.

20:20And kind of I put myself back in the founder operator shoes where like, I still have the battle moves from that as anyone who sat in that seat. It's not always an easy ride. But I think I regularly look to founders and I'm like, build a cap table that are extensions of your team. At the same time, go slow, but go fast, right? Like, don't accelerate on things that don't make sense. Get the learnings and then add fuel to the fire at that point. I like to say that isolation is like this enemy of progress. Like, don't operate in a silo. Ask for help early versus explaining failures late. There's more empathy around than you, than you anticipate and that you would assume.

21:01And then, like, leverage those network effects. Like, find where you can learn from others' failures and misses. like bypass those common pitfalls on hiring, fundraising, distribution, supply chain. Like people are always willing to lend their time in their ear to help people that are kind of a little bit behind them because, again, they know what it feels like to have gone through that. And it's a big reason why we structure Palette the way that we did. We found that there's this almost unnecessary Chinese wall that sits between a portfolio and the LP base, whereas that LP base is this huge source of experience and networks that we want to leverage and streamline that relationship and matchmaking process.

21:46Because as a founder, you're busy. You don't necessarily always have time for networking, but can we be that matchmaker through our networks and help make those right introductions for you? So beautifully said.

21:56Hannah Dittman:And I think such impactful words of wisdom in a lot of that and a great reminder on some important pieces of knowledge. I think having more empathy around than you think, I think that's so especially true in CPG. You know, the people who are in CPG aren't necessarily all in here for the money or for the glitz and the glamour, whatever it is. Most people gravitate towards CPG because they have a really strong passion for people and creativity and problem solving and products and impacting people's lives in a positive way. At the end of the day, when you like boil everything down to the widgets, that's what we're all doing.

22:36Hannah Dittman:We're trying to bring people joy or fix a problem or, you know, that's really the driving force behind the industry. And I think that shows up most often in people's personalities that have gravitated towards this field. And you're clearly one of them. But yeah, I think asking for help, I rarely find a door slammed in someone's face in the consumer world. People are so helpful and kind and have a lot of knowledge. It's a very anecdotally learned business in some cases as well, because everything is so bespoke and unique to whatever you're working on. A lot of ways to learn from other people out there, specifically focusing on fundraising.

23:17Hannah Dittman:You know, if you were mentoring me through a fundraising process right now or coaching me through it, what pieces of advice would you have for me? Or where do you feel like founders misstep or miss some information that would be really helpful for them to understand or to approach the process that would drive more success? It's like don't solve for a price, solve for partner. Like I think no one wants to be diluted down, but ultimately you're inviting these investors onto your cap table. It's a relationship. It's a long term. Like if that investor is value add to you, it's worth the additional points of dilution.

23:53In this environment, capital is not as readily available as it once was, and expectations for being able to raise are higher than ever. And so as you go out to raise, don't just think about your short-term six-month needs, but instead solve for runway, solve for 24 to 30 months, like that period between a seed round and a Series A has extended, and add in that additional buffer. It's never the 30-week process that anyone anticipates. And at the same time, you have a full-time job of building and operating your business. And fundraising's a time suck. Like as much as you don't want it to be, it is a distraction from what you're doing.