Welcome to another edition of Snail Mail. This week we have an essay from Will Quist on VC's relationship to consumer brands & some fun crowd-sourced IG marketing consumer brands (in honor of Adam Mosseri, congrats!)
Venture Capital has a seemingly love / hate relationship with consumer brands. On any given day you can probably find as many VCs talking about how much they love investing in the space as you can find talking about how it's not really a "venture" category. Like all great debates, both sides are right. The devil is in the details…
Despite being a polarizing topic in the venture community, the consumer brand space exhibits a lot of the attractive qualities you would look for in a venture opportunity. The total addressable market is massive―$14T spent globally on an annual basis in consumable goods. There has also been a significant amount of exits in the category. Last year, there was nearly $300B in M&A. Similar to the tech sector, the latter number is on an upward trajectory as more and more of the large players minimize in house development and innovation, relying on startups to drive product development.
Unlike the tech sector, consumer companies are rarely 'winner take all.' The upside of this is that it means there are more winners than you may see in other sectors, but it does mean that you need to be more disciplined from a valuation standpoint. You need to make sure that you are able to derive good returns on gaining 1% market share in your category―and great returns at 10%.
The internet has established an unprecedented ability for companies to launch quickly, going direct to customers and bypassing the gatekeepers in traditional retail. This means that startups can launch more quickly and iterate their products―and more quickly demonstrate market demand for their products that can help make more informed decisions. But, going direct-to-consumer online is only half the story. Most of the successful consumer brands that start online quickly realize that they need be 'omni channel' and begin establishing physical footprints.
Generally, great consumer brands are very capital efficient. They seem to raise a few hundred thousand dollars in a pre-seed or angel round to get a product launch. Once demand takes off, they generally raise $2M - 3M to make sure they can buy the inventory they need, add to a few key roles in the team, and make sure they are investing in the proper customer acquisition channels. After less than $4M-$5M raised, they can clearly demonstrate their ability to generate demand from multiple avenues and that they can replicate the product quickly, and at increasing scale. While most go on to raise more, they are very quickly in a position of leverage with investors. Without the need for operating capital, this can generate secondary demand for secondary shares at attractive valuations for the earliest investors to lock in solid returns.
Given the capital efficiency of these businesses (relative to other sectors venture capitalist invest in) and the need to make sure you are disciplined on entry valuations, it seems like the seed stage is the ideal place to deploy venture capital into consumer brands ― and expect venture capital returns.
📱Top Consumer Products you can't get out of your insta feed