Sramana Mitra: One of the things that I’d like to point out is we work with people at a very early stage. It’s not always viable to start with your own product. This is where the parallel with the department retail business comes in. If you look at the P&L’s of department stores like Macy’s or Bloomingdale’s, they sell other people’s brands. Then in the basics category, they sell their own brand. I have been in this business, so I know this inside out. This is how a lot of people start – acquiring customers and then building their own brand.
In the Internet, there’s a company that’s doing a good job at this. That’s Nasty Gal. They started as an eBay seller. She was selling sassy vintage clothing. She started doing that on eBay. Now, she’s doing her own brand.
It’s a $100 million business. Now it’s venture-funded.
It didn’t start off as venture-funded. It got to quite a size before they went for venture funding. When you are looking at consumer e-commerce brand opportunities, what trends are you seeing? How are people getting off the ground? Is this dynamic playing out in the deal flow that you are seeing – people that are scaling their brand but starting with multi-store?
Tod Francis: It’s hard to put everything in one bucket. The example that you just provided is a pretty classic example of a lot of consumer businesses. If someone’s doing something they’re passionate about, they happen to hit a goldmine. Then they start expanding. I don’t think she started saying, “I’m going to start a venture-backed business.”
Sramana Mitra: Not at all.
Tod Francis: For us to see plans coming in, we aren’t typically going to see someone saying, “I’m going to start at eBay and then expand.” I just want to point out. I think those are the most authentic origins of great consumer businesses. They build the trust, and they can expand beyond that. I actually feel that is a great way to build a consumer business versus what you might want to call the business plan version.
Consumers want that excellence from their providers. I do think it’s a great path. It may be better. We like it when entrepreneurs say, “We’re going to get this one set of customers and we’re going to nail it. When we nail it, then we get the license to do some other things.” Those tend to be the great authentic brands that build over time. If you look at a lot of the businesses today that are doing well, they started there.
Sramana Mitra: When you look at investment opportunities in this specific area, if they come from the first route where have already been in business and have some level of traction and have some understanding of their customer base and their positioning, that’s a more validated business.
What would be the criteria you would apply to gauge whether that is going to be venture scale or not. The follow-on question is when you are looking at these grand business plans where there isn’t a lot of that traction, what criteria do you apply?
Tod Francis: The first point is, “Why do they need any progress at all? Shouldn’t a venture firm back something at the origin?” The reason we like to see a little bit of progress is multi-fold. One is consumer businesses are very hard to predict. It’s the execution of the business that allows you to see if that business may have a shot. That’s point one.
Second is, it’s inexpensive to get a site up and running. It’s not that challenging and capital-intensive to start moving your business to the customer cycle. We like to see entrepreneurs who are scrappy enough and can pull that off. It might only take a couple of hundred thousand dollars to get there. We like to see that initiative.
Then we like to see what they’ve learned and a full cycle of customer experiences. It doesn’t need to be a $5 million business and it doesn’t need to be 100,000 people. We like to see a customer say, “I have a passion for this category. I have sold it to this set of people. I’ve watched them use it.” That’s what people resonate to, “We had an idea. We put it together. We sourced and sold it. We’ve watched a number of cycles and here’s where we’re going.”
We look for that passion and vision. More metrics are better. In our firm, it’s a combination of the entrepreneur, vision, and progress. There’re going to be tradeoffs. We’ll back people we know or respect with nothing, because we’ve already see them do it before. When we don’t know people, we want to see a little more progress.
As a general rule of thumb, if you’re showing $50,000 to $100,000 in revenue, you’re starting to get in the game of, “We’re doing this.” When you hit a million dollars a month in revenue, you become attractive to the bigger funds. I want to point out that a lot of these companies are getting funded at very early stages based on great vision and execution.