In Brands, Exclusives, Finance, Insight

In my firm we spend the vast majority of our time helping firms pursue change and growth. For young brands, there are few things that create more change and unlock more potential than a successful round of capital raising. Hence, we are often focused on helping our clients raise capital. In this series, I share some observations about the things investors ask our clients, why they ask, and some advice on how to respond.

In Part 1 of this series we discussed how the team itself is the first big subject of inquiry by investors. Their next line of inquiry concerns how your venture will grow.

INVESTORS SEEK GROWTH. For young ventures, the key lever to growth is to first establish yourself as a unique brand offering new and better products or services. If your brand is established but still nascent, you’re very vulnerable until it’s clear to all inside and outside your company what it is you’re actually building and why anyone should care. If your brand is successful and adolescent, growing it up will prove a good challenge. Investors know this, want to invest, and will do so largely on the venture’s merits.

Meanwhile, competitors are piling in. Beauty’s growth rate is a powerful attractant to capital. There are now too many dollars chasing too few good ideas. This has had a baleful effect on valuations, founder hubris, and the general entitlement mentality. Moreover, it has resulted in far too many mediocre brands making it into production. At every price point in beauty there are now a hundred brands from which to choose. So. Why will you survive, then thrive, then scale, then create wealth for your shareholders?

At our firm, two questions in search of growth are posed and answered: What are you really building? How big can it get? The first concerns chiefly how unique and motivating your idea is, the second can be understood as an exercise in finding and correctly applying the levers to growth. In this part, we’ll focus on the first question.

We begin with a framework to help you answer the first question. It groups consumer ventures into innovators, disruptors, and democratizers.

Are you an innovator?

Innovation is a devalued term,  but here I’m referring to doing something new likely to create a lot of consumer value. The most instructive examples come from brands value-innovating in their categories. Brands that innovate deeply to offer their consumers unprecedented value, often creating a new, uncontested category that renders the competition impoverished or irrelevant, and builds a decades-long advantage. The logic of value innovation is fairly simple: stack up all the components of cost in a given category’s value chain (either borne by the brand or the consumer) and eliminate the costs that either don’t delight the consumer or don’t let the brand take big profits. One classic example is IKEA, newer examples are Rent The Runway and Warby Parker.

Sephora is an excellent example of value innovation. In the stack of costs and benefits, Sephora kept only the best parts of the incumbent department store beauty counter model, and they ditched the rest. Vast selection, high velocities, great profitability, infinite news and offers, rich visual displays, hand-selling; in short: mostly costs borne by the brands. They ditched all of the bad costs like the expensive glass cases that made it hard for consumers to try the product, the intimidating sales associates, the bad return policies, and vitally, the cost of all the other floors of the department store which sold low-profit, slow-moving goods like coats, couches, and cookware.

It’s as though Sephora took a good look at Saks Fifth Avenue and as a matter of hygiene simply sliced away all the stuff above, beside, and below the beauty market floor. They then fashioned it into an easily built-out unit that works nearly anywhere. They continued to make the brands pay through the nose for the privilege of selling there, not the consumers, who can try all products, and return them post-purchase as they wish. The insight that people like to interact directly with wares in a friendly market setting is not new—it’s Neolithic. Sephora’s genius was to connect that insight to fast-moving luxury goods.

Sephora illustrates well how deep innovation creates durable advantage. It should inspire you. You don’t need a Sephora-sized innovation to attract capital or to make a difference. But you may want to ask yourselves to what degree your venture is actually innovating your space to create unprecedented consumer value, by removing cost inputs that no longer serve a purpose. Read the HBR article and do the stacking exercise—it will reveal much.

Are you a disruptor?

Disruption is a word now used so promiscuously that you need tongs to handle it. But, there are actual disruptors and they deserve attention because they are instructive.

Where value innovation concerned dismantling and rebuilding a stack of costs and benefits, disruption centers on changing a sequence of activities. Disrupt the traditional chain of events binding consumers and brands and you can create serious wealth.

Perhaps the greatest commercial disruptor of our time is Amazon, itself owing its existence to one of the greatest-ever disruptions in human progress, the internet. Amazon eliminated physical retail in the chain of events surrounding daily commerce. That’s disruption. Other great examples are Airbnb and Uber, both of which use simplifying technology to make efficient markets for huge, fragmented industries.

Glossier is a great example of disruption in beauty. Rather than buying or otherwise fabricating a following on top of a fear- and envy-driven brand (just like everybody else), Glossier crafted a life-affirming beauty brand on top of a well-formed community of devotees. In months. They reversed the normal sequence of activities, welding together the integrity of both the products and the community. This at a time when trying to grow either of those things risks the integrity of both. Glossier’s product line and online following can grow as fast as they like because they’re mutually reinforcing, they’re integral.

Glossier (and Anastasia Beverly Hills, and ColourPop) illustrate the power of disrupting a traditional sequence of activities, either by changing the sequence around, taking parts out, or simply taking advantage of why and how people actually buy things in 2018. These are now big, established brands. Don’t be intimidated. Get the venture team together and start drawing your category’s current consumer path to purchase, or its value chain (from factory to product moment of truth with the consumer to her talking about it online), anything in a causal chain, really. Now draw yours. If they are different even in a small way, then you are disruptive. If they aren’t, ask if they should be. If not, you must look elsewhere for answers.

Are you a democratizer?

It is said that Sephora and Glossier are both democratizing the beauty industry, making beauty accessible to everyone. Perhaps they are, but it has much further to go if history is any guide. Look at apparel’s flight path from the 1980s onward. Growth in mass production and the convergence of casual, sport, and business attire trends, in turn attracting massive capital investment, resulting in eventual oversupply, inevitable deflation, and today, near-total commoditization. I wonder at a world today where Gucci (buy the look for $4,999.00) and H&M (buy the look for $49.99) are the two best-managed apparel brands in the world and which coexist happily. H&M does a nice little side business knocking off Gucci really well, and Gucci doesn’t seem to mind. Is nothing sacred?

I believe beauty is heading that way fast—sped along by behavioral tailwinds that apparel could not have envisioned even a decade ago. Ask yourself: to what degree will our venture hasten the demise of the old model and help usher in the new, help to break down barriers?

Jeff Bezos (may have) once said, “There are two types of companies: those that work hard to charge customers more, and those that work hard to charge customers less. Both approaches can work. We are firmly in the second camp.”

Ask yourself, which is our venture? If it’s neither, that’s not a sin, but you are, I think, volunteering your brand into the middle. Our experience in marketing these last 25 years or so tells me the middle gets crushed. Look at Gucci and H&M: there are two decimal places between them, not one.

Democratizing doesn’t have to binary or strictly large-scale. It can be incremental, simple, starting small. Take the idea that the joy from feeling beautiful is a universal to which everyone should have equal access. That’s simple and also entirely compatible with existing beauty value chains. In this vein, I think of FENTY as an amazing example. Colors for people of all colors. Fantastic.

When we see a business plan or brand plan that democratizes, there’s nearly always a quality of moral rectitude to the idea, the sense that justice is being done, a right is once again restored. The key to becoming a democratizer is to bring emotions like the thrill of discovery, the enjoyment of a fine product, the pride and status of belonging, the gnawing need to get involved and rush of joy upon doing so, in short: love, to many, many more people than could access it before. A brand we work with, Olive + M, is clearly in the democratizer camp, because to use their products (which is to adopt their philosophy) is to feel enlightened belonging, pleasure, safety, and intelligence not before widely available in natural beauty products.

I would note here that simply deflating the price of things by connecting demand directly to supply and cutting out the middleman is not quite the same as democratizing. I considered putting Deciem/The Ordinary into this camp but then realized there was something more to them than that, some sort of devotion to efficacy. If you own equity in a pure deflator brand, sell it as soon as possible to whoever might buy it, because the race to the bottom is very much on and when the market for commodity makeup finally equilibrates, some investors are going to get badly hurt.

To determine whether you’re a democratizing brand, get the team together and segment the current market into a grid or a map. Connect brands and their benefits to their price points and their consumer targets. If your brand can deliver prized benefits to vastly more people via your unique innovation in any or all of the four Ps of marketing (price, product, place, promotion), you are probably a democratizing force.

If you aren’t, then ask yourself why. Because it may not be enough to simply be yet another cool idea for a brand in a category saturated by too many similar ideas.

Are you just a cool idea for a brand?

If your venture doesn’t fit into one of the above categories of innovator, disruptor, democratizer, don’t despair. Perhaps you have sole access to valuable brand intellectual property, a tight relationship with an A-list celebrity, a handsome and charismatic founder with a hypnotic vision. Whatever you have, if you expect institutional investors to write checks, your logic must be inescapable and the buzz irresistible, at least until you are big enough to shrug off real offers to invest and go it alone.

If you don’t know what you’re really building, I would guess you have what I call idea risk. Idea risk precedes (and helps define) execution risk. It’s the risk incurred by not having the best articulation of your special thing, the best plan to make it happen, the best plans to scale it up. Your venture may suffer from some basic design flaws—and there is no greater single determinant of a thing’s quality and fitness than its design. We can help with that.

Read the full series What Investors Ask Our Clients:

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