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Published April 11, 2018
Published April 11, 2018

In this part of our series, we gathered questions from the brands making the finalists list at the upcoming Beauty & Money Summit in Los Angeles for them to pose (anonymously) to a few of the world’s best consumer brand investors.

Tengram Capital Partners is a private equity firm formed to invest in companies in the branded consumer products and retail space. Richard Gersten is a Partner at Tengram, a proven operator, and a visionary investor in beauty.

Prelude Growth Partners is a private equity firm focused on providing growth capital and value-added operating support to high-potential, fast-growing consumer brands. The firm was founded by Neda Daneshzadeh and Alicia Sontag, who bring a combined 40 years of complementary expertise in the consumer industry, having previously served as investors and senior operators at world-class firms.

At Lapidarius we focus on growth and change. Raising capital supports both. Whatever the arrangement, the relationship between brand and investor group should function as a true partnership. Good partnerships are founded on synergy, aligned interests, shared mindsets, and transparency. In my experience discussions between young brands and seasoned investors are often fraught—needlessly so. This forum was intended to assuage some of the anxiety prior to the Beauty & Money Summit and make for better discussions between brand and investor. We are grateful to Rich, Neda, and Alicia for lending their vast expertise and their great generosity of spirit to us.


What are the most important criteria when making an investment in a brand that’s reached $5MM+ in revenue?

Tengram: We would ask first about the quality of the products. Is there unique, high-quality product being made and sold? The authenticity and uniqueness of the brand are also critical factors. Then, what are the most viable ways to grow the business? Chief among them should be distribution gains and line extension opportunities. What is the quality of the revenues so far, are they high-margin revenues? Have you been successful selling via your own DTC and/or via a marquee retailer such as Sephora or Ulta, at a non-promotional price? If, by contrast, a big part of your revenues comes from selling sample boxes at deep discounts, for example, that’s a sign that your revenues may not be what they seem at face value. Those are the big criteria.

Prelude: We are looking for passionate founders with authentic stories, compelling brands that have proven to resonate with consumers, and high-quality, differentiated products. We are here to partner with entrepreneurs that are disrupting their categories and creating brands that modern consumers want and love.

How do those criteria differ from evaluating an early-stage brand, i.e., less than $2MM in revenue?

Prelude: No difference than above—just harder to evaluate as it’s so early.

Other than revenue, what are the big factors that increase brand value in your eyes?

Prelude: Factors that increase a brand’s value are (a) strong productivity at core retailers and/or via DTC, and (b) a strong connection with consumers—demonstrating consumer engagement and loyalty.

Tengram: The uniqueness of a brand identity—from a positioning perspective, is there something that is unique and will stand out? We like founder stories that are interesting, too (of which more below).

How do you factor competition into a brand’s valuation?

Tengram: We really don’t, because the reality is that beauty is an intensely competitive industry with virtually no barriers to entry. Presence or absence of competition today doesn’t really detract or enhance value. Value is very company-specific, and contained within the brand.

Prelude: The beauty industry is, and has always been, extremely competitive. Each day, it gets more and more competitive. In this context, it is critical for a brand to have a distinctive value proposition to consumers, as well as a passionate founder focused on delivering that value proposition with excellence. We believe that our capabilities, eco-system, and network offer partner brands an extraordinary competitive edge relative to other brands in the market—and will enable founders to realize their vision and brands to achieve their full potential.

How important is secured distribution when defining brand valuation?

Prelude: Secured distribution in one core, well-regarded retailer is important—whether mass or prestige. The very significant exception to this, of course, is brands that are selling directly to consumers. We have very broad and deep connections with all key prestige and mass retailers—which can benefit our partner brands—as they seek to thoughtfully grow distribution in a high-quality way.

Tengram: If a brand has already secured placement at a major retailer such as Sephora with a purchase order, for example, it will be quite important to our evaluation, because it’s tangible. Anything that is more tangible about your business is easier for us to value and underwrite.

To what extent does IP protection (particularly trademark and patents) influence brand valuation? When does this IP start to become really valuable?

Tengram: You don’t see patents often in beauty. It’s not critical usually. Trademark is critical. Trademark (and brand) is the asset you’re buying. Brands early on often make mistakes with registering trademarks worldwide and protecting them. You have to secure trademark protection early on. Later, when you start succeeding is when the trademark squatters will appear, and they can make things difficult. Be thorough and secure it in every major country. The presence of a trademark legal fight or a lack of clarity may deter investment.

Prelude: Trademark is a base protection that any brand should have secured—in the US market at a minimum. Patents are not required for success. That said, a patent can become a significant value creation lever—if it helps deliver a uniquely distinctive value proposition to consumers.

How important are factors such as exclusivity agreements and proprietary formulations? At what point should the company invest in these?

Prelude: Proprietary formulations are critical. A brand should, at the beginning, own their own formulations or have a clear path to owning their own formulations—as well as the ability to produce at the manufacturer of their choice.

Tengram: In our experience, owning your formulas is not as common as you might think. It’s very important in skincare, less so in color. In color, your shades and molds are important to make exclusive. Those are negotiations you have with your manufacturing partners. In general, almost anything can be knocked off, and will be. What remains protected is your intellectual property as discussed above.


What do you look for in terms of strategy and planning when evaluating a company?

Tengram: The viability and feasibility of the brand strategy. For us to all make money together, we need to multiply sales by a factor. That requires a clear, viable path to growth. And given the aggressive growth plan, is it feasible? Are the growth drivers realistic and tangible? Do you have the infrastructure to get it done: the people, resources, information systems, and infrastructure? For example, most businesses we invest in have only a basic system for finance; most of the time we will need to upgrade them to a real ERP such as NetSuite, which is time and resource intensive at first, but recoups quickly. As partners we are here to help build that infrastructure and we have an unusual depth of experience in doing so.

Prelude: Some brands have a detailed strategy from day one, and some do not. That is OK. At Prelude, we partner with brands to create a 5-year strategy. Where does the brand want to be in 5 years—what will it stand for, who will it serve, how big will it be? Based on that vision, we can create a strategy as well as the 3-5 key value creation levers that will be needed to get the brand from here to there.

What are the minimum operating profits, EBITDA, and gross margins that companies should try to achieve before seeking institutional investment?

Prelude: Gross profit margins should be healthy. The exact numbers typically vary by category (cosmetics vs skincare vs fragrance) and by price point (prestige vs mass). But, broadly speaking, founders should be focused on delivering products that consumers will love as well as healthy gross profit margins for the business.

Tengram: For us, it’s much more a question of revenue scale, but margins matter, too. When a brand is still small scale, even high-quality revenues may not have profits. We are less concerned about present operating profit than the potential for it.

The gross margin number tells us whether when scaled the profit will flow through, cover all investments and selling costs, and still make you money. The margin dynamics vary by size and retail channel, but gross margin is key. As an experienced investor we have a good sense for what the product gross margin should be. If it’s wrong, we need to build a plan to fix it or pass altogether.

Here’s an example: Let’s say you’re a brand that grew up as a home-shopping or DTC-only offering. One of your success factors was probably the elimination of the middleman and/or the reduction of selling costs. So, you make money by delivering value to the consumer. But then, on analysis, there may not be enough margin to support a viable wholesale growth strategy, for example at Sephora, where selling and marketing costs can be significant and eat into your wholesale margin. Problem.

Up front, you need to have a strong grip on your product COGS as a percentage of retail selling price. Because that will tell you (and us) whether there is room in the price/value of your brand to succeed at retail. A very tough test to perform is whether you can still make money when selling via an international distributor deal—where wholesale off retail can be quite significant.

A 3-million-dollar brand may not have good operating margins because of scale. But if you figure out the optimal gross margin, and then adjust pricing so that you are viable selling wholesale into promotional retail, that’s much better than the alternative of trying to fix it later. Start early with the appropriate product cost vs retail, and you’ll be much more immune to bad operating margins later on.

How do you evaluate the long-term potential of a brand?

Tengram: We don’t. We can only evaluate the investment hypothesis and the access to capital and talent going forward. If the hypothesis we went in on was true, if you’re well-capitalized, you should succeed. If the ingoing hypothesis isn’t viable, you’ll find out pretty quickly. If an investment idea hits all the criteria, it should have the ingredients for long-term value.

Prelude: We invest behind brands that we believe will be the iconic, global powerhouse brands of tomorrow. We seek to understand consumer perceptions of the brand—do they like it, or do they love it? Will they recommend their friends to use it? Ultimately, the brands that resonate with consumers the most deeply are the ones that have the most potential to succeed.

How do you price risk into the valuation or the investment terms? What are some big strategic risk factors that aren’t obvious that you examine?

Prelude: We are always looking ahead to the future. Beauty today isn’t the same as beauty six months ago. And beauty six months from now—much less 3-5 years from now—will not be the same as today. A crucial aspect of what Prelude offers is supporting brands in staying true to their brand DNA, making the right strategic decisions, and focusing on execution. In the end, this is the best risk mitigation strategy for any brand.

Tengram: Most of the risk factors are obvious. We price it all in. Risks such as no team in place (and we have to take the risk to build the team). No infrastructure (and we have to build it, using time and money). Losses (which we therefore have to fund, so that every dollar we have to invest to cover the loss is an additional investment dollar on the trade). Reliance of the brand on a single personality or founder. Quality of trademarks. Retail trends that are soft or declining, where topline and sell-through aren’t where you want them to be (and thus will require fixing.) COGS issues as discussed above.

Every brand is different. People will often ask us what a beauty brand trades for, what multiple. There’s no such thing as what a beauty brand trades for! The valuation is a combination of all the factors that make up your business. Just because there is a transaction track record of brands trading for 3X to 4X sales, doesn’t mean yours will. Your brand may trade for more. Or less. It depends.


Do you look for a company where you can replace or reorganize the staff, or one that already has the key people in the right roles?

Tengram: All of the above—there’s no cookie-cutter approach. With Revive, for example, we had to build an entire company, including the team. In the case of This Works, the team was incredibly high-quality already, and thus we didn’t need to make changes. A high-quality team in place is always better. It will of course drive interest levels and valuation considerations upwards. At Tengram we have a track record of attracting and recruiting very experienced and talented people into small brands and making them bigger and more successful. We are going to keep doing that.

Prelude: We are looking for passionate founders that are disrupting their categories and creating brands that modern consumers want and love. We would partner with the founder to identify where their brand needs additional support, and then help them attract and retain that support. A+ founders need to be surrounded by A+ teams, so that they can focus their energies on what they do best.

How much of an advantage or disadvantage is the presence of a strong founder on the team?

Prelude: It is a very strong advantage.

Tengram: Consumers and retailers embrace interesting founder stories. But if a founder isn’t open to change, that may create problems. They need to be open to changing their role, building a strong team around them, doing what they’re great at and letting others take responsibility and succeed. Openness to change is really important. Certain founders are not open to change, and it will impact investment.

How commonly will you replace the CEO as part of the deal?

Tengram: Depends on what’s there on day one. If there’s no professional CEO in place we have to look at putting one in place. Getting the CEO right is critical to the outcome.

Prelude: This is something that would be a brand-by-brand decision, in partnership with the founder. Some founders want to be the CEOs themselves, some founders want to bring in a strong CEO to support them, and some founders have someone they rely on today as a CEO—but that person needs a stronger leadership team (marketing, finance, operations) underneath them.

How do you want the team to view the equity investor?

Prelude: We hope they view their investment partner as a truly value-added partner with deep category experience, a partner who has real-world operating experience and a broad network including world-class operating advisors.

Tengram: It’s crystal clear: never call me your boss, view me as your partner. Our teams are our partners. There’s a pure alignment of interest—we are very much an extension of the team day to day and we are trying to help them with their business. Our business, I should say.


How should brands evaluate and vet competing proposals from investors?

Tengram: If an owner is looking to sell 100% of their company and they don’t care what happens to it, then obviously it’s the valuation number that matters. That’s not as common as the founder wanting to remain staked.

For a founder or owner that seeks to retain some ownership, the logic is fairly simple. Choose a partner that will best help grow the business and thus, whatever stake you retain in the business will grow with it. Ask yourself: do I like and trust the partner? Then, are they uniquely poised and experienced to help me grow it? Then ask, what is my venture worth and does the potential partner see it similarly?

Prelude: Nothing is more important than who you partner with. Founders should look for investors who are transparent, collaborative, and passionate and who are value-add. Prelude brings deep category experience, real-world operating experience, and a broad network including world-class advisors. We think it is important for entrepreneurs to think deeply about what exactly they are looking for in an investment partner. Capital is obviously critical, but beyond that—what capabilities can the investment partner bring to bear?

How open are you to investing in brands that already have minority partnerships and investors?

Prelude: We are open to this.

Tengram: At the end of the day it depends on who the people are and what their objectives are. At Tengram, we tend to purchase control in the brand. That owes to our investment strategy as a firm, we need control to do all the things we need to do to grow the business. If the minority interests want to exit, for example, we are happy to find ways to do that in the trade that work for everyone.

What do you consider the better investment strategy: making small investments in several brands or making a big commitment to 1-2 companies?

Prelude: We have a philosophy of “high conviction, high engagement,” which means we only make commitments to a couple of companies each year to truly allow us the time to be value-added partners.

How does your firm stay involved after the investment?

Tengram: I think we covered most of it above. Be open minded to taking on a partner. Don’t be afraid of the investment community, we are here to grow with you. To succeed with you. Know who your partner is, and what their experience is, how much you trust and like them and believe in them. That’s the basis for evaluation. It’s a marriage.

Prelude: Businesses coming to Prelude are generally looking for true “value-add” capabilities. They are seeking partners who can help them achieve their vision and build their brand to become an iconic global powerhouse. Prelude’s Partners both have extensive expertise in the beauty industry. We have successfully run small brands, big brands, and portfolios of brands. We have deep experience working closely with passionate brand founders—and we bring our strategic and operating capabilities to help brands achieve their full potential. Additionally, we have a tremendous set of 10 Advisors that are here to support our Partner brands—such as Maureen Chiquet (former Global CEO of Chanel) and Maureen Case (former Global President at ELC—Bobbi Brown, Jo Malone, Crème de la Mer). We have strength in marketing strategy—brand DNA/positioning, disruptive brand awareness building, and performance marketing. We can help with decision making which is crucial to building a high-quality brand (which retail partners, which markets, which products to launch) and we can support brands on execution from retail strategy (domestically and abroad), to product architecture and development and all the way through to supply chain. Importantly—I think we are here to help wherever our partners think they need the most help.

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