April 1, 2020
This week, we’re having tea with James Beshara, an angel investor in companies like Gusto, ThirdLove and Halo Top. James was also the CEO/Founder of Tilt, a crowdfunding platform that was acquired by Airbnb.
How a very early bet on Gusto got James into investing
A 5-step framework for evaluating D2C brands
How D2C brands can think about valuations and fundraising
Embarrassing stories from his own experience raising venture money
This interview has been lightly edited for length and clarity.
We had just gotten out of Y Combinator. Josh Reeves, the founder of another company in our batch called ZenPayroll, said “Hey James, I know you’re building your own startup with Tilt, but would you be interested in investing in what we’re building?” And that ended up becoming Gusto.
I looked at my bank account, saw that I had about 25 grand in savings, and put 20 grand into Gusto. And that was my first investment.
I knew that I was going to learn, no matter what. And it sounds like the most ridiculous lack of diversification, to be invested in two different startups. But to me, at 26, I felt that I need to diversify from my one startup.
Building out Tilt, we had a really powerful API for crowdfunding campaigns. Cruise, Away, Soylent, Eero used our API. I got to see up close how quickly a brand can be built.
When I look at the investing landscape, there’s three things that tectonically shift a space, and create a whole new set of opportunities:
20 years ago, Red Bull needed a $250 million ad budget for TV commercials.
Fast forward to today. Instead of people wondering, “Why haven’t I heard this before?” instead the consumer behavior is, “What’s new, and how do I get my hands on it?”
One that started DTC (and became CPG) was Halo Top, an ice cream company. Number one selling ice cream in the country for pints. It’s gone from nothing to beating Baskin Robbins and Ben & Jerry’s in just five years. These brands grow really quickly.
I’ll say five things that are really important for my investment approach for this space:
Many of the outcomes, the best ones could be $200, $300 million outcomes. And that’s an order of magnitude less than what we might look for in a technology company.
$2 million, $3 million, $5 million valuation.
Already has some traction. They’re very efficient businesses. Native Deodorant famously got to a $100 million exit with seven people. I’ve got a portfolio company that is doing similar numbers off of four people.
When you raise too much capital, you back yourself into a corner, where IPO is the only outcome.
Maybe that makes sense. Maybe you have to do that for the economics, but I think the core advantages that D2C companies have are the extreme efficiency that they can have. A company can get going with a brand agency building out the site and brand, and outsourced manufacturing making your product. You could actually get to $50 million in sales with two people. That just doesn’t happen in the software space.
Even six, seven years ago, it didn’t exist:
If you can have traction, then that’s always great. It really is more of a trend than a number. You don’t need to have a certain amount of sales, but if you can have 20%, 30% month over month sales for four or five months in a row.
It would need to be in the thousands of sales. But if you can get thousands of sales, maybe tens of thousands of sales, and get to four or five months of 30% month over month growth, you’re showing this is real traction.
It’s not the number, it’s the trend. Showing that trend allows investors like me to say, “Okay, this is what the graph is looking like. This is what it could be in three, four years.” You can easily do that from a friends and family round of 30, 40 grand. Depending on the product.
It doesn’t have the upside. I’d say it’s easier because you end up with smaller teams, and it’s not as much of the chicken and egg problem. Software takes so long. You can set up shop and not know for two or three years if you’re building the right thing. With D2C, you can discover that more quickly.
But, to your point, people can copy you. I think the ceiling is much lower. It doesn’t make sense if you’re Andreessen Horowitz, trying to put a $8 million check into a company. But it makes a lot of sense to the founder that wants to build a different type of company, and is maybe okay with looking for an exit. You have the advantage of getting going much earlier and getting feedback from customers really quickly, versus software.
People can feel free to reach out to me on Twitter. But I think it is much more on the angel side of things than it is for the institutional side of things.
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The Mercury Team