Series Tea

April 1, 2020

James Beshara:
D2C Investing

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.

In this episode, James shares:

  • 0:35

    How a very early bet on Gusto got James into investing

  • 6:30

    A 5-step framework for evaluating D2C brands

  • 15:45

    How D2C brands can think about valuations and fundraising

  • 18:30

    Embarrassing stories from his own experience raising venture money

Highlights from Series Tea with James Beshara

This interview has been lightly edited for length and clarity.

You’ve done 55 investments. What was the first one?

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.

So you’re running your startup, you decide to wipe out your savings account on the Gusto 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.

You’ve focused on D2C startups, which is rare for angel investors. How did you get into that space and how do you evaluate D2C startups?

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:

  1. Government: You see government with something like cannabis.
  2. Technological: We have the smartphone, a technological shift.
  3. Consumer shift: In 2013, 2014, consumers were willing to buy a brand new brand product story within three minutes of seeing a video on a crowdfunding campaign.

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?”

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What are the top D2C investments that you’ve done?

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:

  1. Product: It has to be an inventive product. I don’t believe in walking down the grocery aisle and saying “D2C toothpaste” and “D2C shampoo.” Halo Top was really good tasting ice cream, but for 130 calories. MatchaBar is a canned, carbonated matcha drink. ThirdLove started with some really cool 3D software and now they have half sizes. No one had that, and no one has that still.
  2. Founders: You need really strong founders with solid backgrounds of getting things done. Doesn’t have to be in the category; the founders of Halo Top were two lawyers who had shown really good, scrappy traction.
  3. Brand universe: What is the universe that they’re building around this product? To hook consumers into not just a product, but this brand universe. Can this team build this really cool universe that people are participating in? You can look at their website and see, what is the importance placed on the logo, the language, the copy? Do they really know how to build this very cohesive brand and universe?
  4. Growth understanding: They don’t have to have traction, but do the founders have a really solid understanding of growth? Someone said something that’s stuck with me: “Founder distribution market fit.” Do the founders really understand how to grow a product? After Airbnb was valued at $1 billion, everyone was throwing money at well-designed applications. But the Airbnb founders were fanatical about growth. They were much more rotated towards fanaticism around growth than they were about just every pixel.
  5. Space: The fifth thing is space. How big is the space? All of these markets are $100 billion, $200 billion. D2C markets have to be really big, because you can’t wait 10 years for them to get there.

What is the actual distribution advantage a D2C brand has? How do you find an edge in that kind of market?

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.

Are the valuations cheaper to make up for that? What is the seed valuation?

$2 million, $3 million, $5 million valuation.

And this is someone that already has traction?

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.

Are those D2C brands that do manage to get normal VC valuations actually doing themselves an injustice?

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.

Is that also a new trend, now that all of these tools exist?

Even six, seven years ago, it didn’t exist:

  • Shopify is insanely powerful; the massive ecosystem that exists for Shopify is outrageous.
  • You have flexibility advantages as a small startup that Procter & Gamble doesn’t have.
  • You have the efficiency that technology startups don’t have; two people can really take it to $10, $20 million in sales. The outliers can take it to $50 million in sales.
  • You can tap into a great network of contractors, freelancers, that you pay for bespoke, specific projects, rather than keeping them on the payroll.
  • D2C has the margins to play with on things like Facebook and Instagram. And the ads are getting more expensive. But that’s why you really have to focus on building that brand universe that people want to be a part of. And if the product is inventive, you get 5 to 10 more times the outcome on a converted customer.

Let’s say I’m a D2C start up. Where do I have to be to get this ~$3 million valuation seed round? Can I just have an idea and a good team? Do I really need to have sold this thing? Kickstarter?

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.

What kind of absolute value?

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.

In some ways, D2C startups are harder. If you managed to achieve that in a SaaS company, you could get a $10 million valuation.

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.

Is Silicon Valley a good place to come to find D2C investors?

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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Thanks,

The Mercury Team