Investor Discussion Series: Alex Ledoux of Ledoux Ventures

I recently caught up with eCommerce angel investor Alex Ledoux of Ledoux Ventures.  Alex is a serial entrepreneur and investor who has invested in Shop Succulents and Inventors Launchpad.

What do you look for when investing?

I look for smaller consumer goods and eCommerce companies doing $1-$4M revenue, preferably in fragmented industries.  I’m not a fan of pre-revenue companies.  It has to be a business that I can bring my skills, such as internet marketing and business development, to bear and accelerate the company’s growth.  I’m especially interested in companies that do poor or little marketing that I can step in with and rapidly scale businesses.

I aim to take a large minority stake and look for founder’s who are hustlers and willing to learn and improve.  Unlike a more traditional technology focused angel investment I generally look to grow and sell my investment within a 2 to 5 year timeline.

In terms of vertical I’m more opportunity driven than having a specific thesis I look to invest around.

As primarily an eCommerce investor what are your thoughts on Amazon?

Dynastic companies have been built in the past and will continue to be built.  Don’t be afraid of Amazon.  The companies I look at build a brand outside of Amazon but they don’t ignore it.  I’m fine with investing in companies that do a large amount of revenue from Amazon even though the problem there is you don’t own or have access to your customer data.  Amazon ideally should just be another channel but not your business’s core.  

In general, Amazon is slow to catch onto consumer trends so you can usually get ahead of them, at least for a couple of years.

Especially early stage for eCommerce - how do you test whether the product has any real legs or is just a fad?

I structure my deals in such a way to limit my downside if the product turns out to be a fad.

What consumer trends are you interested in investing in 2018?

I’m more opportunity focused and less into trends.  However, one area I’ve been looking at is getting involved in the board game space.

What are some resources you use to stay up to date on consumer trends?

Facebook, podcasts such as The Tim Ferriss show and eCommerce Fuel.

How do you source your deals?

Finding good deal flow is hard.  If you are doing things right in eCommerce you often times don’t need investors as your business will generate substantial cash flow. Given that, I put a major focus on bringing much more than just money to the table. I look to be seen as a partner with capital, instead of an investor. I look to bring marketing and business development to any business I get involved in. As far as sourcing deals, Reddit has been a shockingly good place to source deals and get referrals.  I also attend as many events as possible.  I’m planning to start a podcast to build more of a brand for my investment firm as well as partner with accelerators.  I’ve also had some success with cold outreach to companies I’m interested in.  I also want to get deeper involved with the angel community.  

Any investors you personally look up to?

A handful of angel investors that I’ve closely worked with.

Any predictions for 2018?

Amazon will continue to dominate. As an eCommerce business owner you really need to look at how you can best use Amazon’s growth to your advantage without becoming purely Amazon focused. From a marketing perspective, I also think Amazon PPC and influencer marketing are musts for 2018.

Anything else you think potential consumer investors or consumer entrepreneurs should know?

  • It’s amazing how many people I meet with good ideas but aren’t willing to make the jump to entrepreneurship.

  • On the other hand some people think if they just start something everything will just come naturally.

  • I’m constantly amazed by how few companies market correctly. Many companies blindly trust marketing agencies. Or they don’t even get the basics like having a high conversion optimized website. Many companies never take the time to learn who their customer is and look at he data.

  • Marketing and being data driven should be the first focus of any consumer company.

 

 

Joymode

joymodelogo.png

Overview

Joymode is a subscription rental experience startup. They rent products to their members that are used infrequently, mostly based around experiences or utility. For example, one of their “bundles” is for camping where they deliver all the equipment you need for camping for a weekend.  Another is for apartment cleaning where they provide vacuums and more specialized cleaning equipment most people don't own themselves.

The benefit to the consumer is these are highly curated short-term rentals so members don’t have to make permanent purchases of items they will use infrequently. Joymode does all the curation for the experience as well as does free delivery and pickup of bundles.

Joymode business model currently is its member’s pay an annual membership fee and then a rental fee for each bundle they use.

The team is based in Los Angeles, California.

Why I like Them

I like Joymode for a few reasons:

  • Subscription membership model makes customers sticky once they sign up, with heavy loyalty incentives to be a long-term member.

  • Joymode knows its Millennial customer base. They are solving a number of well-documented pain points for younger generations including low disposable income as well as the trend of valuing experiences over ownership. It also dovetails nicely into the fact that urban consumers tend to have smaller living spaces and won’t need to store any of these products.

  • Strong cost saving to the consumer as Joymode’s bundles are less than 10% of what it would cost to purchase the products.

  • Good unit economics with Joymode publicly disclosing ~50% margins on a per reservation basis.

  • Interesting potential growth avenues for the company, especially for Joymode to work with brands to promote their specific products into bundles with Joymode’s young consumer base.

  • Low customer acquisition costs as most customers are via word of mouth as the experiences are naturally viral due to word of mouth marketing.

Joymode has the opportunity to be the Costco of the 21st century to today’s younger generations.

Investor Discussion Series: Mehtab Bhogal of Karta Ventures

Recently I had the pleasure of a lively conversation with consumer focused investor Mehtab Bhogal of Karta Ventures.  Mehtab is an experienced entrepreneur in the consumer goods space and active investor with a unique strategy.  You can read more about his story here.

Consumer investing is notoriously hard - what do you look for that stands out?

I actually think consumer is easier than technology investing as valuations in tech are ridiculous right now, plus the tech best deals go straight to a small handful of VCs anyways.  Conversely, consumer brands are very straightforward to value, as you can usually go off an EBITDA multiplier.  

Moreover, outcomes are less binary than tech because it's relatively easy to get your money out of consumer companies via dividends. Companies are also less likely to need subsequent financing rounds as consumer brands tend to generate substantial cash flow quickly. That cash flow allows consumer brands to do things that most tech companies can't do without going to a specialized lender, like utilizing debt. Suppliers are also an easy way for consumer brands selling physical products to quickly improve cash flow if needed as well.

I don't look for anything in particular with consumer other than my ability to add value myself and via my network of contractors/people that can help train the companies I invest in to improve core operations. A reputable, strong brand (or the ability to build a good brand!) is vital though as that's what keeps other companies from knocking off your product.

What are your thoughts on venture capitalist getting into more traditional consumer companies such as Allbirds?

They will likely keep moving in as margins have become so much more attractive thanks to direct to consumer channels.  Direct to consumer has opened up a lot of doors that simply didn't exist 15 - 18 years ago. 

Especially early stage for consumer - how do you test whether the product has any real legs or is just a fad?

The company needs organic growth. It might be tempting to look at a successful crowdfunded company via a platform like Kickstarter and assume the same sales will carry on post-crowdfunding but these products are often too niche because backers of crowdfunding campaigns are their own niche.

I also test companies I’m looking at by running a bunch of PPC tests on their product (with their permission of course) to see how receptive people are to a product and how much growth might be possible.  Google, Facebook, and Bing are great for this. Facebook in particular is great for this because you're throwing a product out in front of an audience instead of those searching for a specific solution like with Google/Bing search ads. If a product just well via Facebook ads, it's very likely to scale up nicely.

What consumer trends are you interested in investing in 2018?

Smart drugs/nootropics. Companies in the space are largely made up of those who jumped into the industry because they are passionate about nootropics, but don't necessarily have any meaningful level of sophistication when it comes to handling the business end of things. Many of the companies I've looked at in the space don't even have retargeting pixels on their websites which is...odd. I nearly launched a smart drug company a few years back but ended up working on something else instead. 

What are some resources you use to stay up to date on consumer trends?

Mostly a network of people I know or reach out to in the space.

How do you source your deals?

Sourcing deals in the consumer space is much more difficult than tech because there isn't a go-to platform or place for it. Platforms like AngelList are largely focused on tech, and the consumer brands doing deals on those platforms are often blatantly bad deals. 

The other major issue is that well managed consumer brands will generate cash flow quickly, which gives them access to affordable debt facilities. This negates any real need for cash, which means as an investor you have to be able to do more than just write a check and be hands off. You need to be able to show them exactly how you can help take them from doing $700,000 - $2M a year to $5M - $10M in 2 years.

As a result of the aforementioned issues, I've expanded my focus to doing my own deal assembly, buying IP, and building companies around that. This means hiring a CEO, providing them with funding and any other resources they need, etc... 

How important is the brand when you are looking to invest?

A strong brand provides the company with a good moat to protect them from competitors and knock offs. When seeding a deal, companies typically have little to no brand value but that's something that's relatively easy to building a clear identity, a reputation for only making excellent products, and by focusing on delivering amazing customer service.

What do you think of all these Fulfilled by Amazon consumer businesses becoming more mainstream over the last few years?

I don’t like companies that rely on Amazon.  Amazon can and does shut down or disrupt those selling on Amazon and it's an issue that is notoriously hard to deal with. Worse yet, being overly reliant on one platform heavily impacts the multiple you're likely to receive for your business when you sell. If I company I invest in is relying heavily on a particular platform, whether it's an influencer, a marketplace, or a social platform, the first thing I try to do is build out other sales channels to hedge risk.

Any investors you personally look up to?

Warren Buffett in one of my all-time favorites because his philosophy really resonates with me and it's managed to work for him for decades. Ray Dalio is another one of my favorite because he is amazing at building systems...and he's built some of the best in the world that have scaled up beautifully. 

Any predictions for 2018?

Blockchain technology will keep going and hopefully crypto cools off.

Anything else you think potential consumer investors or consumer entrepreneurs should know?

  • People need to get better at testing to identify niches.  They need products that target a niche but are very shareable outside that niche.  Testing only costs $300 - $500 if you have the patience to learn how to write copy, run ads, and create landing pages.  Facebook is a good platform for testing this type of thing for consumer products.  If you do well on Facebook then your product has a ton of potential for organic growth. I think a lot of entrepreneurs skip this step because they want to express themselves creatively instead of building a profitable business.
  • If you're not handling manufacturing yourself, take the time to find a great manufacturer. Very few people realize this, and it sounds obvious, but manufacturers can make or break a company. A great manufacturer will provide you with financing, introduce you to key retailers, help with R&D, etc... A lot of entrepreneurs seem to go with the first guy they find on sites like Alibaba. Don't do that, because you really do get what you pay for. Our manufacturing partner - Dunlop/MXR - for our guitar pedal company Horizon Devices has helped us immensely in more ways than we could ever ask for. Even if someone offered to build the same products for us at half the price we wouldn't switch over because nobody can match what they've done for us.
  • Never compete on price, the bigger players will win that game and put you out of business. They can afford to bleed money if they have to because their warchest is massive. You'll also end up attracting a very...difficult kind of customer.
  • Stage capital carefully, especially before you establish demand. Test any idea you have for the company and then double down when a test does well.
  • Always utilize pre-orders when possible.  If you can’t get demand before launch, your product probably doesn't have that much potential. 
  • Everything is negotiable. Unless you hear something coming out of the mouth of the person that actually owns the company you're negotiating with, then don't take their answer too seriously. We've bypassed $100,000+ MoQs by cutting around intermediaries and speaking with major CEOs. 
  • If everything is executed beautifully, it only takes $15,000 to $25,000 to build out a company doing a few million in revenue in the consumer space. $50,000 to $75,000 provides you with a lot more room for error, but you don't really need much money to get started.

Mizzen+Main

Mizzen and Main.jpg

Overview

Mizzen+Main is a consumer apparel eCommerce startup focused on using advanced performance fabrics to make affordable, high quality, and good looking clothing.  They are constantly pushing the edge on fabric technology.  Currently their fabrics are water resistant, comfortable, wrinkle free, moisture wicking, stretchable, and do not look like normal performance fabrics.  The company primarily sells its products online but has in the last few years expanded to 400+ retail locations and popup locations.

The company is based in Dallas, Texas and currently has around 30 employees.

Why I like Them

Mizzen+Main is following the playbook that has made new consumer companies like Bonobos or Warby Parker such large successes - a reimagining of a long established product that is cool, good looking, and comfortable with an advanced design.  They have a die hard customer base among professional millennial males and have built their brand entirely online with social media.

I also like that the company is experiencing large traction with their biggest challenge their supply chain in order to match the product demand.  I would not be surprised if they are scooped up soon in the large retail and eCommerce war that is being waged between Amazon and traditional retailers currently.

Disclosure:  I have spoken to members of the team.

 

 

New Wave Foods

Image uploaded from iOS (1).jpg

Overview

New Wave Foods is a food startup working on sustainable seafood created from plant based components.  Their first and only currently available product is lab created shrimp made from algae and other vegetables.  Currently their shrimp alternative is available through 20+ restaurants and food distributors with the company targeting general retail availability within the next couple of years.  In developing the product, the team has been able to generate the same nutrition profile, taste and texture as fresh caught from the ocean shrimp.  The company is already at work developing fish and shellfish alternatives.

The team is based in San Francisco and currently has 3 full time employees.

Why I like Them

This is an innovative product that fulfills a large unaddressed need in the market.  Seafood-like alternatives have been mostly ignored by FoodTech companies to date, many of whom are focused on creating meat and egg alternatives.  However, there is obvious interest in these types of products with a growing number of consumers looking for their food to be environmentally sustainable, antibiotic free, allergen free, kosher, vegan, and mercury free.  More than 10% of college students today identify as vegan 

It was also smart that the team chose their initial distribution channel as restaurants directly since +70% of seafood is eaten out of the home. 

Disclosure:  I have spoken to members of the executive team.