20VC 3 Core Considerations When Investing In Physical Product Co's, Are We In A DirectToConsumer Bubble & Why Many Sub $100m Funds Are Moving Earlier and Earlier with Nick Brown, Managing Partner @ Imaginary



In this episode of "20 Minutes VC," host Harry Stebbings interviews Nick Brown, managing partner at Imaginary, an early-stage investment firm focused on the intersection of retail and technology. Imaginary, co-founded with Net-a-Porter's Natalie Massenet, boasts a portfolio featuring companies like Glossier and Everlane. Brown discusses his transition from banking to venture capital and emphasizes the importance of organic growth and emotional brand connection over reliance on paid marketing channels. He predicts a consolidation in the direct-to-consumer space, where only brands with sustainable unit economics will thrive, and foresees increased mid-market M&A activity. Brown also touches on the role of celebrity founders in consumer brands, highlighting the need for authenticity and the limitations of celebrity influence. The conversation also covers the evolving definition of brand, the strategic use of wholesale partnerships, and the necessity of courage in founders. Brown's latest investment, a fitness app leveraging social media influencers, exemplifies Imaginary's investment thesis on innovative marketing and the power of influencer-driven content.

Summary Notes

Introduction to the Podcast and Guest

  • Harry Stebbings introduces the episode of "20 Minutes VC" and his guest, Nick Brown, managing partner at Imaginary.
  • Imaginary invests in early-stage opportunities at the intersection of retail and technology.
  • Notable portfolio companies include Glossier, Daily Harvest, Farfetch, Everlane, and others.
  • Nick Brown's background includes being a partner at 14 W Venture Partners and head of new media at NV Investments.
  • Henry Davis at Glossier provided the introduction to Nick Brown.

"Now if you haven't guessed already, I do have something of a passion for all things consumer and direct consumer, and today that passion is satiated more than ever as I welcome an incredible guest in the form of Nick Brown, managing partner at Imaginary."

The quote highlights Harry Stebbings' enthusiasm for consumer and direct-to-consumer businesses and introduces his guest, Nick Brown, who has expertise in this area through his role at Imaginary.

  • The League, a dating app, is advertised as valuing user time and preferences.
  • Zoom, a video and web conferencing service, is promoted for its ease of use and consistent enterprise experience.
  • Culture Amp is presented as a platform for collecting and understanding employee feedback, trusted by notable companies.

"The League is the app that tells you to keep them. That way they know your time is valuable, so simply tell them your preferences and they will handle the scouting and vetting for you."

The quote explains the value proposition of The League dating app, emphasizing its focus on respecting user time and preferences.

Nick Brown's Entry into Venture Capital

  • Nick Brown describes his transition from banking to venture capital during the economic downturn in 2008.
  • He worked at J.P. Morgan but left to consult for family offices.
  • Recognized New York's emergence as a center for venture opportunities around 2009-2010.
  • Early ecommerce wave was passing, giving way to direct-to-consumer brands and retail innovation.
  • Joined 14 West Venture Partners in late 2010, focusing on online commerce investments.

"I graduated university or college in 2008, which was probably just about the worst time to graduate from school."

This quote provides context for the timing of Nick Brown's career start, highlighting the challenges of entering the job market during the economic downturn of 2008.

The Evolution of Retail and Direct-to-Consumer Brands

  • Nick Brown witnessed the evolution of retail and the rise of direct-to-consumer brands.
  • He gained a comprehensive perspective on changes in retail, wholesale, and physical retail through various investments.
  • The partnership at 14 West Venture Partners allowed him to take ownership of investment areas and build a portfolio.

"I was given this wonderful lens to think about the evolution of retail, the beginnings of direct to consumer brands, changes that were happening in wholesale and physical retail through a number of different investments."

Nick Brown reflects on the valuable experience he gained at 14 West Venture Partners, which allowed him to deeply understand and influence the retail and direct-to-consumer sectors.

Defining "Brand" in Today's Market

  • Nick Brown defines a brand as something that stands for something with the consumer.
  • A brand today establishes an emotional connection between a consumer and a product or service.
  • The emotional response from the consumer is critical to a brand's definition.

"I would say a brand is anything that stands for something with the consumer. And I think a brand today is something that probably is able to establish an emotional connection between a consumer and a product or a service."

This quote summarizes Nick Brown's definition of a brand, emphasizing the importance of emotional connection in branding.

Direct-to-Consumer Bubble

  • Nick Brown discusses the potential end of a bubble for direct-to-consumer brands reliant on paid channels like Facebook.
  • Suggests that the strategy of building businesses through paid advertising algorithms is no longer viable.
  • The complexity of building a brand or physical product business requires more than just gaming Facebook or Google algorithms.

"I think we are in probably the end of the bubble of brands or direct to consumer businesses that are purely building their businesses off paid channels."

Nick Brown posits that the era of direct-to-consumer businesses heavily dependent on paid advertising channels for growth may be coming to an end, indicating a shift in the industry's approach to building brands.

Evolution of Entrepreneurship in Retail

  • Traditional retail disruption used to occur through wholesale or physical retail channels.
  • Modern entrepreneurs often begin with a direct-to-consumer (D2C) online approach, then expand to traditional offline channels.
  • Availability of capital has changed the growth narrative for starting businesses.

"The difference to me of today versus ten or fifteen years ago is it used to be that if you were someone that had excitement or vision around creating a brand or creating a product, or around even just disrupting a category, you went about disrupting that by going through wholesale or physical retail."

The quote explains how the approach to disrupting the retail market has shifted from traditional wholesale and physical retail to starting with an online D2C model due to easier access to capital for entrepreneurs.

Interplay Between Wholesale and D2C

  • Some businesses greatly benefit from wholesale partnerships.
  • Wholesale can provide access to customers in regions less familiar with the brand.
  • Entrepreneurs must first prove their ability to drive traffic and create compelling narratives online.
  • Wholesale partnerships are often explored once a company has achieved a certain revenue threshold.

"I think the right wholesale partner can be an extraordinary opportunity in how these companies think about growth."

This quote suggests that strategic wholesale partnerships can significantly contribute to a company's growth, especially for those that have already established their online presence and brand narrative.

Impact of Rising Online Acquisition Costs

  • Online customer acquisition costs are increasing.
  • Brands are finding growth through wholesale partnerships to be more profitable.
  • The shift to wholesale is partly due to the expensive nature of online traffic acquisition.

"I think a lot of brands have found that they're able to achieve a real velocity of growth in a more profitable fashion by partnering with the right types of wholesale businesses."

The quote highlights that due to rising online marketing costs, brands are turning to wholesale partnerships as a more cost-effective growth strategy.

Venture Scale Returns in Physical Product Companies

  • Physical product companies that sell online are tech-enabled retail companies, not tech companies.
  • Growth is dependent on the ability to manage inventory, innovate products, and market effectively.
  • Imaginary's investment strategy involves entering at a stage where they can see venture scale returns, often at ten times plus upside.

"I have always said that if you are in the business of making your own product and selling that product online, you are a retail company that is tech-enabled. You are not a tech company."

This quote clarifies the distinction between tech companies and tech-enabled retail companies, emphasizing that the latter's growth is tied to physical product management rather than network effects.

Optimal Insertion Point for Investment

  • Competition for deals has led funds to invest earlier in a company's lifecycle.
  • Imaginary has shifted from Series A focus to closer to seed stage investments.
  • Investment decisions are based on the founder's potential and the timeliness of the market opportunity.

"We've actually gone and I think a lot of funds of our size, call it sub 100 million dollar funds, have made a very deliberate choice to move earlier."

The quote reflects the strategic decision by smaller funds, including Imaginary, to invest at earlier stages due to intense competition and the potential for higher returns.

Focus on Organic Growth and Repeat Customers

  • Imaginary prioritizes investing in companies with a strong repeat purchase rate.
  • The firm looks for founders who can grow their businesses organically and tell compelling brand stories.
  • The approach to investment is more intuitive, focusing on organic growth rather than solely on quantitative metrics.

"We're very focused on repeats for these businesses. So getting a real sense of whether or not this is a product that people are going to continue to want to buy."

This quote emphasizes the importance of customer retention and repeat business as a key factor in Imaginary's investment decisions.

Marketing Spend Balance

  • Different businesses require different marketing spend strategies.
  • Stitch Fix, with over a billion dollars in sales, contrasts with early-stage companies.
  • Marketing spend ranges between 5-20% of monthly net sales.
  • Early-stage businesses often push towards paid marketing, especially on platforms like Facebook.
  • As companies grow, they shift from paid to brand marketing.
  • Businesses spending more on brand marketing than paid marketing are more appealing.

"But I think for us we tend to look at between...somewhere between five and 20% of monthly net sales going to marketing."

The quote outlines a general guideline for marketing budgets, suggesting a proportionate spend based on net sales.

"Oftentimes companies that we're backing will skew a little bit heavier towards Facebook early on."

This quote emphasizes the initial focus on paid marketing for customer acquisition in early-stage companies.

"I would say we tend to get more excited by businesses that are spending more than half of that spend on more brand related marketing than paid related marketing."

The speaker expresses a preference for companies investing more in brand marketing over paid marketing, indicating a strategic long-term vision.

Evolution of Founder Traits in Consumer Brands

  • Founders' traits have shifted from being product and merchant-focused to marketing and brand-focused.
  • The crowded market and ease of starting a business have led to this shift.
  • Social media has given consumers a voice, increasing the need for founders with courage.
  • Courage is seen as the most important trait for founders.

"I think one generation ago, the majority of the transformative businesses in these sectors were built by merchants. I would say today they tend to be built by really strong marketers, really strong brand and creative individuals."

The quote compares the past and present traits of founders, highlighting the current emphasis on marketing and branding skills.

"The character trait that they most often share is probably courage."

Nick Brown identifies courage as a key trait for founders, necessary for standing by their convictions in the face of public scrutiny.

Role of Celebrity Founders in Consumer Companies

  • Authenticity is crucial for celebrity founders to be successful.
  • Examples like Goop and Good American illustrate successful celebrity-founded companies due to their authentic connection with the brand.
  • Celebrity involvement can jump-start a company but doesn't guarantee long-term success.
  • The right celebrity can create a powerful brand if it feels natural and makes sense.

"It definitely works when it's authentic."

Nick Brown stresses that authenticity is the key to success for celebrity-founded companies.

"It only takes you so far, right? I mean, it takes you probably from zero to two. It doesn't get you from two to ten."

The speaker points out that while celebrity founders can provide an initial boost, they are not enough to ensure sustainable growth.

Future of Direct-to-Consumer Brands

  • Direct-to-consumer (D2C) brands will need to demonstrate profitable unit economics.
  • Brands with unsustainable unit economics may fall out of the ecosystem.
  • The next few years will be telling for the viability and growth potential of D2C brands.

"Well, I think you're going to have a moment in time when a lot of these businesses need to show that they have the unit economics that allow them to be profitable."

Nick Brown predicts a critical period where D2C brands must prove their profitability to continue growing and receiving investment.

"I think you'll have probably a tier of companies that have been funded with venture capital off the wrong kinds of unit economics or unit economics that aren't really scalable or workable, kind of fall out of the ecosystem."

This quote suggests an upcoming market correction where only D2C brands with scalable and profitable business models will survive.

  • An increase in mid-market M&A activity is observed, particularly in food and beverage and beauty categories.
  • Legacy retailers are acquiring growth by purchasing brands, entrepreneurs, businesses, and teams with exciting prospects.
  • The final view of product businesses is shifting towards being tech-enabled retail brands/businesses rather than tech businesses that sell products.
  • Utilization of data for decision-making and understanding recurring revenue is leading to potentially higher trading multiples for these companies compared to legacy retail, but not as high as tech multiples.
  • There is a shift towards recognizing the true nature of these businesses, leading to a reduction in market "froth" and a focus on building sustainable brands for the long term.

I think we're already seeing a lot of companies being acquisitive in the sort of food and beverage space, certainly in the beauty category.

This quote highlights the current trend in the M&A landscape, where there is a notable increase in acquisition activities in specific sectors like food and beverage and beauty.

I think we'll probably see that across the board where you have legacy retailers needing to buy growth and finding brands and entrepreneurs and businesses and teams that are doing exciting things that may make sense within a large organization.

The speaker predicts a broader trend of legacy retailers acquiring emerging brands and businesses to fuel growth, indicating a strategic shift in the retail industry's approach to expansion.

And I think once that happens, we lose a little bit of the froth and we can sort of get back to simply building great, exciting, meaningful businesses and brands for the next 10, 20, 30, 5, 100 years.

This quote suggests that once the market adjusts to the new valuation paradigm of tech-enabled retail, there will be less speculative investment and more focus on building long-term, sustainable businesses.

Nick Brown's Favorite Book

  • "To Kill a Mockingbird" is Nick's favorite book because it's a classic American tale with universal appeal.
  • The book has a lasting impact, with most people having read it multiple times throughout their lives, providing a way to understand someone's character.

To kill a Mockingbird. It's obviously a classic American tale of growing up and is a beautiful story.

Nick expresses his admiration for "To Kill a Mockingbird," emphasizing its status as a classic and its thematic richness.

But I think the reason why I love that book in particular is because just about everybody's read it, just about everybody remembers when they read it and just about everybody has read it again.

The quote reflects on the widespread readership and the memorable experience that "To Kill a Mockingbird" offers, suggesting its role in forming a common cultural connection.

The Future of Retail and Replatforming

  • Amazon dominates the retail landscape, shaping consumer purchasing behavior.
  • The concept of replatforming involves leveraging Amazon's platform while also growing through other channels, including physical and online retail, as well as third-party partnerships.
  • Retail is evolving to accommodate the dominance of Amazon but also allows for the growth of independent brands and businesses.

I mean, we're definitely seeing a world that's dominated by Amazon, I think that's for sure.

Nick acknowledges Amazon's significant influence on the retail sector, setting the stage for the discussion on the future of retail.

And probably a combination of both of, you know, I think if replatforming means a world that is dominated by Amazon, but where there is still opportunities for brands and businesses to grow off their own channels, off physical channels, off online channels, off other third party wholesale and partnership channels, if that's a replatforming of a legacy industry, then, yeah, I do think we're probably going through one.

This quote explains replatforming as the adaptation of the retail industry to a market led by Amazon while still maintaining opportunities for brands to grow independently through various channels.

Amazon's Market Impact

  • Amazon has increased market efficiency and changed consumer purchasing habits.
  • The platform allows consumers to save time by purchasing routine items, which in turn frees up time for other activities.
  • Amazon's role is seen as creating market opportunities rather than solely disrupting existing businesses.

Yeah, I do think so. For me, what's most interesting about Amazon is how efficient it's made us.

Nick agrees with the notion that Amazon contributes positively to the market by increasing efficiency, highlighting a key aspect of Amazon's impact.

It's the price disruption, but it's also a real creation of time.

The quote captures the dual impact of Amazon on consumers: disrupting traditional pricing models and creating time savings, which in turn affects consumer behavior.

Investment in Fitness App 'Know'

  • The investment in the fitness app 'Know' was driven by the intersection of media, technology, and fitness.
  • 'Know' leverages social media influencers for content creation and marketing, highlighting a strategic approach to breaking through market noise.
  • The investment reflects a broader interest in innovative marketing strategies and the evolving fitness technology landscape.

We invested in a fitness app called know. The reason we did that was for several reasons.

Nick introduces the investment in 'Know,' setting the stage for discussing the rationale behind this decision.

And I think what's most exciting to us in particular about this business is that it is leveraging social media influencers, both for the creation of that content, but also for the marketing of that content.

This quote details the strategic use of social media influencers in the fitness app 'Know,' emphasizing the importance of content creation and marketing in their investment decision.

Closing Remarks and Thanks

  • Appreciation is expressed for Nick's contribution to the ecosystem and the conversation.
  • A behind-the-scenes look at the show is available on Instagram.
  • The show promotes various products and services, including The League, Zoom, and Culture Amp, highlighting their unique features and benefits.

It's my pleasure. Also, I am thrilled to do it and I'm happy we got to spend a little bit of time together.

Nick expresses his pleasure in participating in the conversation, reflecting a positive engagement with the host.

As always, I cannot thank you enough for tuning in, and I can't wait to bring you a very special episode with Armandadga, founder and CTO at Hashicorp on Friday.

Harry Stebbings thanks the audience for tuning in and teases an upcoming episode with a notable figure in the tech industry, fostering anticipation for future content.

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