20VC Dollar Shave Club's Series A & B Lead Investor, David Pakman on The Requirements For A Successful Subscription Business & Why A Lot of Investors Do Not Like Consumer



In this episode of the 20 minutes VC, host Harry Stebbings interviews David Pakman, a partner at Venrock and a key investor in Dollar Shave Club, to discuss the company's journey and recent acquisition. Pakman, who has a background as an Internet entrepreneur and co-creator of Apple Computers Music Group, delves into his investment strategy, focusing on the significance of low churn rates and large market demand for subscription services. Despite initial difficulty in raising capital, Venrock's belief in Dollar Shave Club's potential and its non-consensus investment approach paid off, leading to a successful exit through an acquisition by Unilever. Pakman also touches on the evolving landscape of consumer products, highlighting the necessity for companies to adopt a direct-to-consumer model and leverage data to improve their offerings.

Summary Notes

Introduction to the Episode and Guest

  • Harry Stebings hosts the 20 minutes VC podcast and invites listeners to follow him on Snapchat for behind-the-scenes content.
  • The episode celebrates the acquisition of Dollar Shave Club.
  • Guest David Pakman is a lead investor in Dollar Shave Club's Series A and B funding rounds.
  • David Pakman's background includes being a partner at Venrock, a former CEO of eMusic, co-founder of MyPlay, and co-creator of Apple Computer's Music Group.
  • The episode also includes a promotion for Eve, a direct-to-consumer mattress company.

"Welcome back to another episode of the 20 minutes VC with your host Harry Stebings. And you can add me on Snapchat at htebbings with two B's for all the backstage footage and passes into the top VC's offices." "But for the show today, we're celebrating the acquisition of Dollar Shave Club. And when we thought about this episode, we thought who better to have as a guest than one of Dollar shave's biggest advocates and lead investors in the a and B round, David Pakman."

The introduction sets the stage for the episode, highlighting the significance of the Dollar Shave Club acquisition and the credentials of the guest, David Pakman.

David Pakman's Background and Venture Capital Journey

  • David Pakman is a computer science engineer with a traditional path into venture capital.
  • He worked at Apple for five years and started the music group there.
  • Pakman has been involved in starting and working at various Internet companies.
  • He joined Venrock as a partner eight years ago, focusing on early-stage tech investing.

"I'm a computer science engineer. I went to work at Apple for about five years. I did software product marketing there as a product manager and then I started the music group. After Apple, I left and either worked at or started two or three different Internet companies." "And after three Internet entrepreneur episodes, I joined Venroc about eight years ago as a partner and I focus on early stage tech investing."

David Pakman describes his journey from engineering to venture capital, emphasizing his experience in the tech industry and his role at Venrock.

The Investment in Dollar Shave Club

  • Dollar Shave Club raised capital when subscription businesses were out of favor.
  • David Pakman's experience with subscription services and understanding of key metrics, particularly churn rate, influenced his decision to invest.
  • He was impressed by Dollar Shave Club's launch video and the potential for low churn in a large market.
  • Pakman's investment decision was based on the company's low churn rates and other promising early metrics.

"When I saw the dollar Shave club launch video, just like everyone else did on their launch day in March of 2012, I was blown away by the comedy. I thought the marketing was fantastic. I loved the value proposition." "But what intrigued me the most was hey, this is a huge market where churn is likely to be really low." "I flew to LA quickly and sat down with Michael and his team and started to go through the numbers and I was very specifically focused on let me see churn. Let me see what the early cohort churns are. And they were extraordinarily low."

David Pakman explains that Dollar Shave Club's marketing, large market potential, and low churn rates were key factors in his decision to invest in the company.

Challenges in Raising Capital for Dollar Shave Club

  • Despite impressive early figures, Dollar Shave Club faced difficulties in raising capital.
  • The company's seed round included many well-known VCs, which initially concerned Pakman.
  • Surprisingly, many seed investors were not engaged in the Series A round, making it less competitive for Pakman.
  • The lukewarm interest from investors in e-commerce was beneficial for Pakman's investment opportunity.

"In the case of dollar shave, there were a couple of things that were interesting about its origin. It had raised about a million dollar seed round from many well known vcs." "But surprisingly, a number of the firms who were already seed investors either did not engage with the company around its series A or took a look and passed." "But it was a signal that there's something about this company or category that investors don't love, and that's generally true of e commerce."

David Pakman discusses the unexpected lack of competition in investing in Dollar Shave Club's Series A round and the general investor skepticism towards e-commerce.

Party Rounds in Funding

  • Harry Stebings questions the prevalence of party rounds in the current funding environment.
  • David Pakman suggests that party rounds may be less common now, but he lacks data to confirm this trend.

"I'm so intrigued there. Party rounds are such an interesting debate for me. Do they still prevail largely in the funding environment today, or have we seen a quelling of them in hopefully more rational environments?"

Harry Stebings expresses curiosity about the occurrence of party rounds in funding, prompting a discussion on the topic.

Venture Capital Seed Strategy

  • Larger VCs have experienced a trend of involvement and subsequent pullback from seed funding.
  • Seed funding is characterized by involvement of multiple parties to distribute risk.
  • Concerns exist around the potential dominance of larger Series A and B funds in seed rounds.

I think now we're six or seven years into the last cycle and larger VCs, many have already tried and some have abandoned the seed strategy.

The quote explains that larger venture capital firms have been engaging with seed funding strategies for several years but are now pulling back from this approach.

Venroc's Investment in Dollar Shave Club

  • Venroc's investment strategy included leading both Series A and B funding rounds for Dollar Shave Club, which is rare.
  • The decision to lead was influenced by the company's impressive growth and the absence of other firms willing to lead the Series B round.
  • The internal conversation at Venroc was thorough, considering the implications of leading a round with no external lead.

Venroc took the lead in both the A and the B, which is quite rare.

This quote highlights Venroc's unusual decision to lead consecutive funding rounds for Dollar Shave Club, indicating a strong belief in the company's potential.

Series B Challenges and Confidence in Dollar Shave Club

  • Dollar Shave Club faced challenges in finding a lead for their Series B despite significant revenue growth.
  • David Pakman's confidence in the company was based on the team's execution and leadership.
  • Venroc had to strategize for future funding, acknowledging they could not support the company alone to exit.

There was no lead to be found... I had to articulate a funding strategy that if the company needed to raise lots more know Venoc is not a mega fund, we could not fund the company through to its exit.

The quote explains the absence of a lead investor for the Series B round and the need for a strategic funding approach due to Venroc's limited capacity to support Dollar Shave Club to an exit.

Transition to Wider Market Recognition

  • Venroc's strategy involves early non-consensus investment with the expectation of later market consensus.
  • The transition from Venroc being the sole lead to wider market recognition occurred by the Series C round.
  • The shift was marked by multiple term sheets and the selection of TCV and Woody Marshall to lead the Series C and D rounds.

We talk about being non consensus at the time of our investment, provided it is consensus later.

This quote reflects Venroc's investment philosophy of initially going against the grain with the hope that the market will eventually recognize and agree with their early assessment.

Factors Attracting Macro Interest and TCV

  • Dollar Shave Club's continued growth, expanding margins, and product diversification attracted macro interest.
  • The company's performance and the lack of competitive pressure from incumbents like Gillette and Amazon increased investor confidence.

We went from 20 million in year two to 60 million in revenue in year three... Gillette had not still to this day, has not reacted in a competent way that put any pressure on dollar shave club.

The quote details Dollar Shave Club's revenue growth and the competitive landscape, which contributed to attracting broader investor interest and securing further funding.

Investment Thesis and Amazon's Potential Threat

  • Venroc has a specific investment thesis for consumer products, which Dollar Shave Club met.
  • A key consideration is whether Amazon could commoditize the category, which Venroc concluded was unlikely for Dollar Shave Club.
  • Other investors shared concerns about Amazon's potential impact, but Venroc's analysis suggested it was not a significant threat.

We have an investment thesis about consumer products... we concluded that Amazon would not be able to do that in this category.

This quote explains Venroc's analytical approach to investment, particularly regarding the potential threat posed by Amazon's entry into the market, which they determined was unlikely to impact Dollar Shave Club significantly.

Dollar Shave Club's Marketing Success

  • Michael Dubin's understanding of storytelling and humor played a crucial role in Dollar Shave Club's marketing.
  • Dubin's background in comedy and creating viral videos helped him connect with the male customer base.
  • The marketing strategy highlighted the absurdities in traditional razor buying experiences, such as excessive security and celebrity endorsements.
  • The company produced numerous videos, each as humorous and engaging as the initial viral video, to maintain consumer interest and convey different parts of their story.

"So I think Michael really understands what makes a compelling story that consumers respond to. He's a storyteller, right? I mean, he literally has comedic experience and built viral videos for companies before. So he sort of understands how he tells story."

This quote explains the importance of storytelling in marketing and how Dubin's background in comedy and video production contributed to the success of Dollar Shave Club's marketing campaigns.

Dollar Shave Club's Exit Strategy

  • Michael Dubin aimed for Dollar Shave Club to dominate the men's grooming category and become a multibillion-dollar brand.
  • The board and Michael Dubin considered going public to raise capital for international expansion and more product offerings.
  • Unilever's acquisition offered immediate access to global distribution, marketing resources, and production capabilities.
  • The decision to sell to Unilever was influenced by the potential for rapid growth and the alignment of visions between both companies.

"Unilever offers that right now as an acquirer. They operate in every country. They have massive distribution and marketing resources. They've got great production ability. They basically offer that to the companies they acquire."

The quote emphasizes the strategic decision to sell to Unilever, highlighting the benefits of leveraging Unilever's established global presence and resources to accelerate Dollar Shave Club's growth.

Future of E-commerce Exits

  • The shift from legacy media to digital channels and the rise in online shopping necessitate a direct-to-consumer (DTC) approach for consumer product companies.
  • Traditional companies often lack the capability to sell directly to consumers and struggle when attempting to do so.
  • The success of Dollar Shave Club has put pressure on larger consumer product companies to adapt to the DTC model.
  • Acquisitions are seen as a means for established companies to quickly gain expertise and presence in the DTC space.
  • Not all e-commerce companies will be acquisition targets due to various concerns, but leading DTC brands are attractive.

"I think there is pressure now on all of the large consumer products companies to become DTC. And you can either buy or build or both."

This quote highlights the current market pressure on traditional consumer product companies to adopt a direct-to-consumer model to remain competitive, suggesting that acquisitions will continue as companies seek to integrate DTC capabilities.

Opportunities in Consumer Products

  • The team's experience with Nest showed that innovation in stagnant product categories can create and dominate premium market segments.
  • Products that incorporate sensors and data processing can improve over time, providing a competitive edge.
  • Investments are being made in sectors with potential for disruption and innovation, such as the automobile industry.

"We had a great experience with Nest, where we learned from an incredible team that you can take a very popular, very large consumer products category... and you could not just innovate and advance the state of the art, but you could actually create a premium product and own sort of the premium segment that didn't exist before."

The quote reflects the insight gained from Nest's success in innovating within a traditional product category, leading to interest in other areas capable of similar disruption and premium positioning.

Electrification and Evolution of Automobiles

  • Shift from oil internal combustion engine cars to electric cars.
  • Autonomous vehicles require robust software and data, areas where incumbent car companies lack expertise.
  • Direct-to-consumer sales model, as demonstrated by Tesla, provides a better experience.
  • Concept of cars that improve over time with software updates, similar to smartphones.
  • Investment in Pearl, a company that sells direct-to-consumer add-ons for cars, enhancing safety, convenience, and autonomous driving capabilities.

"It's going to be a shift away from oil internal combustion engine cars to electric cars."

This quote explains the transition in the automotive industry towards electric vehicles, moving away from traditional internal combustion engines.

"Cars are going to drive themselves, and autonomous vehicles need really good software and lots of data, two things that incumbent car companies aren't very good at."

Here, David Pakman emphasizes the importance of software and data for the development of autonomous vehicles, pointing out a weakness in current car manufacturers' capabilities.

"We think cars will be sold direct to consumer. The way Tesla is doing it, much better experience and fits with the things I was talking about before."

David Pakman suggests that the direct-to-consumer sales model, used by Tesla, enhances the customer experience and aligns with the industry's evolving trends.

"So we're intrigued by the idea of cars that can get better over time."

The concept introduced here is that cars, like smartphones, can receive updates and new features without needing to purchase a new vehicle, which represents a significant shift in how we perceive automobile ownership.

Growth Mindset and Self-Improvement

  • Carol Dweck's book on growth mindset is David Pakman's favorite, highlighting the brain's capacity for growth and learning.
  • Emphasizes the importance of neuroplasticity and continuous self-improvement.
  • Reading the book annually reinforces the concept of personal growth.

"Carol Dweck's book is my absolute favorite from, I would say, the last two years. It sort of taught me the growth mindset that so many people talk about now."

David Pakman expresses his admiration for Carol Dweck's book, which promotes the idea that intelligence and abilities can be developed over time.

Productivity and Personal Development

  • Productivity is not about specific hacks but a focus on goals and overcoming mental barriers.
  • Belief in the potential for personal greatness through hard work and smart strategies.
  • Commitment to daily learning and self-improvement.

"I'm definitely focused on not letting anything stand in my way mentally, not letting me, myself be self defeated."

This quote underlines David Pakman's determination to avoid self-imposed limitations, which is essential for personal development and productivity.

Dollar Shave Club's Unique Position in E-Commerce

  • High margins due to selling their own products.
  • Low customer churn rate and high loyalty through subscription service.
  • Customers' lifetime value (LTV) expands as they purchase more products over time.
  • Innovative marketing strategies that engage customers effectively.

"They are super unique marketers that really understand how to have conversations with their customers."

David Pakman highlights Dollar Shave Club's exceptional marketing skills, which contribute significantly to their success in the e-commerce space.

Role of Science Studio in Dollar Shave Club's Success

  • Science Studio's early support was crucial for Dollar Shave Club.
  • Contributions from Peter Pham and Mike Jones in networking, business development, strategy, and pricing.
  • The introduction of a highly qualified COO, Kevin Datu, was pivotal, facilitated by the studio's connections.

"They were very, very helpful early on, I can tell you that."

The quote reflects on the vital assistance provided by Science Studio in the initial stages of Dollar Shave Club's development.

Investment in Pearl

  • Pearl's team comprises former Apple employees with experience in delivering popular consumer electronics.
  • The company's mission to innovate in the auto space with advanced consumer products.
  • The decision to invest was influenced by the team's expertise and the vast market opportunity.

"They are an incredible team. I think there are 53 people from Apple, 70 total people now that built and managed and delivered iPhones, iPads, Apple Watch and iPods in use by more than a billion people."

David Pakman explains his investment in Pearl, emphasizing the team's impressive background and their potential to disrupt the automotive industry.

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