20VC Why Brands Can Have The Same Revenue Multiples As Enterprise Companies & The Right Way To Think About Amazon In Today's World of Commerce with Eurie Kim, General Partner @ Forerunner Ventures

In this episode of "20 Minutes VC," host Harry Stebbings interviews Yuri Kim, General Partner at Forerunner Ventures, known for investments in major e-commerce successes like Jet.com and Dollar Shave Club. Kim shares her serendipitous journey into venture capital, her partnership with Kirsten Green, and Forerunner's focus on early-stage companies shaping the future of commerce. She highlights the importance of brands establishing a direct-to-consumer relationship, leveraging data, and maintaining strong unit economics. Kim also discusses the evolving landscape of customer acquisition, the impact of Amazon on their strategy, and the significance of ownership and reserve allocation in portfolio management. The conversation touches on Forerunner's latest investment in ShopShops, a platform merging live streaming with shopping experiences, exemplifying the firm's commitment to innovative consumer trends.

• Forerunner Ventures is an early-stage firm focusing on entrepreneurs defining the next generation of commerce.
• Yuri Kim is a general partner at Forerunner Ventures, with a background in consulting at Bain and investing at Castanea Partners.
• Forerunner's portfolio includes Jet.com, Dollar Shave Club, Birchbox, Bonobos, Glossier, Hotel Tonight, Warby Parker, and Zola.
• Yuri Kim serves on the boards of Away, Move With, and The Farmer's Dog.
• Michael Kimmer at Sandana and Kirsten Green were thanked for introducing Yuri Kim to the show.

"Last year, Kirsten Green was announced as one of the most downloaded episodes of the year, and today I'm thrilled to release our episode with her partner, Yuri Kim, general partner at Forerunner Ventures, the early-stage firm dedicated to investing in entrepreneur, defining the next generation of commerce."

The quote introduces Yuri Kim and Forerunner Ventures, emphasizing their focus on commerce and their notable investments.

• NatureBox offers an unlimited snacking program for offices, emphasizing health with no artificial ingredients.
• Lisa is an online mattress company that donates one mattress for every ten sold, promoting better sleep with a luxury foam mattress.

"Naturebox is the first-ever unlimited snacking program for offices of all sizes, starting with just $12 per month per employee." "And all Lisa mattresses are 100% US or UK made, and for every ten mattresses they sell, they donate one to a shelter."

The quotes describe the services and value propositions of NatureBox and Lisa, highlighting their focus on health, convenience, and social responsibility.

• Yuri Kim's entry into venture capital was serendipitous, not planned.
• She was introduced to Kirsten Green by a mutual friend, Mitchell Green, and they connected over their shared interest in consumer brands.
• Yuri was working on e-commerce strategies at Bain but wanted to return to her entrepreneurial roots.
• She was captivated by Kirsten Green's vision for Forerunner Ventures and joined the team after Kirsten received her first term sheet.

"So he made the introduction, and Kirsten and I met over coffee down at the ferry building in San Francisco and started chatting." "About a month and a half later, I get a phone call saying that she had gotten her first term sheet for Forerunner Partners one, and she asked what I thought about joining her team."

These quotes recount the personal connection between Yuri Kim and Kirsten Green and the pivotal moment when Yuri decided to join Forerunner Ventures.

• Forerunner Ventures challenges the notion that consumer and e-commerce brands have lower valuation multiples than enterprise models.
• Recent analyses show that enterprise SaaS M&A deals since 2015 had an average revenue multiple of 3.5 to 4x, comparable to consumer deals.
• Forerunner Ventures aims for balanced investment entry points and advises founders not to prioritize valuation over building a strong business.

"I think commerce deals can absolutely drive the same valuations and have super exciting venture returns." "We're often coaching founders not to optimize for valuation in the early days anyways, but it's about building a strong business."

These quotes emphasize Forerunner Ventures' perspective on valuation multiples in commerce deals and their investment philosophy focused on business fundamentals over initial valuation.

• Ownership percentage is increasingly important for investors seeking outsized returns.
• Forerunner Ventures considers ownership when investing to ensure it can significantly impact the fund's performance.
• The firm balances market valuation trends, potential acquisition prices, and reasonable investment valuations to achieve this goal.

"Speaking of kind of outsized returns, it's also largely driven by ownership. And something that I'm seeing a huge amount more swaying towards today is kind of the dominance of ownership in investors thinking."

This quote reflects the growing emphasis on ownership stakes in venture capital investments and its impact on fund returns.## Importance of Ownership in Early-Stage Investments

• Ownership stakes are crucial in early-stage investments due to the high risk involved.
• Significant returns are needed to make the investment worthwhile, even in the event of a successful exit.
• A balance between the work put into a deal and the potential outcome based on ownership is necessary.
• The strategy has evolved from focusing solely on percent ownership to considering the actual dollars at work.
• The firm's approach is quality over quantity, emphasizing meaningful deals with potential for substantial returns.

"So ownership really matters. I think especially when you're in the earliest stages, you're investing in a lot of companies, there's very high risk because they're so early. There's sometimes not even product and market yet, or the founding team is super small."

This quote highlights the significance of ownership in early-stage companies, where the risk is amplified due to factors like the absence of a product in the market or a small founding team.

"If you have 100 million dollar fund, you still need to make three, four, five, x on that to be a top tier firm."

This quote emphasizes the necessity for a venture fund to achieve multiple times return on its fund size to be considered successful and top-tier.

"And so we want to balance the work that we're going to put into a deal with the amount of ownership and potential outcome that there could be."

This quote speaks to the need for a venture firm to consider the effort they will invest in a deal relative to the ownership stake and the potential financial outcome.

"So if you have a smaller ownership percentage of a business, but you've been able to put two, three, $4 million, and you think that there's a potential to get ten or 20 x on those dollars, that's still a great deal."

This quote explains that a smaller ownership stake can still be valuable if the firm is able to invest a significant amount of capital with the prospect of a high return.

• Reserve allocation is guided by a two to one rate, with initial investments being a portion of the total dollars earmarked.
• Reserve allocation decisions are based on a company's performance and potential for outsized growth.
• The process involves assessing whether to allocate more than the fair share of reserves or to be transparent with founders about the lack of additional investment.
• Follow-on investments are treated as new decisions, and the investment thesis is revisited to ensure it remains valid.

"So as a guideline, we're similar to many of the other firms out there, where we're earmarking reserves at about a two to one rate."

This quote describes the firm's baseline strategy for reserve allocation, which follows an industry standard.

"So once we see a business is gaining traction, we make a decision on whether or not it warrants more than its fair share of reserves."

This quote indicates that reserve allocation is dynamic and may be adjusted based on a company's growth and traction.

"Every investment, including follow on investments, are considered new decisions, and we revisit the thesis on the investment."

This quote underlines the firm's approach to follow-on investments, treating each as an independent decision and reevaluating the original investment rationale.

• Digitally native brands are born online and often target millennial or digitally savvy consumers.
• Vertically integrated brands control both product development and customer experience.
• These brands have a direct relationship with their customers, allowing for quicker adaptation and superior service.
• Owning customer data is a significant advantage for digitally native vertical brands.

"The digitally native portion of the term we see as just the brand is born online. It typically focuses on the millennial consumer, or the consumer who's otherwise digitally native themselves."

This quote defines the term "digitally native" as brands that originate online and cater to consumers who are accustomed to the digital world.

"The vertically integrated part of the term refers to the fact that the brand both makes and sells their product."

This quote clarifies that "vertically integrated" means the brand has control over the entire process from production to sales.

• Not all digitally native vertical brands are suitable for venture capital investment.
• A key consideration is the brand's potential to grow beyond its current product offerings.
• The focus is on the potential for a brand to become a lifestyle choice and connect with consumers on a deeper level.
• The essence of a brand is not just its visual identity but its overall mindset and approach to consumer relations.

"We think about whether the brand has a potential to become a real lifestyle brand, whether they can connect with consumers on a broader set of needs than just individual products, and really sort of speak to an ethos that the consumer is going to live and breathe."

This quote explains that for a brand to be a good venture investment, it must have the potential to resonate with consumers on a lifestyle level, not just as a product.

• The founder's authentic passion and mission are critical in creating a brand that connects emotionally with customers.
• Brands with a strong, founder-driven ethos are more likely to receive support in their early stages.
• The founder's influence on the brand's messaging and customer experience is a key factor in investment decisions.

"Most of the time, it has to do with the founders, and it's the authentic passion and mission that these founders are bringing to the brand, which ultimately translates to an experience that I think customers start to have that emotional connection to."

This quote emphasizes the importance of the founder's genuine passion and vision in creating a brand that can forge an emotional bond with its customers.## Unit Economics in Brand Investment

• Importance of unit economics when investing in brands.
• High-margin categories like beauty allow early-stage companies to invest in business growth.
• Vertically integrating helps brands leverage margins for marketing and customer service.
• Building a brand is challenging without sufficient margin dollars.

"And that's actually unit economics. So Henry has a finance background. He's extremely savvy when it comes to just thinking about the business of a brand."

This quote emphasizes the significance of a founder's understanding of unit economics and the advantage of having a finance background in managing a brand's business aspects.

"And certain categories have structurally higher margins than others. Beauty is obviously one of them."

This quote highlights the structural differences in margins across different categories, with beauty being an example of a high-margin industry.

"By vertically integrating the earlier stage, teams have the ability to start investing in their businesses and marketing and customer service because they have that margin to play with."

The quote discusses the benefits of vertical integration in early stages, allowing brands to invest in growth due to available margins.

• The increasing difficulty of customer acquisition in consumer spaces due to incumbency advantages.
• Brands must be flexible and forward-thinking to find new acquisition channels.
• Breakout success requires doing everything well, not just focusing on a single strategy.

"And I think that all companies would love to believe that there's some silver bullet."

This quote suggests that companies often hope for a simple solution to customer acquisition, which rarely exists.

"They're doing paid acquisition, they're doing social media marketing, they're doing branding, they're doing all kinds of different types of activations to connect with their consumers."

The quote lists various strategies that successful brands employ to acquire customers, indicating the need for a multi-faceted approach.

• Brands that become overnight successes often reach product-market fit within their first year or two.
• Brands that break out after several years require disciplined founders and may need to reach profitability first.
• Brands like Warby Parker and Casper achieved early success and became well-known quickly.

"It is very obvious when it happens. It is a clear difference from the existing sort of pack."

This quote describes the noticeable difference in growth when a brand reaches an inflection point and begins to stand out from competitors.

"But when you have something that really is resonating with the consumer, you start to see that early traction."

The quote emphasizes the importance of a product or brand resonating with consumers to achieve early traction and potential breakout success.

• The market is in a state where incumbents are actively acquiring innovative e-commerce companies.
• Some companies will choose to IPO or become acquirers themselves.
• The potential for e-commerce companies to be acquired by incumbents or to stand alone is a current market trend.

"We're definitely in an exciting time in the market where big incumbents are not only just realizing that they're losing customer market share and mind share, but they're actually starting to finally take action against that fear and concern."

This quote discusses the current market dynamics where large incumbents are beginning to acquire innovative companies to stay relevant.

"Some will IPO and maybe even become acquirers of their own."

The quote suggests that some e-commerce companies will not only go public but may also start acquiring other companies, indicating a dynamic and evolving market.

• When evaluating investments, it's important to consider the competitive landscape and potential for acquisition.
• The goal is to back founders aiming to build substantial, lasting businesses.
• Acquisition is considered as one possible outcome for a business, but not the primary focus.

"So plotting a quick M&A plan is not really on our, you know, I'd be lying if I said we don't think about it."

This quote reveals that while mergers and acquisitions are considered, they are not the primary strategy for investment decisions.

"We do have the thought exercise around what does the competitive landscape look like as we're thinking about an early stage company, and what is that company disrupting?"

The quote indicates that understanding the competitive landscape and the disruptive potential of a company are part of the investment evaluation process.

• Amazon is recognized as a formidable force in the market.
• Despite Amazon's dominance, companies can still find opportunities to succeed.
• Amazon's presence requires companies to be strategic in their approach to the market.

"But you have to keep in mind that Amazon is here and they have advantages in terms of the billions of eyeballs that they've got on their website."

This quote acknowledges Amazon's significant market presence and the need for companies to strategize accordingly.## Leveraging Amazon

• Discussing the potential for businesses to use Amazon as a tool rather than viewing it as a threat.
• The importance of considering Amazon's vast user base and distribution channels, like voice, to gain a competitive advantage.
• Encouraging innovative thinking within internal teams and portfolio founders.

"How could we leverage Amazon? How could we get access to that incredible user base and maybe convert them into our own experience?"

The quote emphasizes the strategic consideration of utilizing Amazon's resources, such as its user base, for a company's benefit rather than competing against Amazon directly.

• Yuri Kim's favorite book, recommended due to its concept of seeking innovation over competition.
• The book was a personal gift from Yuri's father, adding sentimental value.
• The strategy focuses on finding untapped markets rather than competing in saturated ones.

"It's called Blue Ocean Strategy. I love it. Because my father gave it to me and it's the only book he ever gave me."

The quote highlights the personal significance of the book to Yuri Kim, as well as the core idea of the Blue Ocean Strategy which is integral to their approach to business.

• Live streaming video is seen as an exciting consumer trend.
• The potential for live streaming to bridge online and offline experiences.
• Anticipation for how customer interaction with companies and brands will evolve through live streaming.

"I personally think that live streaming video is really interesting right now."

This quote indicates Yuri Kim's enthusiasm for the live streaming video trend and its implications for consumer engagement with brands.

• The role of a board member in strategic thinking and planning for a business.
• Recognizing patterns and growth stages to help founders stay ahead and avoid pitfalls.
• The importance of trust and communication in the board member-founder relationship.
• Being an advocate and confidant for founders to support them through challenges and victories.

"It's my job to help the founders think strategically about next steps for the business."

The quote outlines the responsibility of a board member to provide strategic guidance to company founders, emphasizing the advisory aspect of the role.

• Voice technology presents a challenge for brand differentiation.
• The risk of product commoditization in voice-activated platforms.
• The need for strong branding and direct consumer relationships to ensure product recognition by name.

"Voice is a new platform, and many products are going to run the risk of getting commoditized."

This quote captures the challenge posed by voice technology to brands, where specific product requests may become generalized, making brand recognition more difficult.

• Yuri Kim enjoys the Business of Fashion for its coverage of the fashion and consumer business.
• The Skimm is mentioned as a guilty pleasure for casual reading.

"I really love the Business of Fashion."

The quote signifies Yuri Kim's preference for industry-specific content that provides insights into the business side of fashion.

• Witnessing a positive shift from prioritizing growth at all costs to building stable, fast-growing businesses.
• Founders becoming more disciplined and venture communities influencing this change.
• The result is more stable businesses, which is beneficial for the venture ecosystem.

"Switching the mindset from growth at all costs to building sound businesses that are still growing really fast."

Yuri Kim expresses approval for the observed trend where startups focus on sustainable growth rather than rapid expansion without regard for stability.

• Invested in Shops, a company leveraging live streaming video technology.
• Shops connects online customers to offline shopping experiences, particularly between the US and China.
• The decision to invest was influenced by the founder's strong background and the company's alignment with multiple trends.

"We just wired an investment yesterday, which is called Shops, and this team is leveraging that live streaming video technology."

The quote describes Yuri Kim's latest investment decision, highlighting the relevance of the live streaming trend previously discussed and the potential for cross-border commerce.

• Yuri Kim is highly regarded in the venture ecosystem, as evidenced by recommendations from twelve prior guests.
• The interview showcases Yuri's insights and experience in the venture capital field.

"A much loved and respected individual in the venture ecosystem."

This quote is a testament to Yuri Kim's reputation within the venture community, as reflected by the numerous recommendations for her appearance on the show.