GUEST BLOGGER: Dori Karjian
Managing Director, G2 Investment Group, LLC
The consumer products market is one of the more fickle sectors in which early stage investors can play, but there is a lot of upside in it. With consumer products, the seller is asking the buyer to part with discretionary cash. To the extent most consumers are already spending their discretionary cash on any other number of “groovy” products, the entrepreneur entering this space is faced with the uphill task of wrestling that discretionary cash away from established products. To do that, emerging companies need to create a new “need” in a consumer.
A great case study for this is Vitaminwater. Water has been around for a long time…you can add bubbles to it, you can call it French, you can claim it is mined from effervescent streams with natural healing powers, but for the whole part, there is not a lot you can do to fundamentally alter the base product. But you can change the reason a customer needs to buy it. By simply adding food coloring, sugar, and mysterious health products…Bingo!! Suddenly, you’re not buying water because you’re thirsty. You’re buying water because you want to gain a step on the basketball court, avoid catching a cold, or have the energy to sit through a late afternoon staff meeting. This, of course, is complete nonsense. But people buy it (I can’t get enough of the stuff), which is brilliant marketing, and, not coincidentally, the prime value driver that lead to Vitaminwater’s $4billion sale to Coca-Cola.
So what should you look for in a consumer product company if you are considering making an investment? I look for three things:
Fundamentals.
First, and foremost, the company has to have sound fundamentals in order to create value. The most important fundamentals to me are:
1) Sales Growth. What is the company’s plan for sales growth? As discussed below, I believe that marketing and brand building is the most important exercise for a consumer products company. But so is identifying and capturing appropriate sales channels specific to the product. For example, let’s say I’m looking at two companies, each of which sells an identical home-improvement product. Company A has just hired a VP of Sales and Marketing, who has only five years of experience, but all of it was spent as a Product Acquisition Manager at Home Depot. Company B has just hired a 20 year veteran from Proctor & Gamble – great resume, great experience, great track record – but no relationships at Home Depot. All things being equal, I would favor Company A. Relationships are everything and Company A has hired someone who can move the product into the most important sales and distribution channel for that specific product.
2) Operating Margins. Good P&L discipline is crucial to maintain projected margins. But externalities can wreak havoc on even the most disciplined companies. To that end, I like companies whose margins are not subject to price volatility of commodities used in production. A young soda company, for example, may not be able to withstand the pressures that come from a dramatic increase in the price of aluminum – if they can’t pass the price off to the customer because they are already positioned as a “luxury” brand, they may have to cut back on sales and marketing efforts, which could be a death knell at an early stage.
3) Capital Turnover. No company, in any stage, can succeed without managing its cash flow. For a consumer products company, I want to see a detailed plan with regard to inventory control. More importantly, I want to see that capital is managed effectively so that inventory, receivables, and fixed assets do not exhaust capital that could be used to promote sales and marketing, which, again, I think is a key component to a consumer products company.
You have to begin with fundamentals. But how do you differentiate between companies that have done a good job with the tangibles? I look at the intangibles.
Narrative is everything.
I believe that people connect not with products, but with the narrative behind a product. This is why I believe that marketing and branding is the key differentiator between companies in this space. Vitaminwater really just picked up where Gatorade and Michael Jordan left off. And they were willing to put their money where their mouth was, giving a young rapper named Curtis Jackson (aka 50 Cent) a 10% stake in the company to be their spokesperson. Vitaminwater spent money creating affinities between people that the consumer public identified with – 50 Cent, Casey Kahne, Carrie Underwood, Kirk Herbstreit (and what I think is even more brilliant is that they diversified themselves with their spokespeople, so that they could hit several specific demographic niches). If Ray Allen believed that drinking Vitaminwater would prevent him from getting sick, shouldn’t you? Vitaminwater’s principal competitor, SoBe – what was their narrative? I can’t even tell…I think it has something to do with car insurance (they use a cute green lizard that I swear I have seen before). It’s not even close. A consumer products company must have a story to tell. I look for companies that understand the importance of narrative.
Management Team; Look for Failure.
The character, personal make-up, and experience of the senior management team is obviously crucial in a start-up. This small group of men or women are the stewards of your investment. They need to be smart, they need to want to work hard, and they need to have a track record. But, in my opinion, their track record should not be without flaws. I think it is impossible to be a successful entrepreneur without having failed previously at something. Given the choice between an experienced entrepreneur who has previously failed and a pedigree CEO who has never worked in a start-up, I would choose the former. Every entrepreneur fails at some point. Successful entrepreneurs learn quickly from their mistakes, don’t repeat them, and tend to have the intestinal fortitude to roll with the punches that hit a start-up. Our culture and history is filled with stories of business and political leaders who have endured failure after failure, but are remembered for their successes – Thomas Edison, Walt Disney, Abraham Lincoln, Fred Smith…all failed before they succeeded. If you’re investing in a company whose senior management has never failed before, be careful, they could be learning these painful experiences on your dime!
There is no prescribed formula for a successful start-up. But, I think a company that has a plan with an emphasis on value-creating fundamentals, understands the importance of narrative and branding, and has a management team that understands how to steward a start-up, will be positioned to beat the many odds that are stacked against it. Now, I am going to enjoy a delicious Power C beverage by Vitaminwater: it is guaranteed to unleash my “inner beast” and I’m going to need that for my soccer game tonight.
Learn more about investing in consumer products companies from Dori and other experts, plus meet 12 promising early stage companies in this space at ZINO Marketplace, tomorrow 6/24, 1:30-6:30 pm at the Pan Pacific Hotel in Seattle.
Dori Karjian is a Managing Director of and General Counsel to G2 Investment Group, LLC, a New York based investment management group. G2 was launched in 2009 and is currently building a multi-faceted platform that will execute on an investment management model based on a modern approach to portfolio-level asset allocation. Mr. Karjian oversees business and legal affairs specific to the development of G2, as well as continued oversight of portfolio companies owned by G2’s predecessor company, Three Sticks Partners, LP. This portfolio includes branded and media focused consumer companies, including Hartmoor, LLC (created to exploit the merchandising and media activities of Sarah Ferguson, the Duchess of York) and Prince Dimitri, LLC (a luxury bespoke jewelry design company founded by Dimitri Karageorge, Prince of Yugoslavia), as well as Bonds Cay, a luxury resort development in the Berry Islands of the Bahamas. Mr. Karjian has had significant experience structuring and assisting early stage companies through the initial financing and operational stages. He is a graduate of Tufts University and the University of Oklahoma College of Law, and is licensed to practice in California and Washington. Previously, as an attorney in private practice, Mr. Karjian focused on securities and corporate law, with an emphasis on emerging companies, gaining significant complex business structuring experience. He lives in Seattle, with his wife and two young children.
