The Exchanges

Q not the right asset class to underwrite small brands. So again, why is that? And what's the kind of core thinking behind this? And the one that I'm super interested by given the last few years is What advice would you give to a founder who's taken VC money as a brand and now is realizing that they maybe can't reach the growth heights that their VCs have set them?

A That's a really difficult situation to be in. Again, I think in certain categories, venture works really well, but overall, no, I don't think VC is the right source of funding for capital intensive businesses, which have a cash cycle in which you incur costs before you generate revenue or in which you incur greater costs as you scale your inventory. You really need working capital, and that's what Assembled Brands provides. So if you've taken venture capital and you needed working capital, what's happened is you've taken on an enormous amount of dilution, and you're going to really disappoint the venture capitalists and their limited partners. So, I mean, you can't really go back in time, but I would say you probably need to restructure your cap table at some point.

AI assessment note: “I would say you probably need to restructure your cap table at some point.”

Q macro and the fragmentation maybe of consumer preferences into these more niche brands. We have Alex Towsing at Lightspeed on the show, and he said that we're seeing a re-platforming of retail. I'm super interested. How do you respond to that? And maybe where do you see the growth of retail over the next decade? Is it this kind of incredibly fragmented niche brand experience How do you view that?

A I think it is. I mean, at Assembled Brands, you know, we incubated and operated these emerging kind of mobile-first brands for the modern consumer. We built distribution across online and offline channels. We developed all the creative content for campaigns. We did video, editorial, e-comm, and social. We did all the financial planning and analysis to build inventory forecasts, benchmarking metrics, and underwrite. And why I say that is because it really allowed us to map out the value chain as it existed before. And it exists today. And really what we learned is that as retail is replatformed, it will only get easier to start brands and organize all the pieces of the value chain to get product to market quickly. And, you know, we can talk about infrastructure a bit later from our point of view, what the replatforming of retail has disrupted their traditional financing mechanisms for brands. And that's the gap we're filling. And it's an important point to hit on, even though it's a little technical, which is Traditionally, a store would make a purchase order. That brand would use the purchase order as collateral for a factor or a bank. The brand would take the money from the factor bank. They would go make their goods. They would sell them in a store, and they would rinse and repeat. With marketplaces like Amazon, social platforms like Instagram, and e-com platforms like Shopif…

AI assessment note: “as retail is replatformed, it will only get easier to start brands”

Q also the interplay between brands and VCs, but I would love to start today, Adam, with maybe more macro specs on, and discuss, often cited as the doom and gloom of retail and consumer brands, but when we chatted before, you presented a slightly different view than the media suggests. Yes. Let's start with that. Why are you optimistic about the current state of the consumer brand and retail environment?

A Yeah, it's a tale of two cities. On one hand, consumer spending is stronger than it's ever been, and on the other hand, retail closures are escalating rapidly. So in 2018, more stores closed than opened, and Amazon is clearing out retailers. At the same time, consumer spending is growing, and so what that means is, is that the survivors have more business. You know, millennials have more disposable income than the previous generation, but they have different spending habits. So, 90 of the hundred largest brands lost share in 2018. And so, consumers are shifting to these niche brand innovators. And typically, those new emerging brands spend more money on inputs like ingredients or materials and use channels like Shopify and Amazon Marketplace for distribution. You know, and they also sell through more traditional offline wholesale and direct channels as well. I'd say the friction for emerging brands is really access to the right kind of capital. So for example, Assembled Brands co-founded a brand called Kate, spelled K-H-A-I-T-E, with a woman named Catherine Holstein. And it grew faster than we expected, and it needed more capital. I've raised hundreds of millions of dollars in my career, but Factors, which are banks that will provide loans against accounts receivable, so orders from retailers, wanted a personal guarantee and would only fund 30% of our retail orders. Because we …

AI assessment note: “consumer spending is growing, and so what that means is, is that the survivors have more business”

Q macro and the fragmentation maybe of consumer preferences into these more niche brands. We have Alex Towsing at Lightspeed on the show, and he said that we're seeing a re-platforming of retail. I'm super interested. How do you respond to that? And maybe where do you see the growth of retail over the next decade? Is it this kind of incredibly fragmented niche brand experience How do you view that?

A I think it is. I mean, at Assembled Brands, you know, we incubated and operated these emerging kind of mobile-first brands for the modern consumer. We built distribution across online and offline channels. We developed all the creative content for campaigns. We did video, editorial, e-comm, and social. We did all the financial planning and analysis to build inventory forecasts, benchmarking metrics, and underwrite. And why I say that is because it really allowed us to map out the value chain as it existed before. And it exists today. And really what we learned is that as retail is replatformed, it will only get easier to start brands and organize all the pieces of the value chain to get product to market quickly. And, you know, we can talk about infrastructure a bit later from our point of view, what the replatforming of retail has disrupted their traditional financing mechanisms for brands. And that's the gap we're filling. And it's an important point to hit on, even though it's a little technical, which is Traditionally, a store would make a purchase order. That brand would use the purchase order as collateral for a factor or a bank. The brand would take the money from the factor bank. They would go make their goods. They would sell them in a store, and they would rinse and repeat. With marketplaces like Amazon, social platforms like Instagram, and e-com platforms like Shopif…

AI assessment note: “I think it is. I mean, at Assembled Brands, you know, we incubated”

Q I do have to take the opportunity to ask. You've obviously backed and founded General Assembly. Tell me, what were the biggest takeaways for you from that learning experience, and maybe how do you think it affected your mindset today with assembled brands?

A Sure, you know, with regard to General Assembly and assembled brands, both are companies whose mission is to empower entrepreneurs to pursue the work they love. In one case, people developing digital products. In another, assembled brands, people developing physical goods. And so if there's one learning I carry from one company to the next, it's that during a gold rush, you want to sell picks and shovels. And, you know, because assembled brands started by actually developing brands, developing goods, our group really understands the consumer journey from the founder perspective and the buyer perspective and the ender consumer perspectives. And our goal is really to fill the gap. For brands that are growing distribution by offering things like capital and data and a network to promote success. And so when we're building assembled brands, we created this proprietary methodology called the ABC formula, the assembled brands capital formula that uses data to understand how deep a brand's relationship is with its consumers. And that data allows us to extend capital that is less dilutive than what private equity or venture may require and beyond what banks are willing to do. And, you know, finally, partnering with assembled brands offers these consumer goods companies an advantage because they can access the intelligence derived from that data, and it leads to better and faster result…

AI assessment note: “during a gold rush, you want to sell picks and shovels.”

Q not the right asset class to underwrite small brands. So again, why is that? And what's the kind of core thinking behind this? And the one that I'm super interested by given the last few years is What advice would you give to a founder who's taken VC money as a brand and now is realizing that they maybe can't reach the growth heights that their VCs have set them?

A That's a really difficult situation to be in. Again, I think in certain categories, venture works really well, but overall, no, I don't think VC is the right source of funding for capital intensive businesses, which have a cash cycle in which you incur costs before you generate revenue or in which you incur greater costs as you scale your inventory. You really need working capital, and that's what Assembled Brands provides. So if you've taken venture capital and you needed working capital, what's happened is you've taken on an enormous amount of dilution, and you're going to really disappoint the venture capitalists and their limited partners. So, I mean, you can't really go back in time, but I would say you probably need to restructure your cap table at some point.

AI assessment note: “I would say you probably need to restructure your cap table at some point.”

Q we move into the quickfire round, discuss two elements that we've slightly touched upon but not delved into, being kind of fundraising and infrastructure. If we start on the latter with the infrastructure element, when we chatted before, you said to me that infrastructure to power emerging or niche brands is broken. You gave me so many cliffhangers before this. What did you mean by this kind of broken infrastructure?

A Well, I would say it's getting better. The industry used to be straightforward. You made samples, showed them to stores, you got purchase orders from those stores, you use those purchase orders as collateral to get money from the bank, made the goods, You sold them in the store, rinse and repeat. With the introduction of e-commerce distribution, the business got more complicated because you're adding channels. So as you add channels, distribution becomes more fragmented. The technologies you need to stitch together are more fragmented. Your marketing channels are more fragmented. And, you know, you've got your factory base, of course, and the product development you've got to do. So what's really needed and what's being built is the software and systems to link all of the parts of the supply chain together seamlessly. And as that happens, there'll be more and more niche brands selling to a global consumer base immediately, and it's getting easier and it's getting cheaper every day.

AI assessment note: “distribution becomes more fragmented. The technologies you need to stitch together are more fragmented.”

Q stand soon. It's another big concern, though, is for me, those that maybe do really go aggressive on social and online channels, it's kind of saturation rates of marketing channels. One Once that low hanging fruit has already been attained, you know, often companies burn money inefficiently on channels that have essentially tapped out. How do you think about kind of saturation rate of marketing channels and approach it today?

A It's a great question. I mean, I would say brands don't have to grow forever. They can get to 30 or forty million in revenue and generate profit, which is why they're not great VC investments, but that doesn't mean they don't deserve capital. The biggest mistake I see is when founders fail to realize this and grow at all costs by overspending on marketing channel in excess of the first sale. Or worse, the lifetime value of the customer. You know, as I said before, that's literally lighting money on fire. You have to look at the business on a regular basis and know when to cut growth. And you want to be aggressive, but not stupid. You can measure demand. And, you know, once assembled brands has financed your business, we can look at those underlying metrics on an hourly basis and tell you how you can safely grow and how much capital you need to do it or whether you need to cut.

AI assessment note: “know when to cut growth. And you want to be aggressive, but not stupid.”

Q stand soon. It's another big concern, though, is for me, those that maybe do really go aggressive on social and online channels, it's kind of saturation rates of marketing channels. One Once that low hanging fruit has already been attained, you know, often companies burn money inefficiently on channels that have essentially tapped out. How do you think about kind of saturation rate of marketing channels and approach it today?

A It's a great question. I mean, I would say brands don't have to grow forever. They can get to 30 or forty million in revenue and generate profit, which is why they're not great VC investments, but that doesn't mean they don't deserve capital. The biggest mistake I see is when founders fail to realize this and grow at all costs by overspending on marketing channel in excess of the first sale. Or worse, the lifetime value of the customer. You know, as I said before, that's literally lighting money on fire. You have to look at the business on a regular basis and know when to cut growth. And you want to be aggressive, but not stupid. You can measure demand. And, you know, once assembled brands has financed your business, we can look at those underlying metrics on an hourly basis and tell you how you can safely grow and how much capital you need to do it or whether you need to cut.

AI assessment note: “You have to look at the business on a regular basis and know when to cut”

Q we move into the quickfire round, discuss two elements that we've slightly touched upon but not delved into, being kind of fundraising and infrastructure. If we start on the latter with the infrastructure element, when we chatted before, you said to me that infrastructure to power emerging or niche brands is broken. You gave me so many cliffhangers before this. What did you mean by this kind of broken infrastructure?

A Well, I would say it's getting better. The industry used to be straightforward. You made samples, showed them to stores, you got purchase orders from those stores, you use those purchase orders as collateral to get money from the bank, made the goods, You sold them in the store, rinse and repeat. With the introduction of e-commerce distribution, the business got more complicated because you're adding channels. So as you add channels, distribution becomes more fragmented. The technologies you need to stitch together are more fragmented. Your marketing channels are more fragmented. And, you know, you've got your factory base, of course, and the product development you've got to do. So what's really needed and what's being built is the software and systems to link all of the parts of the supply chain together seamlessly. And as that happens, there'll be more and more niche brands selling to a global consumer base immediately, and it's getting easier and it's getting cheaper every day.

AI assessment note: “With the introduction of e-commerce distribution, the business got more complicated because you're adding channels.”

Q I do have to take the opportunity to ask. You've obviously backed and founded General Assembly. Tell me, what were the biggest takeaways for you from that learning experience, and maybe how do you think it affected your mindset today with assembled brands?

A Sure, you know, with regard to General Assembly and assembled brands, both are companies whose mission is to empower entrepreneurs to pursue the work they love. In one case, people developing digital products. In another, assembled brands, people developing physical goods. And so if there's one learning I carry from one company to the next, it's that during a gold rush, you want to sell picks and shovels. And, you know, because assembled brands started by actually developing brands, developing goods, our group really understands the consumer journey from the founder perspective and the buyer perspective and the ender consumer perspectives. And our goal is really to fill the gap. For brands that are growing distribution by offering things like capital and data and a network to promote success. And so when we're building assembled brands, we created this proprietary methodology called the ABC formula, the assembled brands capital formula that uses data to understand how deep a brand's relationship is with its consumers. And that data allows us to extend capital that is less dilutive than what private equity or venture may require and beyond what banks are willing to do. And, you know, finally, partnering with assembled brands offers these consumer goods companies an advantage because they can access the intelligence derived from that data, and it leads to better and faster result…

AI assessment note: “if there's one learning I carry from one company to the next, it's that”

Q I have to ask, this is too interesting for me. How do you think about pricing when number crunching on their data? How does one address the topic of pricing given kind of all the differing inputs that you have in terms of data?

A Well, I think there's a process of price discovery. And the bigger problem tends not to be the price, but understanding the lifetime value of the customer and the cost to acquire that customer. So when you're thinking about pricing, usually people get costs wrong and they obviously get the price to cost ratio. The cost can be higher than what you're selling the good for. And that's when you're literally lighting money on fire. And that happens more than you would think. And so you need to know things like if you're a shoe brand, what is the average number of SKUs you should have? What is the average product development cost for those SKUs? What is the average marketing spend per SKU? And optimize your business that way, because there really are right numbers.

AI assessment note: “the bigger problem tends not to be the price, but understanding the lifetime value”

Q also the interplay between brands and VCs, but I would love to start today, Adam, with maybe more macro specs on, and discuss, often cited as the doom and gloom of retail and consumer brands, but when we chatted before, you presented a slightly different view than the media suggests. Yes. Let's start with that. Why are you optimistic about the current state of the consumer brand and retail environment?

A Yeah, it's a tale of two cities. On one hand, consumer spending is stronger than it's ever been, and on the other hand, retail closures are escalating rapidly. So in 2018, more stores closed than opened, and Amazon is clearing out retailers. At the same time, consumer spending is growing, and so what that means is, is that the survivors have more business. You know, millennials have more disposable income than the previous generation, but they have different spending habits. So, 90 of the hundred largest brands lost share in 2018. And so, consumers are shifting to these niche brand innovators. And typically, those new emerging brands spend more money on inputs like ingredients or materials and use channels like Shopify and Amazon Marketplace for distribution. You know, and they also sell through more traditional offline wholesale and direct channels as well. I'd say the friction for emerging brands is really access to the right kind of capital. So for example, Assembled Brands co-founded a brand called Kate, spelled K-H-A-I-T-E, with a woman named Catherine Holstein. And it grew faster than we expected, and it needed more capital. I've raised hundreds of millions of dollars in my career, but Factors, which are banks that will provide loans against accounts receivable, so orders from retailers, wanted a personal guarantee and would only fund 30% of our retail orders. Because we …

AI assessment note: “consumer spending is growing, and so what that means is, is that the survivors have more business.”

Q I totally agree with you there. Can I ask one that I struggle on myself, actually, when I look at kind of brands' Instagram pages. What is it that attracts you, excites you, engages you, that you find a really positive indication or symbol of the company's meaning and embodiment, so to speak?

A I think, you know, obvious metrics like engagement with the Instagram podcast, But I think what is so amazing about Instagram is that it really speaks to this new cohort of consumers. I kind of liken it to music, which is people today like to discover indie bands. They like to share that with friends. They like to go to small venues as opposed to some giant outdoor arena. Now there's a giant outdoor arena too, but I think people would rather see that same band in a smaller venue. And therefore that band would play a number of shows at a smaller venue to meet the needs of the customer. And so I, I think what Instagram, like Spotify does, is empower that social discovery. And the best sign that a brand is doing well is what I would guess I would call organic referral. So it's people are seeing the content, they're commenting on the content, and they're sharing the content organically.

AI assessment note: “the best sign that a brand is doing well is what I would guess I would call organic referral.”

Q agree with you there on the broken nature of that archaic financing mechanism for those brands. I do have to ask, though, because there has been maybe a VC realization as to the opportunity around millennial consumer spend and these brands that have risen around it, with billions of dollars being pumped in. So I have to ask, and it's a contentious one, are we in a consumer bubble, Adam?

A It's a great question. I would say millennials are a cohort that's increasingly online. So Amazon did 7.5 billion dollars of sales on black Friday. Amazon has about a hundred billion dollars in retail sales and represent about 40% of the online market. So if my math is correct, that means there's about two hundred and fifty billion worth of goods being sold online. If you assume there are say 20,000 small brands doing between one and ten million in revenue, that means the total addressable market is between twenty and two hundred billion. So the market is really big and growing. So who finances that growth? You know, as I described before, banks and factors can't, because there aren't purchase orders when the buyers are individual customers, so founders go to VCs. And the problem with VC financing and the manufactured consumer goods space is that the growth expectations exceed the reality of prudently growing a physical inventory base. So, you know, to a hammer, everything looks like a nail, and tools serve a particular purpose and may not be applicable to particular situations. You can open a bottle of wine with a hammer, but I wouldn't recommend it. And so, you know, venture capital is a specific tool that works miracles for certain kinds of businesses, but the rule is that there are millions of small businesses that grow more slowly over a longer time horizon and need a lowe…

AI assessment note: “growth expectations exceed the reality of prudently growing a physical inventory base.”

Q I totally agree with you there. Can I ask one that I struggle on myself, actually, when I look at kind of brands' Instagram pages. What is it that attracts you, excites you, engages you, that you find a really positive indication or symbol of the company's meaning and embodiment, so to speak?

A I think, you know, obvious metrics like engagement with the Instagram podcast, But I think what is so amazing about Instagram is that it really speaks to this new cohort of consumers. I kind of liken it to music, which is people today like to discover indie bands. They like to share that with friends. They like to go to small venues as opposed to some giant outdoor arena. Now there's a giant outdoor arena too, but I think people would rather see that same band in a smaller venue. And therefore that band would play a number of shows at a smaller venue to meet the needs of the customer. And so I, I think what Instagram, like Spotify does, is empower that social discovery. And the best sign that a brand is doing well is what I would guess I would call organic referral. So it's people are seeing the content, they're commenting on the content, and they're sharing the content organically.

AI assessment note: “best sign that a brand is doing well is... organic referral”

Q of free and open distribution today for smaller brands with large incumbents, often big gaming companies, and then also big retailers who are able to spend big, especially on kind of ad channels, be it your social channels, and really kind of push the message there. Am I right to be concerned by this kind of lack of free and open distribution? I mean, how do you think about it?

A Yeah, I wouldn't overestimate the competition. If you have a great product, if you have great service, if you delight your consumers, you've got a winning formula. I would say it's hard to compete if you have a commodity for a very broad audience. There are more niches to go after than ever, and more product innovation than ever. And broad channels can be used to reach niche communities of like-minded people with authentic, differentiated products around the world instantly. I would say there's not much room to make a mistake without burning a lot of money, so being capital efficient is a critical part of Creating value. And, you know, at Assemble Brands, our goal is to look at your data, tell you how much money you can raise, at what rate you can raise it, and when you need to pay it back. And additionally, we can benchmark those metrics and connect you with vendors along the way to improve your company.

AI assessment note: “I wouldn't overestimate the competition. If you have a great product”

Q agree with you there on the broken nature of that archaic financing mechanism for those brands. I do have to ask, though, because there has been maybe a VC realization as to the opportunity around millennial consumer spend and these brands that have risen around it, with billions of dollars being pumped in. So I have to ask, and it's a contentious one, are we in a consumer bubble, Adam?

A It's a great question. I would say millennials are a cohort that's increasingly online. So Amazon did 7.5 billion dollars of sales on black Friday. Amazon has about a hundred billion dollars in retail sales and represent about 40% of the online market. So if my math is correct, that means there's about two hundred and fifty billion worth of goods being sold online. If you assume there are say 20,000 small brands doing between one and ten million in revenue, that means the total addressable market is between twenty and two hundred billion. So the market is really big and growing. So who finances that growth? You know, as I described before, banks and factors can't, because there aren't purchase orders when the buyers are individual customers, so founders go to VCs. And the problem with VC financing and the manufactured consumer goods space is that the growth expectations exceed the reality of prudently growing a physical inventory base. So, you know, to a hammer, everything looks like a nail, and tools serve a particular purpose and may not be applicable to particular situations. You can open a bottle of wine with a hammer, but I wouldn't recommend it. And so, you know, venture capital is a specific tool that works miracles for certain kinds of businesses, but the rule is that there are millions of small businesses that grow more slowly over a longer time horizon and need a lowe…

AI assessment note: “the problem with VC financing... is that the growth expectations exceed the reality”

Q I have to ask, this is too interesting for me. How do you think about pricing when number crunching on their data? How does one address the topic of pricing given kind of all the differing inputs that you have in terms of data?

A Well, I think there's a process of price discovery. And the bigger problem tends not to be the price, but understanding the lifetime value of the customer and the cost to acquire that customer. So when you're thinking about pricing, usually people get costs wrong and they obviously get the price to cost ratio. The cost can be higher than what you're selling the good for. And that's when you're literally lighting money on fire. And that happens more than you would think. And so you need to know things like if you're a shoe brand, what is the average number of SKUs you should have? What is the average product development cost for those SKUs? What is the average marketing spend per SKU? And optimize your business that way, because there really are right numbers.

AI assessment note: “the bigger problem tends not to be the price, but understanding the lifetime value”

Q one layer beneath, though, to probably my biggest nerdy passion point, which is the channels that these brands distribute through. We started to touch on kind of the changing consumer there with the shift to millennial, and the distribution channel obviously changes as a result. So first, How does the shift in consumer spend to millennial shift the fundamental distribution channel usage of brands and retail today, do you think?

A Yeah, so adding channels adds complexity. You have online, offline, direct, and wholesale. So you can think of that as an X and Y axis, right? Online, offline, direct, and wholesale. You then have all of the attendant technologies like Shopify, Google Analytics, QuickBooks, HubSpot, that you have to link up on the back end of your business to see what's going on. You then have all of the creative and quantitative marketing required to sell your goods. And then product development and manufacturing, and that can actually all be pretty hard to coordinate. And the problem is that no one is consolidating the information from those distribution channels, crunching the data and spitting out a financing formula to provide a bespoke working capital solution. So the long tail of brands have the people, they have the product and they have the consumer demand. What they don't have is the short-term capital, the benchmark data to improve their business and the network of vendors and founders to thrive. And that's what we're providing.

AI assessment note: “spitting out a financing formula to provide a bespoke working capital solution.”

Q one layer beneath, though, to probably my biggest nerdy passion point, which is the channels that these brands distribute through. We started to touch on kind of the changing consumer there with the shift to millennial, and the distribution channel obviously changes as a result. So first, How does the shift in consumer spend to millennial shift the fundamental distribution channel usage of brands and retail today, do you think?

A Yeah, so adding channels adds complexity. You have online, offline, direct, and wholesale. So you can think of that as an X and Y axis, right? Online, offline, direct, and wholesale. You then have all of the attendant technologies like Shopify, Google Analytics, QuickBooks, HubSpot, that you have to link up on the back end of your business to see what's going on. You then have all of the creative and quantitative marketing required to sell your goods. And then product development and manufacturing, and that can actually all be pretty hard to coordinate. And the problem is that no one is consolidating the information from those distribution channels, crunching the data and spitting out a financing formula to provide a bespoke working capital solution. So the long tail of brands have the people, they have the product and they have the consumer demand. What they don't have is the short-term capital, the benchmark data to improve their business and the network of vendors and founders to thrive. And that's what we're providing.

AI assessment note: “And that's what we're providing.”

Q of free and open distribution today for smaller brands with large incumbents, often big gaming companies, and then also big retailers who are able to spend big, especially on kind of ad channels, be it your social channels, and really kind of push the message there. Am I right to be concerned by this kind of lack of free and open distribution? I mean, how do you think about it?

A Yeah, I wouldn't overestimate the competition. If you have a great product, if you have great service, if you delight your consumers, you've got a winning formula. I would say it's hard to compete if you have a commodity for a very broad audience. There are more niches to go after than ever, and more product innovation than ever. And broad channels can be used to reach niche communities of like-minded people with authentic, differentiated products around the world instantly. I would say there's not much room to make a mistake without burning a lot of money, so being capital efficient is a critical part of Creating value. And, you know, at Assemble Brands, our goal is to look at your data, tell you how much money you can raise, at what rate you can raise it, and when you need to pay it back. And additionally, we can benchmark those metrics and connect you with vendors along the way to improve your company.

AI assessment note: “at Assemble Brands, our goal is to look at your data”