Lessons from 15 Years of Consumer Investing
Lessons from 15 Years of Consumer Investing

VMG Partners has helped shape many visionary ideas into iconic brands. With their investments and expertise, 46 brands have been able to bring their passion to life and impact millions of lives.

At the forefront of the VMG Partners’ investment portfolio, is Wayne K Wu, General Partner and Managing Director. Wayne firmly believes in the company’s core philosophy of “Velocity Made Good”. In the recent episode of Brick by Brick: Building Insurgent Brands hosted by DSG Consumer Partners, Wayne explained how this philosophy is at the very heart of everything VMG does, and why it is so important for Founders to succeed.

Read on to pick up some key lessons from this very enriching session.

Key Investment Decision-Making Framework:

The discussion started by asking Wayne the question everyone wanted to be answered. How does VMG evaluate businesses and decide what to invest in? Wayne says VMG does not obsess over growth metrics. Instead, they look at the overall picture.

First, they measure the total addressable market (TAM). A TAM that is too small, implying a very niche audience, is not great news from an investor standpoint.

Second, they estimate the velocity of purchases for the business. How often are customers repeating their purchases?

Third, they look at the gross margins of the business, and the economics behind every transaction. Every sale should make the business some money from the very beginning.

Fourth, they evaluate founder fit and alignment, the values and vision, and the strength of the founding team.

Apart from these core criteria, Wayne also stresses on brand defensibility. Things like NPS, social media metrics and probability of customer recommendations- all point to the strength of the brand, and VMG looks at these metrics over a period of time- to check for business endurance. Indicators like a strong supply chain mechanism, the lack of a need for discounting to push sales, trademark ownership, etc, all point to a healthy brand being built that has garnered customer support and love.

Business Metrics that Matter the Most:

To ensure they are taking the right calls, and their portfolio companies are on track towards achieving their goals, Wayne and his team focus first on a set of metrics that give them a good idea about the health of the business.

First, is gross margin. A 30 percent gross margin is considered healthy, and they’d ideally expect this number or higher. Lesser than 30 percent indicates poor business performance, faulty management decisions, and risky investment for VMG.

Second, is the unit sales per store per week, relative to the brand’s nearest competitor. A good revenue per store per week indicates good sales velocity and repeat purchases, which are critical to brand growth and sustainability.

Third, is the profitability on the first purchase. The VMG team does not buy into justifying customer acquisition costs (CAC) with the lifetime value (LTV) of the product. The business should be making profits from the first sale. If it is not, they’d like to know how far they are from it. VMG does not advocate waiting for very long to justify the CAC.

Fourth, is the gross margin in relation to CAC and LTV. Sometimes, high repeat products can have low gross margins, leading to poor payback in the short to medium term. This can be justified if the LTV is greater. However, companies with lesser operating history cannot count on high LTVs, as they are more likely to be dependent on future fundraises to keep running. This is a red flag.

Correlation between Business Profitability and the Size of Outcomes:

It is often assumed that businesses that are not yet profitable, are valued using some kind of a revenue multiplier. Wayne says this is far from the truth. When businesses are acquired by a strategic acquirer, or go the IPO way, the revenue multiple is just a function of math, and the real driver is a projected discounted cash flow and EBITDA multiple.

Value maximization is really the triangulation of growth and profitability. The best performing IPOs in the United States have at least 10 percent growth and 10 percent EBITDA margins, not the ones showing 50 percent growth and poor EBITDA margins. Typically, VMG looks out for a 15 percent growth, 15 percent EBITDA margin combination, or better. Strong EBITDA automatically implies higher gross margins, leading to that larger “revenue multiple”.

Profits Remain Elusive for Some Commonly Noted Errors:

Wayne identifies the three most common reasons why consumer brands find it hard to make profits. The biggest is poor gross margins. Businesses should consider unit economics very seriously. They cannot rely on the scale to hit high gross margins. The benefits of scale are very rarely realized by most brands.

The second is overmarketing their products. Brands should refrain from establishing a culture of spend, and first, try out all possible ways to organically generate demand. Tactical and strategic marketing is the way to go, as opposed to blindly splurging on channels like digital marketing.

Third, is building a large team when instead, the focus should be on building the right team. A small team that is passionate, has the right skills and experience, is willing to get their hands dirty, and put in the work needed in the initial phases, is what Founders should focus on.

Common Traits in their Most successful Founders:

First, is the quality of self-awareness. Wayne highlights that Founders with extraordinary self-belief, and sharp awareness of their skills, strengths, and shortcomings, are quickly able to build great teams and great products.

Second, is the ability to evolve, identify gaps and changing business dynamics, and build teams and experts for areas that are not their core strength.

Third, and most important, is being good human beings who stand for the highest standards of business and work ethics. Leaders known for their work ethic also attract the best teams, which further helps build the business.

Common Mistakes Founders Make While Building Businesses:

Wayne cautions Founders against unrealistic optimism. A healthy paranoia is essential to make sure there are no tumbles in the journey.

Redundancy is another efficiency flaw he identifies and advises structured and streamlined operations to address this.

Businesses must build a supply chain that is able to overcome the rainy day, and evolve and respond to changing market conditions, consumer behavior, legal frameworks, and other elements that impact operations.

But most of all, Founders must be mindful of the ecosystem they operate in, and respect its standard practices and protocols. For example- suppliers and retailers need to be treated as partners and given respect for what they bring to the ecosystem. A defiant, defensive or pushy attitude can make the system work against the business.

Watch the complete webinar here: https://vimeo.com/698966303

Brick by Brick: Building Insurgent Brands is a monthly talk series hosted by DSG Consumer Partners featuring the brightest minds across the world on everything it takes to build enduring consumer brands sustainably.

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