Don’t trust your taste buds

Alex Bodney 0:00

It's not irrelevant, but whether you like something might not be the reflection of the the broader market or if you don't like something that might not be the reflection of the broader market. But yeah, I mean revenue's great, but what did it cost you to get that revenue? We want to see repeat purchase rate and retention. If you want to be an angel in any of these spaces, spend time getting to know people that are in that industry. Ask questions like you talked about, you may only get 60 minutes with a founder. Go meet somebody like me or somebody else that's active in the space.

Introduction

Andrew Kazlow 0:36

Welcome to the Diligent Observer, where we help angel investors see what most missed. I'm your host, Andrew, and every week we explore what works, what doesn't, and why through conversations with experienced startup investors and operators. My guest today is Alex Bodney, co-founder and managing partner of Midnight Venture Partners, an Austin-based VC with a focus on consumer brands like Olipop, Happy Dad, and Tat. In this episode, Alex and I discuss some super common mistakes that angels make when evaluating super deals. For example, mistaking personal tape for market demand. break down three of the most important numbers for vetting a CPG deal, and we talk about why saying yes to a huge distribution deal could actually be a horrible mistake. I hope you enjoy learning from Alex

Alex Bodney 1:39

As much as I did Alex, thank you for being with me today. Thanks, Andrew. Good to see you again.

Andrew Kazlow 1:51

I know it's been a while, but cool to be here and excited

Why angels gravitate toward consumer brands

Andrew Kazlow 1:54

to chat. Likewise. Well, I I want to start with a question I'm excited to ask, which is why do you think so many angel investors tend to get started with a CPG deal? It seems like every angel I know, their first investment is into some consumer product. And I would love to hear why you think that is.

Alex Bodney 2:14

Yeah, I think the the tangibility of what we do lends itself to that. Typically, the things that we're investing in inside of CPG, and obviously midnight will we we do stuff that's well beyond CPG as well, but have a good concentration in that area. You're probably interacting with a product or a competitor of that product in your day-to-day life. You understand it, it's familiar. Um, and so I think naturally people can kind of gravitate towards that and have more of just a first-base approach and understanding of the product versus something that's more abstract or deep tech that you may not have kind of a core competency in as an angel, um, and maybe a little more intimidating to you. So I think the tangibility, the familiarity, those things kind of tend to lend themselves to allow angels to feel more comfortable.

Andrew Kazlow 3:08

I agree. It also feels like the local nature of a lot of these brands is a driver. Like a number of the angels and investor community we work with are like very focused regionally or you know on some kind of affiliation group. And so if it's a local thing, they're like they get excited about it.

Alex Bodney 3:26

Um and I think we're biased too. Like I'm sitting here in Austin, Texas. Austin's certainly one of the hubs of CPG innovation, and and so many cool brands have been built and scaled here. And so I think they're uh that's an even more heightened version of what you said is that there just is a CPG CPG ecosystem here in Austin. That may not be the case for for everybody and every angel out there, but I think it's what you said is even more true here.

Andrew Kazlow 3:55

Yeah, I think maybe also I'd be curious to your reactions to this, but I think for a lot of angels, there are motivations at play other than pure you know profit and like giving back impact, you know, driving some kind of change in a particular category seems to be one of the drivers oftentimes that I feel like maybe is relevant to why so many get started with a consumer product because they can see it on the shelf, somebody using it, it's just like you said, very tactile.

Alex Bodney 4:20

Yeah, I think you know a lot of the folks that are LPs in our fund, our responsibility is to grow their capital and give them back more than they gave us. Like at the end of the day, that's our job. But I think there is an element too of hey, we're in so many deals that are, you know, things that I don't get to interact with, things that I can't see. I think it's super cool that my child or my grandchild can walk through a grocery store with me and we can say we own a piece of that business directly or indirectly. Um, so there definitely is again that goes back to the tangibility and and and the touch it-feel-it kind of aspect to it, but that's certainly it's not a small

The mistakes new CPG investors make

Alex Bodney 5:03

part of it.

Andrew Kazlow 5:04

What just kind of on this theme of you know newer investors getting started here, what do you what are the things that you feel like are most commonly misunderstood about what it takes to actually do well in this space? I want to unpack a lot more of this, but like what are the things that are most commonly misunderstood when folks are just getting started?

Alex Bodney 5:23

They're like, oh, it's Yeah, as I as I was preparing for this, I wanted to make sure that I said something to to start. I don't believe that all angels are created equal in this space. I think if you're an exited founder inside of a given industry that's writing an angel check, you're in a whole separate sphere than somebody that's just writing a check because they met a founder and they think it's a cool idea and they don't have any industry expertise. Those two things are are not the same. I think, you know, broadly when we're talking about angel investors, somebody that's had success in their career, um, has discretionary income, has the ability to write a check into an illiquid asset that they hopefully understand the uh the likelihood or lack thereof of getting their money back. Um, when we're talking about that, I think there is there's a couple of things. I think we see, again, talking about CPG specifically, trusting or falling in love with your your own face fuds, and and that, you know, we talk about it all the time. It's not irrelevant, but whether you like something might not be the reflection of the the broader market, um, or if you don't like something that might not be the reflection of the

Why great ideas still fail

Alex Bodney 6:39

broader market. And so when it comes to CPG specifically, I think sometimes people can fall in love with their own their own uh taste buds. Um and then I think that I hope that people understand the difficulty in building and scaling anything, any startup, whether it's CPG or anything else. I mean, the math is out there, the odds of reaching 10 million in revenue, 100 million in revenue, like it it's really small. And so I think there is a lack of understanding, in my opinion, of how many things fail or were competitors to the brand name that you're familiar with. Like they weren't the only person with that idea four years ago. Um there was 17 other competitors that all got started. And give me an example. There were angels. Yeah, so um we have, you know, we invested in Olipop. Um we're investors in recess, we're investors in leisure hydration, which I'm drinking right now. Uh Sesh is a nicotine pouch business. All of those brands that I just named are doing incredibly well. Ollipop is certainly the most notable of those. There's been a lot of other kind of modern soda brands that have been founded that aren't doing north of 500 million in revenue. They have a category creator that that was their partner in creating that category and Poppy, who's had incredible success in their own right, obviously with an exit to Pepsi. Um and so if you were an angel that wrote a check into one of those deals, you look like a genius, and somebody else may have had the exact same thesis and written a check into a competitor that didn't have the same success, their thesis was right, but the execution um and and a few other things didn't go their way, and so they haven't had the same outcome. Um so I think yeah, there's just very rare are you seeing one brand attack a problem um and address it by itself. Um, and so there can only be so many winners inside of a given category.

Andrew Kazlow 8:45

Yeah,

Category creators vs. fast followers

Andrew Kazlow 8:46

it's interesting you say that. So I actually got to spend a summer working at Curie Dr. Pepper back during business school, and I was and still am just appalled by the sheer volume of brands and SKUs and how fast consumer tastes change. Like it is just ridiculous. I mean, if you you you bring up Ollipop and Poppy, like just in that category. Like, do you know how many uh like I don't know how you can categorize that, um how many brands, how many different you know, companies are playing in that space right now, like healthy?

Alex Bodney 9:22

I wouldn't have the number off the top of my head, but I mean it's it's north of ten for sure. And I think the interesting part is that Ollipop and Poppy largely were created in the same time frame, um built the category together, have largely been kind of neck and neck from a revenue or business size perspective throughout their history. Um that's not necessarily traditional to have two competitors kind of scale uh at really similar rates with one another. Um a lot of times you see a category creator, we call them category creators or fast followers. And and so there's there's two different trains of thought. Do you have such a big head start by being the category creator, or are you at an advantage as a fast follower of that category creator probably having spent a great deal of money in consumer education, category awareness that you are going to kind of kind of ride the jet stream on as a fast follower? Do you get to learn by what they did wrong, make some tweaks and kind of just piggyback that way? Um so there's a lot of different nuance inside of any of these given categories, but I I think it's pretty rare to see two brands started largely at the same time, scale really in a similar fashion, um, and both reach the amount of success that they've had. I mean, they've they've built, we joke, when we invested in Olipop, if you look at all the if you go into consumer data sets, modern soda was not a category of any of this consumer data when we invested in Olipop. Modern soda is very much a category inside of any big data set that you look at from a retailer or or any other any other service that's providing that.

Andrew Kazlow 11:09

So all else being equal, do you pick the first to market or do you pick the fast follower? Which is better in your opinion?

Alex Bodney 11:18

I don't think there's a there's not a yes or no answer to that question. Um, what we talk about all the time uh as a fund that's doing this as a career and and building a firm. What we do is is about access. And so you may not have access to both of those deals that may dictate your decision. You may feel really strongly that the team at the category creator is way better than the team at the fast follower, or vice versa. That may be what sways your decision. Um it may come down to hey, we think this product is is actually extremely superior to the other one. There's a lot of nuance. We would never make a blanket decision of, oh, they weren't the category creator, so we're not gonna invest with them, or they were the category creator, we only do fast followers. We we we don't have that. We're we're investors in in both. Um, and there's I don't believe there's a right or wrong answer.

What angels misunderstand about dilution

Andrew Kazlow 12:15

Other things that you feel like early angels getting into the space don't understand, or or you mentioned the difficulty, like why this is so hard in any business, but maybe say more about the difficulties specifically of scale scaling a consumer brand that are distinct from other stuff.

Alex Bodney 12:32

Yeah, I don't to to answer the question slightly differently, and and I'll I'll answer the second part in a second in terms of scaling a consumer brand. I think the one thing that I talk to a lot of angels that they may not have a full understanding of going into it is the amount of dilution that they're probably going to experience over time. As an angel, you're likely participating in the really early days, the infancy of a business, CPG or not. And more than likely, there's going to be numerous additional rounds of outside financing raised in the course of that business's journey. Each one of those is dilutive to you. So if you started out with 2% of the company and they go raise a round that's 20% dilutive, and then the next round is 30% dilutive, like that stuff starts to stack on top of each other. And then there's just the unfair reality that the last money into that business has seniority and preference. And so if and when an exit is coming, the the folks that were in the earliest are sitting towards the bottom of the capital stack uh when you start to look at the waterfall and how those distributions are going to be made. So I think that's probably something that's not generally understood by first-time angels or people that are just starting to do that. Um, in terms of difficulty scaling a CPG business, we're fascinated. Like the route to market and how you market your product is changing all the

How consumer brands reach customers today

Alex Bodney 14:07

time. And we kind of started midnight towards the end of the direct-to-consumer wave, where you had some really incredible outcomes that were created during that time, and and so we got uh we were fortunate to um to we were fortunate to see that trend shift and change. Um and now you you've seen the rise of the the influencer and the creator and paid social and just buying into the meta or Google hamster wheel of paid social is not the name of the game today as it was in in 2020 or 2021. The dynamics of that are just completely different. Um and so now you're seeing so much organic content, so many brands bringing content creation in-house. Um can you scale a brand to 10 or 20 million dollars of revenue or a hundred million dollars of revenue without having ever touched a retailer? That that would have been an absurd idea 15 years ago. Today we see brands do it all the time. They're 100% digitally native. They get to 10, 20, 50, 100 million of revenue before they ever go to retail. Um, and then how you get to retail, that part hasn't evolved quite as quickly. Um, we've had some really interesting conversations as of late on the distribution side of CPG and understanding how that universe is is going to shift and change in the next few years if it can. Um So I think those things are all kind of the nuance of making sure that the team that you're investing in really understands the landscape and how to execute the opportunity.

Andrew Kazlow 15:52

A quick note before we continue the conversation. Alongside the Diligent Observer podcast and newsletter, I also run an outsourced operations service specifically built to serve angel networks. My team handles things like initial screening, social media, newsletter prep, platform management, and a whole lot more. The kinds of things that either aren't getting done or shouldn't be done by busy community leaders. If that sounds interesting to you, send me a note. Now, back to it. So you just had a bunch of things that are really interesting. What I would love to hear more about is this distribution hasn't quite evolved yet, but it seems to maybe be starting to. What does that mean? Tell me more about that.

Why retail distribution is so difficult

Alex Bodney 16:31

Yeah, you gotta be a little bit guarded based on some of the conversations that we're having, but largely, you know, you beverage specifically, there's different routes to market. One would be broadliner, and one would be DSD, direct store distribution, and and again, there's no right answer. Like Olipop largely has built their business through through Broadliner, and and Poppy built their business with a DSD network. And again, they they went at about the same rate. Um, but I think it's distribution's expensive, and so that's kind of what I mean by how it's evolved. If you want to be in HEB and Kroger and Safeway Albertson and Publix in the Southeast or Walmart and Target and nationwide, it's not a cheap game, and getting your product on the shelf isn't free. Uh, just having the best product and having a cool brand doesn't guarantee you that shelf space. The amount of yeah, I know, right? It's crazy. Um the amount of relationship capital, having the right brokers, understanding what the buyer wants to see, what your price pack architecture looks like, who do you partner with for a route to market partner from a distribution side to get the product where it needs to go to avoid out of stocks, to make sure you have your inventory under control. Like there's a zillion ways that that any of these brands can get tripped up. And

When too much distribution becomes dangerous

Alex Bodney 17:57

and I think what we talk about with our founders often is especially the ones that that truly have started to find product market fit, and they're having retailers reach out to them versus them reach out to retailers, that's you're in a great spot when that starts happening. But you can get tripped up if you take on too much distribution too fast, and your supply chain and the operational side of your business can't support it, and you fail inside of that retailer as a result, you're probably not getting a second chance. And so there's a fine dance or balance between, hey, you just offered us 1800 doors. We'd actually like to start with 500 of your key doors and prove it out that way. And there's often a lot of conversations that can happen between a brand and a retailer to that end. Um and sometimes if if you have your supply chain dialed and your operations are ready to support it, great. Take all 1800 doors, knock it out of the park. But that's that's a conversation that that a founder has to have inside of their own business and and really have kind of their hands on the steering wheel of that side of the business in order to make that decision.

Andrew Kazlow 19:01

It's interesting you bring that up because I feel like a lot of the CPG pitches that I see are raising because they've got some you know base level of distribution, they got to where they are, they raised a little bit of money and they're they're trying to scale. Walk me through like let's assume that this is a company that's got some you know basic distribution, they're on one retailer or they're in one, you know, whatever. They've got some like some kind of a ground point and they're raising to go faster.

How Alex screens CPG investments

Andrew Kazlow 19:31

What's your recipe for how you screen companies out, or like what what's the playbook for, okay, this is really interesting versus yeah, not interested. Obviously, let's just assume it's like you know, valid team and other stuff that you would expect is is reasonable. Like, what are the things that uniquely in this market I need to be pressing on?

Alex Bodney 19:51

Yeah, I'll talk about from a retail perspective and then a direct-to-consumer perspective. The vast majority of of our brands, and we use direct to consumer loosely, have actually started to break it out where we kind of treat Amazon as its own channel. So direct to consumer and Amazon would fit under an e-com umbrella if we wanted to see like how big a brand's digital business was, but those two channels are really, really different and and separate

The most important retail metric

Alex Bodney 20:17

to themselves. And then you have wholesale or or retail. On the wholesale or retail side, the most important metric to us is velocity. And I'm never gonna compare a beverage to a center store snack item that's not relevant, right? Like their velocity may be different than that other brand in a totally different category. But define velocity. Yeah, sorry, thank you. Um velocity we would define as units per store per week per skew. And so, say you have three different skews, leisure hydration has uh a lemonade, a mango, and a blueberry inside of a given retailer. That's three skews. So we want to see the velocity of each one of those skews on a per door per week basis. And so that means we've got uh we're in Whole Foods at X hundred locations on a per door basis. How many of those items are being scanned out of each store on a weekly basis? Um, when we take that data and look at it across category competition, we have a pretty good idea of whether or not this is being adopted and how it's comparing to you know the amount of other brands that we've screened or invested in or been friends with over the last however many years. You know, we have a pretty good understanding of of what a good number looks like. Um and we can pretty quickly go, that's not interesting. Like that, you know, it's it's half of what it should be. There's a problem there. Um or wow, that's best in

Why repeat purchases matter

Alex Bodney 21:54

class. There's something to dive into here on the digital side, uh, specifically direct to. Consumer, so selling through your own website, Shopify, or other? Um, we want to see repeat purchase rate and retention, right? Like, okay, cool. You you ran a great marketing funnel that resulted in converting a customer or converting a target into a customer. How often are they coming back to buy that product? What percentage of your overall direct to consumer revenue is a repeat purchaser? That number should be climbing and growing over time. Um CAC customer acquisition cost versus lifetime value. We typically define lifetime value as a 12-month period. So what's the ratio of your cost to acquire that customer to what that average customer, what's the value of that customer inside that 12-month period? There's a a a good range that we kind of know is is foundationally correct, and you can build and scale a business off of that. And if you're well below that number, it's probably a giant red flag, and we need to dive in and see if it's a correctable issue or if it's just not working. Um, so those are really the two biggest buckets, biggest fucking on each side of digital versus versus wholesale that we're looking at in in kind of our first meeting with a brand.

What revenue doesn’t tell you

Andrew Kazlow 23:14

Well, I think one of the things that's interesting is so many founders tend to just leave with you know revenue dollars and and numbers. But what you're talking about is underneath that, it's like, okay, yeah, obviously you have some kind of revenue attraction, but it's specifically velocity and repeat purchase rate and then LTB to cat.

Alex Bodney 23:30

And we're we're at the tip of the iceberg. I mean uh that's you know, that's like diligence question one and one A. Uh my my partner, I have two partners that started midnight with me, uh, Chris Adam and Ryan Springer. Um, and and Chris really leads our diligence effort on most of the opportunities that we're investing in. Uh when Chris gets in your data room, those are those are like the like, yeah, sure, we we know all that stuff. Like, here's 42 other things that we're gonna dive into. Um, but yeah, I mean revenue's great, but what did it cost you to get that revenue? I think that's also kind of a really surface level question that we want to dive into. Uh we don't expect an 18-month-old brand to be profitable. That's a rarity. Um, that doesn't scare us away. Now, if you're burning five million dollars a month and you're doing eight million dollars in revenue, that's probably something that needs to be talked about, right? So there's there are uh acceptable bans depending on the product, depending on the category,

Why gross margin matters

Alex Bodney 24:41

that just makes sense. Um and then there's you know marketing costs and so many other things that that eventually contribute to the bottom line. So it's not as look, revenue growth is great. If you don't have revenue growth, that's probably a problem. Um, and so anything that we're investing in likely is a high growth, top line, high growth opportunity, and then we're diving in to understand what are the other economics that that kind of make up that growth and and is your gross margin scalable? That's for us, that's probably the biggest one in an early kind of seed to series A opportunity. There's gonna be so so much expense in acquiring customers and getting on shelves, trade spend, promo, all those things kind of take away from from your net sales number. Um, do you have foundationally, do you have a strong gross margin that this business can be scaled at? Um and if you don't, it's really hard to kind of unwind that. Now, obviously, there are economies of scale if we're talking about CPG, and the bigger your business gets, the larger your, you know, whether it's raw materials that make up your your cost of goods sold, whether it's ordering aluminum, whether it's you know line time with your manufacturer, there are economies of scale that will be gained as your business grows. Um, but that can only go so far. Uh, and so we want to make sure that there's a foundational gross margin that allows the business to be scaled uh in a healthy in a healthy manner.

The questions angels should ask founders

Andrew Kazlow 26:15

So I want to press you for questions two and three because I think a lot of angels we're not getting we're not we're not gonna write a million dollar check, we're not gonna lead around. I'm maybe getting an hour of a founder's time and a pitch, and that's about that's about what I get, and I need to make a call if I'm putting my five or twenty-five K check in. So compressed for me, like what are the two or three other questions that you would emphasize? Let's say, you know, founder knows their velocity data cold that seems impressive based on my general knowledge. What's question two and three?

Alex Bodney 26:52

What's the reason for being, both from a personal and a product standpoint? Are you just doing this because it's cool and it's interesting to you for today? And but if it gets real hard, what are you gonna do then? So from a personal standpoint, we really want to understand why you're doing this. Um give us examples of adversity that you've faced in the past and how you've handled them. I have incredible respect for any founder, um, and specifically the ones that we've had the opportunity to partner with. It's an incredible group of people that are pursuing something that they believe is worthy of all of their time and energy, um, at the sacrifice of family and fun and free time and money. Uh, most likely all these people could be they're they're highly talented, uh, intelligent people. They could be making a lot of money working at bigger companies, and they've forgotten that to pursue this endeavor. Um and so we have a ton of respect for those people and the sacrifices that they make to scale those businesses. So kind of peeling back the onion on on what is that why, and then on the product side, is there a reason for being? Or is this just the 13th version of a given category and you wanted to make your own just because you wanted to make your own? That's not necessarily a strong enough reason for being. Um, and so I think that that's one thing. Um and then uh I haven't oh uh overall category size, and so we talk about this all the time. If the category that you're playing in, however you want to define that, is not big enough to support an incredible outcome, and that's from a venture fund manager's perspective, that may be different, or the expectation may be different from an angel's perspective. We're running a business, we're trying to multiply our invested capital as much as humanly possible inside of the industries that we're playing in, and so we have expectations for each check that we write to be able to return a certain percentage of that fund. We need to make sure that we're playing in big enough categories where those outcomes can be extremely meaningful back to ourselves and eventually our limited partners.

The art and science of consumer investing

Andrew Kazlow 29:23

You talk a lot about earlier the kind of sensing the category before it's defined. And so to it's is the category big enough? Really hard to answer when it doesn't exist yet. And this is kind of like classic venture.

Alex Bodney 29:38

I use Olipop as the example all the time. Uh my my business partners and I talked, and we we we we have a we know a lot of people that have been on the cap table at Ollipop for a lot longer than us, and we've sat there and said, Man, would we have seen it in 2018 if that opportunity midnight didn't exist in 2018? But in 2018, had midnight existed and and David and Ben shown up on our doorstep, would we have seen the vision? It hadn't even been called a a a prebiotic soda yet. It was a tonic, a digestive tonic. And and so, like I mentioned, modern soda now is a category. It wasn't then. Would we have had the ability to kind of see what that category could be? I don't know. Um we obviously could see it when when we got involved, which was a little later, but still early in in the business's life cycle. Um, so I think there's there's art and science to all of this, you know, talking about customer acquisition costs and lifetime value. That's kind of a science side of it. Understanding the people that are behind this and the brand ethos and and how they're gonna communicate their message and believing in that and understanding whether or not that's gonna resonate, that can be kind of the artistic side of it. Um, but it's yeah, sometimes in venture and and what we do, you have to be able to see through walls a little bit or

Emerging consumer categories to watch

Alex Bodney 31:02

at least try to.

Andrew Kazlow 31:03

Well, help me see through some walls. What are some emerging categories that you're excited about right now?

Alex Bodney 31:07

Yeah, I think to to look back, one that that we really got right was um Sesh. Uh there really hadn't been a ton of innovation in that category yet when we did the deal. Fell in love with the founding team, um made it a point both on that they made the effort to come meet us in person, we made the effort to spend time with them in person, and and kind of really hit it off and believed that they were capable of doing something big in the space, talking about category. Zen was really just exploding at that time. We kind of understood how big the category was in Europe and that the United States was playing catch up. Um, and so it really was a belief in Max and his team that they could execute this opportunity inside of a category that was getting ready to explode. Uh, I think both of those theses have been proven out to be correct. In terms of um looking forward, um I'm gonna use a really broad term, but longevity and folks paying attention to what's going in and on their body. Um, you're seeing the proliferation of peptides right now. It's a part of almost every conversation I find myself in. Um somebody's trying something or thinking about trying something, what's regulated by the FDA versus unregulated, what's approved. Like it's it's kind of the wild, wild west right now. We're paying a ton of attention to that. And I think there's there's downstream effects of all that too. Um, you've seen the proliferation of uh products that are high in protein. I think anybody that's on a GLP1 is looking for low caloric sources of easily digestible protein. And so what products kind of fit into that? If you believe that GLP1s are here to stay, those products should kind of as a downstream effect of that, if you're not necessarily directly invested in a GLP1 manufacturer, what are the tailwinds or the downstream effects of the proliferation of those products? That would be one. Um, I think I I touched on it, kind of the uh picks and shovels aspect to what we do. Are there ways to get innovative around route to market and distribution for some of these brands? What are tools that we think a lot of our brands in our portfolio would all be able to leverage? Um, and so we do like to have a few picks and shovels plays inside of our portfolio. Um and then I mean category reinvention is happening all the time, and sometimes it's non-obvious, and sometimes it's really obvious. Like Jesse and Ben's, uh, one of our portfolio companies in the frozen potato space, unbelievable product. Depending on the given SKU, they have three to five total ingredients. Uh you know, it's potato, salt, beef tallow, is what like if you look on the bag, those are the only three things in that bag. You go look at their competitors and some of the incumbent brands that they are disrupting right now, there's 17 ingredients, a bunch of words that you can't pronounce. And if you put yourself in the shoes of a mother of three, and now I've got this cool brand that's got great imagery. I love the name. There's three ingredients, I know exactly what they are, or I could go buy this incumbent product that doesn't look cool, my kids don't think it's cool, and there's a bunch of stuff that I'm unsure what it is. Like, that's obvious. And and so there's non-obvious uh positioning, leisure hydration would be a great one where forever hydration has really been marketed in a performance aspect. Somebody with purple sweat dripping down their forehead, is it in you, you know, uh Gatorade like forever. And I was a huge Gatorade consumer as a kid because I was an athlete and I loved everybody that that they had as as brand ambassadors for their product. Today's generation, it's not resonating. They they want to be spoken to in a more approachable way. And so when we talk about Alex and Steve, two brothers that founded Leisure, incredible founders, and and have become great friends. They wanted to create a brand that was way more approachable, but still delivered function. So they talk about fun, flavor, and function. And so you have to make a product that people want to try that they really enjoy and want to buy again after they do try it. And then when they open the hood, they realize that wow, this is an incredible product that's actually delivering a ton of function to me. I think marketing and trying to sell products based on function as the main driver is pretty hard, unless you have something like genuinely proprietary that's that's game-changing. Um, but they're reinventing the hydration category in a fun and approachable way. Um, and so that one to me is like a little less obvious versus the Jesse and Benz one. Now, I say it's obvious. I didn't think of it, you didn't think of it, maybe we did, but they had the the guts to go execute on it, and they are they're taking the market by storm. It's it's their their growth at retail is

The opportunity in pet care

Alex Bodney 36:30

it's shocking.

Andrew Kazlow 36:32

Okay, so two categories I want to get your thoughts on, and then uh I want to talk about exits. Two categories that I think are both changing a lot, but I want to hear your take on pet care, just pets in general, and then uh alcohol. Both of these seem to be changing a ton. COVID, this new generation. React to both of those just categorically. Like, what are your thoughts?

Alex Bodney 36:55

Uh, I will throw a disclaimer that I am not the foremost authority on either. Um we do have uh a few investments in pet as a general category. Really bullish on pet. I think it's interesting to watch how people think of and treat their pet today. Um I think my generation, I'm 34 years old, my generation thinks of their pet as a child more than they do as just a dog or a cat. Um, and they want to create the absolute best lifestyle for that pet and they're willing to spend in order to do that. Um I think that if you really start to uncover what's been in kibble and some of the legacy products inside a pet, if you think of your pet as a child, you might not be super excited about what what's inside some of those products. Yeah, the same logic applies. Can I read and understand these things? 100%. And so there have been numerous success stories inside a pet. Uh, we're fortunate to be investors in in a in a pet food business called Jinx. They've grown a ton at Walmart, did a really cool deal there to help get the business off the ground and built their digital business. And it's clean ingredient, it's approachable, it's it's marketed again in kind of that fun and approachable fashion. They've done some cool things with Chris Evans and other celebrity brand ambassadors on that business. O. Norman, co-founded by Kaylee Cuoko. Katie Hunt is the founder. Um, she is a rock star operator, and and they're approaching it more from a supplementation standpoint, which again, I I think 15, 20 years ago, if you'd have said, Yeah, I'm giving my pet supplements, people would have looked at you like you had three heads and said, What the heck are you talking about? And so that is that's just normal today, right?

Is alcohol actually dying?

Alex Bodney 38:45

Um, the other one, alcohol, um the stats are unavoidable. Um, I think that you are seeing younger consumers drink less. We as a firm and myself individually do not believe that alcohol is dying. And um I I think if you look at the amount of time that alcohol has been a part of social interaction in society, both in the United States and and more broadly, it's in the fabric of who we are and how we celebrate and and and so many different other occasions. I don't think it's going away. Um, I was uh I was made to feel old the other day. I was introduced to a new phrase um called zebra striping, and I was like, I I don't think of myself as old, but I have no idea what that means. And so I guess the kids are calling it now uh you go alcoholic beverage, non-alf beverage, alcoholic beverage, non-alf beverage, rather than just having just a bunch of booze for eight hours at a time. And so I think things like that are going to become more prevalent, but the alcohol industry, in our opinion, is not going to die. Um, I think there are different ways to market and introduce those products to consumers. We have one of the the most fun and cool brands in all of alcohol, in our opinion, which is which is Happy Dad, um, a hard seltzer that's gotten into hard tea and now hard lemonade, and it's just a really cool brand. I think if you walk around any airport, go to any sporting event, you will interact with a happy dad hat. Um, and I think part of our thesis for that too was inside of that seltzer category, nobody'd really built a brand. There had been brands that had had a lot of commercial success, but nobody really built a brand that consumers resonated with. That to us is is the opportunity that Happy Dad represented and still does represent. And so, you know, they're they're doing incredibly well. Um, so we're not afraid. We we haven't invested in spirits as a firm yet. I think um we've spent a lot of time and and learned what we don't know about that. I think there's a there's an uneducated but understandable thought that like, oh, you guys understand CPG, so you understand alcohol. The distribution system is so different. Like, yes, they are a consumable product, but how they get to market is literally night and day. And if you don't understand how alcohol is distributed, you are in for a rude awakening and a long education. And so we haven't played there a ton. I think there's a lot of interesting things uh going on in that space. I wouldn't be if somebody came to me and said, Hey, I I want to put money in an alcohol brand, I think some other people may look at the data and go, that's the craziest. Why would you do that? I I would say, what's the opportunity? Why do you think it's a good idea, and probably tell you that there's a reasonable chance of a decent outcome?

How CPG companies exit

Andrew Kazlow 41:54

Walk me through how CPG businesses exit well. Because it's really easy for a founder that's got a soda product to be like, oh, I'm gonna exit to one of you know, Coca-Cola, Kiri Dart Pepper, Pepsi. Like, okay, I get that. But how do I evaluate if a founder's actually on track to doing that well?

Alex Bodney 42:15

It's a great question. Uh we have one partial exit under our belt as a firm. So I uh I'm certainly not the perfect person to ask. There's a lot of big boys in our world that we look up to that would have a lot better answer to this. But tell me what they would say then. Yeah, I think I think what we've learned and what we understand from you know, we also have the fortune of being in the right rooms and having relationships with some of the MA people at some of these bigger strategics. I think that's the first thing in our category is that the most obvious acquirer uh are a lot of these big strategics. Um, whether that whether that be in personal care or food and beverage, um, and and and everybody kind of knows Coca-Cola, Pepsi, Ker, Dr. Pepper, Unilever, Proctor and Gamble, like you, you know who they are. There's obviously a ton of kind of middle market private equity folks that that want to play in that space and do on a regular basis. And then IPOs are are also on the table. Um, I think though when you're looking at that strategic exit, the two most important things that we consistently hear are growth and gross margin. And so that's kind of what I was talking about earlier. Do you have that gross margin that this business can be scaled upon that strategic that's looking to make that acquisition? They understand that they're gonna have manufacturing advantages day one post-acquisition. They're gonna have distribution advantages day one post acquisition. And so they're not so concerned maybe with hey, your bottom line isn't perfect. Well, that's because I've been going about this independently competing against you, Mr. or Mrs. Big Strategic, that is playing games with me on the shelf and and Making it harder for me to get my product to market. If I'm on your team, that whole dynamic changes. Um, but is the gross margin really healthy? Is it margin accretive to their business, or is there line of sight to it being margin accretive to their business? And is the product growing? Right? Like those, those two things are are the most important. Um and and we talk about we call it landing the plane. In our industry, until you land the plane, it's just a number written down on paper. We have a lot of brands inside of our portfolio that are five, ten, twenty times larger than at the the time that we invested, and we're really proud of that track record. We have to find homes for those brands to produce liquidity for ourselves and eventually our limited partners. Um, and that's that can be the hardest part about what we do, frankly.

Advice for angel investors entering CPG

Andrew Kazlow 44:52

Alex, final thoughts for the angel listening to this that's interested in this category, anything we haven't covered so far?

Alex Bodney 44:59

Yeah, I don't want to be discouraging. I think though, you know, um there's people that are doing this professionally. Uh, we do this every day. I I wouldn't even want to guess the number of brands that we screen on a monthly basis. Um I I kind of know it, but it's uh it's a really big number. And so I think I would just encourage people to get reps in as i in any way that they can, right? Like we have the advantage of pattern recognition because of the amount of time and reps that we get inside of the categories that we spend a lot of time, but that's pretty hard to replicate. And so I think if you want to be active, if you want to be an angel in any of these spaces, spend time getting to know people that are in that industry, ask questions like you talked about, you may only get 60 minutes with a founder. Go meet somebody like me or somebody else that's active in the space, or you know, a founder of a bigger brand. Like, what do I need to look out for? What are the what are the risks associated with this? Um, so I don't want to be discouraging. I think it's cool. I think that that everything that we do is an ecosystem, right? Without incredible founders taking the leap to start brands, we don't exist. Um, a lot of times things are too early for us to participate. Without founders and friends and family that are willing to take that early stage, or excuse me, angels, friends and family that are willing to take that early stage risk. That business can't scale to a point where it's time for us to participate. There's way bigger fish further up the food chain than us in in private equity and venture inside of inside of these industries. And if we're not willing to participate, that business isn't going to scale to where they're writing a $30 to $50 million check to help get it to the next stage. So it's all an ecosystem. Um, ton of respect for everybody that's participating. Uh, I just would encourage people to make sure that they're kind of eyes wide open with with whatever capital they're deploying. Well, we will wrap there.

Andrew Kazlow 46:59

Alex, thank you for your time and I look forward very much to the next conversation. I really enjoyed it. Again, it's good to see you, and I thank you for having me on. Thanks for listening to this episode of the Diligent Observer. I'm your host, Andrew. And if you're an angel investor looking for essential angel infel in five minutes every week, I think you'd enjoy my newsletter. I send my best stuff, interesting deals, and more straight to your inbox so you never miss a thing. Subscribe today at the diligentobserver.com.