Deb Benton — Willow

Wednesday, May 25, 2022

Today we chat with Deb Benton about her new fund, Willow, that she founded with Amanda Schutzbank.  Deb is on the board of Carbon38, TomboyX, The Leaf Group and she has all sorts of insight on how to do consumer investing well and what sort of metrics to look for.


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I am thrilled today to be chatting with Deb Benton of Willow. Deb is an expert in early stage consumer branded companies. She was the president and COO at NastyGal. And before that, at ShoeDazzle, COO at ShoeDazzle. She’s a board director at the Bouqs, Carbon38, and public company, the Leaf Group. She’s a really impressive track record. Pre Willow investing in Tapcart, Skylar, Thankful. And now she has her first fund Willow.

Congratulations, Deb. Thanks for being on the show here.

Thank you so much. It is such a pleasure to be here.

Yeah. It’s really exciting to see you raising your fund. Tell me some more about Willow.

Yeah. So I had been I’ve been investing for the past six years, basically with the thesis that consumer brands, early stage consumer brands need to be assessed, valued, capitalized and scaled in a way that is unique to them as a category. Different, different than a SAAS company, different than a software company. So I started investing about six years ago. Angel investing check sizes, generally anywhere from $50 to 200 into these seed stage rounds, and had a strong belief that the founders and the companies not only needed capital, but also needed operational and strategic support where I could provide help.

So I took a lot of advisory seats. I took board seats and I have 15 companies in my personal portfolio. And then about a year ago, I decided that it was time to institutionalize because what I was finding was that for these early stage rounds that I was doing.

There really wasn’t an institutional source of capital with this particular thesis. And so I decided to institutionalize exactly the same way that I had been investing for the past six years. I really wanted to do it with another woman.

And I’d known Amanda Schutzbank for many years. We’ve invested together. Amanda was at Amplify, which is a fantastic early stage preseed fund here in Los Angeles. We did a first close on May 1st, and we just finished our first deal last week.

Congratulations. And so will you be leading you’ll still be focused on seed investments. And we have be. Yes. Leading those rounds.

Will you be co investing some of both. Yeah. Probably a little bit of both. Ideally, we’d like to lead as many as we can in the consumer brand space and within consumer brands. We are more focused on self care. Personal care, which includes beauty, colour, skin care, hair care, anything to do with personal grooming. Health and wellness is another big category that we’re really focused on. And I’d say the intersection between those two is really growing.

I really like apparel and accessories. However, I’d say the lens that we look at those opportunities, it needs to we’re very values, like we have a very values led investment thesis around consumer brands. So with those companies, you know, they need to have something that’s highly differentiated. It could be around sustainability. It could be around supply chain transparency. It could be around production or fabrication. But they there needs to be something that is incredibly unique.

It’s a very tough category. And I think to really stand out, you need to have something that’s very highly differentiated. I also really liked food and bev. I don’t know that category as well. So in that area, I would probably tend to participate with a strong lead that knows that just the sales and distribution is very different than what I’m used to. So but I really like the category again, particularly as it intersects with health and wellness.

We have carved out a small portion of the fund for what we’re calling consumer tech enablement, and similar to Thankful and Tapcart that I have in my personal portfolio. Those companies support the brand or support the consumer’s experience of the brand through technology. I like that as well. So we’ve carved off a section of our fund that will be dedicated to that, those deals. We will participate in. We won’t leave those. There’s much better funds that are very tech oriented that can make those.

Got it.

And so maybe you’ve answered my first question, which was going to be about how do you assess these companies?

I would say broad table state criteria for revenue states. We’re looking at one to five million in run rate revenue. The categories that we’re really interested in and specifically the companies really interested and have very strong product margin profiles. E-commerce is e-commerce has its own set of challenges. In some ways it’s easier than physical retail. But when you look at things like distribution and outbound shipping and returns, you know that that’s an added cost, that that is substantially more than physical retail.

So, you know, the PNL is a little bit different. You really need to have a pretty robust product margin profile to be able to succeed. I think online, unless you’re going to be a massive volume play like an Amazon Target or a Wal-Mart, and that’s not an area that we plan. They do that very, very well. I have I feel no need to compete with them. We’re kind of at the very other end of the spectrum focusing on very emotional connected brands like what line items?

Are you really looking at to understand whether it’s a healthy business? Yeah. So the first line item that I would look at is what I what I call product margin. And that’s that’s simply your product revenue minus your direct product costs landed to get to your warehouse. So before any kind of variable costs run your warehouse, it’s simply your landed product costs. It varies by by category. I’d say for personal care, I’m really looking for seventy point plus in product margin.

At least scaling to that. Some of these categories can be over 80 as well. That’s fantastic. It also happens to be that those categories, which makes them even more attractive, the return rates on those categories tend to be low. So accessories tend to have a very high product margin. They tend not because there’s not a fit involved. They except for footwear, they tend not to have high returns, beauty, skin care, personal care, grooming products.

They tend to have a much lower return rate as well, and they tend to be seventy three or above in their what I call initial markup or their their product margin with apparel. And again, this is why we probably have an even tighter set of criteria around apparel. It’s hard. Returns tend to be much higher, particularly in categories like dresses. Returns can be anywhere from 35 to 50 percent, which is crazy. And it really, really upsets the income statement when we have those kinds of returns.

It also affects LTV and repeat purchasing because you tend to have more dissatisfaction on the consumer side. So there’s secondary effects of having a higher return outside of just the financial implications. I would say for for apparel, there’s a there’s a couple of different ways that you can tackle apparel if it’s a pure vertical integration. I would I would really want to see 70 points and above again, or at least scaling to get there with them with volume. Some of these companies are taking what’s called a hybrid approach, and they are, in essence, outsourcing some of the internal design and production costs.

And they’re doing it with a partner. So that is a that’s a blended model. I would want to see probably sixty three to sixty five percent on the product margin there, because you’re in essence eliminating some of your internal costs, which usually reside below the line.

Anything below that. It starts to get really hard because the next line item that I would look at is gross margin. And for me that. Product margin minus your net shipping costs, minus your your credit card merchant discount fee and minus your packaging fees. That gets to gross margin.

Anything below 50 percent on a gross margin for me is really, really tough unless there’s a recurring revenue component to it. So that’s subscription. I can entertain that because I can. I can have a safer assumption of LTV than I can around the one I’m purchasing.

How do most of these companies because you said you’re investing when they already have a one to five million run rate.

How how did most how do you. Most of them grow up. Most of the companies that you’re meeting, you know, do they do a preseed or did they maybe are they new to venture when you meet them? Yeah.

The vast majority have raised somewhere between 250 and five hundred thousand by the time they get to me. Some of them have crowdfunded. They use that really effectively. And that’s a really interesting more than much more than I think.

Tech companies, these these types of companies tend to bootstrap because think about it. But these days, you know, I’ve been in this world for so long. Twenty years ago, you needed to build everything and helps. Right. There was no Shopify. There was no social media. There were no 3p ls right. All of these costs that have come down precipitously have allows companies to scale or at least get somewhat product market fit before they really go in and take a lot of capital.

That didn’t used to be the case.

One other thing that you said to me, because I was asking you about a particular investment opportunity. You said, look, you don’t like investing when there’s a product. If there isn’t a brand, a platform, something more there. How do you know when something can be a platform? Like what does that mean to you? I guess, yeah, it’s a great question.

And I should. Say it doesn’t mean that that that single product companies can’t be remarkably successful because they can. They absolutely can. Look, look, look, look around. Anywhere you look, especially in homes, you can certainly have companies that have done extraordinarily well with one product. And maybe they go on to have a couple of others. But it’s really a product focused company. It’s just not what I’m particularly interested in. I, I really get behind and get excited by companies that are built on values.

I think today’s consumer, particularly the younger consumers. But I think we’re all kind of getting there now. We want to use our wallet to shop with brands that support what we think is right. This younger consumer is far more interested in things like sustainability and impact on the earth.

You know, the type of labor that’s being used to supply chain far more than than consumers in the past to them. And I I think it’s fantastic. I think it’s great because I think capitalist power and consumers are exerting the power that they have and should have.

Got it. OK. So that’s some about what you’re looking for.

I could ask a lot more questions.

Let’s talk about how you’re actually helping these companies as they go through scaling. And, you know, I’m specifically very interested in what sort of the playbook is and where you think that playbook is going.

I think team and recruiting is is something that I am particularly interested in coming from my days of operating. Saw how much leverage you can get out of having the right people in the right seats. So I think that’s probably the first thing. The second thing that I’m particularly interested in and I think these companies need support on is just an a fanatical obsession around the consumer and exceeding consumer expectations. Today’s consumer is so savvy and has they have so many options as they should.

They can pick and choose. So really understanding. And the great thing with digital brands is you get access to a ton of very rich data around around your consumers and you can see things that physical only brands really can’t see. 

There’s certain things there around knowing their customers that are non obvious or that you see some companies doing really well, that other companies aren’t doing as well.

You know, you’d be surprised at how many companies don’t just actually talk to their consumers. You know, I it’s probably one of the first questions that I ask. We’ll be in debate after debate about what’s going on. And, you know, my question will be, have you randomly selected 50 customers and just called them literally just just called them?

It’s the greatest source of information. And many don’t do that. You know, you don’t have to go out and spend a fortune on consumer insights and all of these different databases of, you know, prescribed information about your consumers. I think having that one on one connection with them and just randomly having the conversation can be incredibly informative.

I also think putting a a a framework around how your consumer makes their purchase decision and how your consumer values, your brand, what problem it is, is that are you solving for your consumer really getting deep in on that? Often I think we have our own ideas around what problem solving. And then you talk to the customer and it’s actually quite different. And so I think that that adjusts kind of the hierarchy of messaging, of how you build your brand.

I’ve heard people say, well, the reason, one reason to open an online presence. Is because it gives you the chance to know your consumer better. I never totally understood that because online I have so much more data at my fingertips. But maybe that’s why do people go off line?

What do you coach people now about when they should go off line and why?

Yeah, I think it depends. There’s no one said answer. I think it depends on the category. I think it depends on the environment. I think it depends on the opportunity. I think it depends on how much capital is going to be required. I think it depends on strategy, what you’re what you’re trying to achieve. I do think that you that the most successful brands are aware that consumer is the consumer doesn’t get up in the morning and think, oh, today I’m going to be an offline shopper and tomorrow I’m going to be an online.

You know what I mean? Like Batel there, we need those terms for our own, you know, our own internal structure and how we think about it and how we how we allocate resources. But the consumer doesn’t think that way. The consumer just wants you to be wherever she is.

So, again, I think it comes down to knowing your consumer what she will value, where she shopped, what brands are aligned, where where do you want to be and what you’re hoping to get out of it. I’ve seen strategies that some brands simply are looking at and looking at it as a marketing expense.

And as long as it breaks, even they’re fine with that because they believe that the brand halo or in fact is sufficient and they can justify that expense. They don’t want to lose money, but they’re fine if it breaks even. I think that that’s interesting. And I think that that’s good for some of these brands. Others, which are more highly dependent on physical distribution, need them to be moneymakers. So that would be a decision, a different set of criteria and decisions that those brands would go through versus, you know, a brand that is ninety five percent online and simply wants to flagship stores, one in New York and one L.A., one in L.A. for marketing purposes.

It seems like it’s getting more and more expensive online. So maybe that’s your point. Do you know where your customers are? First and foremost, yeah. Yeah. I mean, the paid acquisition has never had the consumers that you acquire through nonpaid have always been more valuable.

Think about as you’ve got these concentric circles going broader and broader, you’re right in the center. You know, your first few circles, they’re going to hear about you because you happen to live in their sphere very directly and you’re catering exactly to them. And they can become your ambassadors, right? They become your evangelists. They’re the ones that you want to figure out how to make so happy.

And they go out and tell the world. And so they’re there. They’re, in essence, an extension of your brand. There’s not like there’s not a billion of those people right there. They’re very limited. So then you have to then you have to figure out what’s what’s your second degree? How do you attract them? And it could be through these evangelists. It certainly can be through paid 

My concern with, you know, like a Facebook, the Facebook advertising or Instagram. I’m just not actually sure how effective it is. I see it’s very expensive. And the way that Facebook likes to attribute it, it gives them very, very, very considerable attribution.

Like, I think 30, 60 day windows, which is a little bit ridiculous. But I do think Facebook today, I see it acting very in a very similar way that TV of 10 years ago acted. It tends to lift all channels. So, you know, I can’t say with complete conviction from a data perspective that that’s that is that’s happening. I believe that to be happening and I’ve seen enough of my company is kind of lower and increase their Facebook spend and kind of corresponding effects on all channels.

So I do think it’s acting as as as as kind of this enhancer of other channels. That being said, not everybody’s on Facebook. You know, GenZE is probably not hanging out on Facebook. My new obsession is tick tock, like I’m obsessed. So I’m trying to figure out, you know, and it has a different nuance to it than Facebook or Instagram again.

Do do a lot of your companies work with influencers? Is that do you coach them on that? Some of them take best advantage of that.

Yeah. Again, I think it depends. I mean, don’t forget, I was with Brian when he launched ShoeDazzle with Kim Kardassian, who isn’t? You know, I would say it’s probably like the Oji influencer. That was back in 2008 and Brian did a phenomenal job with that. I mean, that was just that was extraordinary. Kim’s brand, I think, was very highly aligned with the shoot as a brand and her and it was something that her customers really want.

I’ve seen disasters, you know, in other situations where, you know, companies are just trying to throw talent or influencers at a brand and it doesn’t make sense whatsoever. And there’s like this cognitive dissonance with the. Consumer goes and says, wait a minute, why is this individual ripping that branded complete? Doesn’t make sense. It backfires and it’s a waste of money. I’ve seen the trend has been, I would say, in the last few years to move more towards micro influencers.

There is a general trend happening now, and I can talk about this because I’ve spent far too much time on tick tock. Tick tock is really a platform for the people. And so, you know, if you can think of Instagram, is that perfectly picture polished view of everything’s perfect, whether you’re an influence or even a person like everybody’s life is perfect. I mean, it’s it’s it’s it’s so deceiving. Tick tock. On the other hand, it really is built around, I think, to the everyday person.

And I think we have moved from a trend wise to that. I not sure the celebrity culture is going to be what it was beforehand. I shouldn’t say that because I work with a lot of talent.

If someone’s at one to five million when you invest run rate, how what’s the next stage? How are you? How do you think about the stages after that? Not just from a funding point of view, but grow?

It’s not that it’s exactly this, but in general, you know, brands that are doing it’s going to be more more frequently kind of one, two, three, one, two, four.

They raise a seed. The seed could be anywhere from a million and a half to three. That’s a typical seed valuation is going to be anywhere from, say, five to 10 roughly. We are trying to stay super disciplined around being sub 10 for us the next round. They’re probably going to raise in general five to seven. My guess it’s going to be they’ll be doing eight to 10 in revenue and they might raise anywhere from, let’s say, 20 to 30 pretty money valuation.

That’s kind of roughly where I see it. And then after that, many of these brands, you know, I I want to push these folks to get to profitability sooner rather than later, at least on a on an order basis and ideally, you know, contribution level. So, you know, getting them getting them to that point, they can either if some of these brands are selling at that point in an M&A, they get to 30, 40 million dollars revenue and they’re either break even or slightly positive.

And the acquirer knows that with scale their margins, their operating margins are going to be more they could sell for a very nice multiple. And in the M&A market at that point, or they could take in a growth round from private equity, from a strategic sometimes even a family office.

Are there other any other big things that changed between the way a company looks when it’s a one to four million dollar company and the way it looks when it’s a 10 million dollar company? 

You’re going to see margin improvements across the board as you scale just because you’re going to have the volume of goods.

So you can negotiate better rates for your product margin. You can negotiate better shipping rates for your grip that goes into your gross margin. You’re a three people. You’re going to have greater volume. You’re going to figure that out. Your data is going to be better. It’s going to decrease their their work requirements. So you should be able to negotiate better rates there. So there’s a you know, it’s an ongoing process, always trying to bring your costs down as you scale.

That never ends. 

I’ve been dying to ask you about what we’re seeing today with some of the sort of darlings of the e commerce world, the online e-commerce people, and, I don’t know, brand lists maybe out of voices like what are you taking?

What are you seeing when you look at these companies?

Well, let me first say it’s very easy to be an armchair critic because I know I’ve been on the other side of it and I know it always you know, it’s so easy to be on the outside looking in saying, oh, my goodness, like they did this wrong. They did this wrong.

I think, for a lot of it comes back to my personal thesis around how this category of company, these consumer brands, digitally native consumer brands, how they should be valued and how and how they should be capitalized, meaning how much capital they should be bringing in and and really much more quickly they should get to profitability.

We should be backing into the valuation. Really like, you know, where do we think that this company is going to end up? We know from the data that a successful exit, the vast mass majority, are going to happen in a day.

Right. Two hundred to five hundred would be a fantastic. So if that’s the case, you know, any venture investor going in with, you know, where the three hundred million dollar pre money valuation? Well, they’re not going to be super happy with that exit. So they would have to really believe that that is going to be a billion dollar enterprise value when they exit. That’s possible. It does happen. We do see it. You know, we do see some of these companies going public.

It’s just not the norm. So when you think about a portfolio construction model for a v.c, they they they’re counting on a couple of their exits being this billion dollar exit.

So I completely understand that. But we can’t force that thinking into what we know, these how these consumer brands scale and naturally exit. Right. We can’t we can’t say, oh, no, we need that. So we’ve got to figure out how to make you that. And, ah, that’s not going to happen. Right.

So you’re saying the model is a company that’s maybe doing 40 million in revenue, that’s looking at a couple hundred million in as an exit in an M&A sort of situation?

That could be an option or it could be that it raises. Right. It could raise it, do it big growth round. But then but then whoever comes in that that investor and it’s if it’s a consumer brand, it’s probably going to be a private equity investor. Not always. But probably they’re going to want at least a three to five times return. That’s what they’re going to model out. And I think consumer brands.

I think they’re just very different. I think they they grow in scale very differently than assess company. And it’s not logical to me that we assess them and have the same sort of expectations when they’re fundamentally very different companies.

Yeah, well, that leads me to one of my I’m super interested in some of the stories of how you grew in scale, either NastyGal or ShoeDazzle, but maybe like NastyGal, you took it to 100 million in revenue company right when you were there.

What? Yeah. Well, what what what were the good parts? Were the the tougher parts?

Well, I joined Sophia. She and Sofia Amoroso was the founder of NastyGal, and she had built this really beautiful brand. And I credit Sophia with bringing this aesthetic and this brand online where nobody had done it yet. 

For a long time. She wasn’t even producing NastyGal. I was even producing their own brand. It was you know, they were just curating other. It was really a retail play. But because she did it all online and she did it under the brand of NastyGal, she was one of the first, I think, to be able to create a brand around, ostensibly a retail play.

And that was you know, I really credit her and her early employees.

And that company just took off beautifully. I think the challenge, the challenge came in. You know, we raised at a pretty high valuation. I would say over the years the competitive environment changed.

So, you know, there was a lot of focus on NastyGal, Ellen lot being written. And when a lot about the success of it. And so that welcomed a ton of competitors. I would say that, you know, we probably welcomed in 10, 15 and 20 competitors and a lot of the time they were selling exactly what we were selling and simply undercutting us by 50 cents. 

We invested a lot in trying to build our own brand. And that cost a lot of money. I’d say operationally we spent too much. And I you know, I take full responsibility for that. I think we had raised a really big round. We spent too much. We’ve probably spent it in the wrong ways. We weren’t focused on nearly as much on profitability.

Is that today to do it again? I would certainly be focused on. But, you know, there’s a lot has been said about NastyGal. Everybody wants to come up with this. It was this. It was this. It wasn’t. It was. It was. There was a whole bunch of things going on. Things are changing all the time. That’s the world of early stage.

Yeah. And, you know, in addition to that, not just did the business struggle, but Sophia got so beat up in the media.

Oh, my goodness. I mean, it’s still it’s so trapped. I mean, it’s just it’s just tragic. It’s quite upsetting. It’s quite upsetting. Yeah. I mean. Well, yeah. Go ahead. I’m sure. Is your perspective on that. Yeah.

Look, it’s I think it’s super unfair. There was so much speculation. I think I think we live in a weird society where we want to, you know, we want to put people on pedestals and everything’s great and everything’s great. And then there’s a misstep when we want to pull people down. You know, so, so strongly.

And, you know, frankly, I think women get it harder. I really do. And I think it’s completely unfair. And it got deeply personal. You know, it used to break my heart just reading the articles that were being read and the words that were being read. I mean, they were vindictive and mean and personal and completely unprofessional. I have no issue at all about talking about or even speculating about what went wrong or, you know, what decisions, because we can all learn from that.

But, you know, and she was often eviscerated. 

But then when you’re investing in companies that are built on values and this is some of what you’re looking for, sometimes that gets very infused with the founders themselves. Right.

I mean, it’s an interesting question. I would say at ShoeDazzle, we frequently had the conversation around the need to separate the shoe dazzle brand from Kim’s brand that that the company had to stand on its own. And I would argue that we were successful. I mean, the company is still around today. And Kim’s not involved.

And I’ve heard Gwyneth talk about Goop and how she really wants some Goop to stand on its own. And to be honest. I think she’s actually done a really good job about that. I think Goop’s brand is powerful. And it does stand on its own. And whether or not you’re a fan of Gwyneth, it is almost it doesn’t really matter.

You can still be a fan of Goop. I think that’s the place to be.

And and on the on on your front.

Who do you go to for advice? Like where how are you navigating your own career?

Oh, my. Gandules here. What a great question. I have a lot of friends and lot of colleagues. I have for our very first close, we were very fortunate to have extraordinary LPS you know, some fund managers, some really well known fund managers have joined us. Individual M l PS They are an extraordinary source of mentorship questions sometimes as just questions around fun mechanics and they’re very helpful there. So those folks I have great female friends and colleagues like yourself.

I mean, I’ll be calling you for sure that especially in the investing world. You know, there’s not too many of us. And I think that the more that we build our own community and reach out to each other and support each other, that’s very that’s very helpful. Again, you know, a lot of these are uncharted territory.

So I think the more that we kind of get together, band together, create community support, one other, we we can encourage other women to come. It’s hard.

Absolutely. That’s why I’m really excited about Willow. I would say that mentorship is great. But actually, when you can have women who can make investments with capital behind them, that’s huge. It’s. It’s game changing. Well, great. Thank you for coming on the show. And I’m. I’m so excited for Willow to be part of the L.A. ecosystem. And congratulations.

Thank you so much. I love it. Happy to be due to show anytime. It’s a lot of fun.