Last week, I met up with Battery Ventures’ Brian O’Malley, who invests in a range of things but has been particularly successful leading some of the firm’s e-commerce investments. Among the related companies that O’Malley has championed at Battery are Skullcandy, the now public earphone maker; the fast-growing grooming products startup Dollar Shave Club; and high-end home furnishings company Serena & Lily.
While e-commerce has been falling in and out of fashion on an almost yearly basis, O’Malley suggests that making smart retail bets, including on consumer packaged goods companies, isn’t that complicated. He starts with knowing what not to do, like focusing on the “things that are already done versus the things that are yet to come.” He elaborated during our sit-down. Our chat has been edited for length.
You seem to be a big fan of consumer packaged goods companies. But they have a spotty track record. What’s the appeal?
The good thing about CPG is high-frequency purchase rates. Take Dollar Shave Club. Guys shave every day, and once you get that staple, you [then sell] the toothpaste and hair gel and aftershave. There’s a whole list of products that you can add on afterwards. With CPG, you can very quickly get to hundreds of dollars of spend per customer.
Is the trick to avoid low-margin businesses?
Low margins are part of the challenge. CPG companies are also logistically complicated, they take a lot of money and time to scale, and there’s a big change [required] in behavior. So if I’m a Gillette customer, I might not like the idea of spending $20 for razor blades, but I don’t go to Google and type in “razor blades.” So companies typically have to spend a fair amount of money to gain visibility and change consumer thinking.
Is there a model way to invest in these types of companies then?
Well, if you need to raise big money to scale them over time — $25 million to $50 million rounds – you’re at the whim of what’s exciting to big money at that time. That’s the issue. So the types of things we’ve invested in on the consumer side have very quick payback periods on the unit economics. So you’re either paying back your advertising in three to four months because the advertising is cheap and the margins are good, or there’s more of this shared-risk model where you’re paying either a sales rep or an affiliate based on what’s actually sold. That way you’re always kind of marginally profitable.
You make it sound so easy. Where do you think some of the bigger-known names, like Beachmint and ShoeDazzle and Fab, have gone wrong?
Each one is different, but at the end of the day, the old adage that retail is detail is very true. It comes down to running a really tight ship. So you need to be very proficient at logistics, and with marketing and so forth. But when a lot of money was flowing at these companies, many of them became professional fundraisers as opposed to professional operators.
People grew enamored with the idea of changing a business model or selling online, when at the end of the day, great product wins. If you have a great product, it doesn’t matter if you have a flashy business model. People will tell other people to come back and buy it.
Does it matter what the product is?
I don’t really care what the product is. I’ve got companies that sell everything from custom men’s shirts to baby bedding to wine devices. The question is: how big is the opportunity, what’s the pain point, how do you tell people about what you’re doing, and then what’s the buying behavior from there. Is it viral? Will users tell more people about it?
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