Passing on promising opportunities
Close counts in Bocce ball but not in venture
In this issue of the Labyrinth I’ve decided to share with you an (slightly) edited email we sent when passing on a recent opportunity.
When we pass on a company with whom we’ve only lightly engaged, we usually just write a short and polite note with a one sentence explanation for why the opportunity wasn’t a good fit for us. However, when we dig deep with a founder and subject them to a diligence process I feel like the least we can do is give them the cliff’s notes version of all the reasons we chose to pass. We do this not to beat up on the founders but to arm them for future discussions and to provide them (one opinion) on how they might build a stronger business.
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Hi [______] -
Hope you and your family are staying safe throughout all of this.
We really appreciate you spending the past month or so educating us on your business. Kudos to all the progress you've made thus far with product development and with your initial traction on the D2C/Marketplace side of things.
This was a very tough decision because we believe your product is best-in-class and we believe you are a strong operator, but it's going to be a pass for us.
We are passing for a few reasons we describe below. These comments are made purely to be constructive.
1. Retention / Repeat Purchases
We love your product and think you have distinct quality advantages over all the competitors in your space.
However, the data is showing that less than 10% of customers come back for a subsequent purchase across all cohorts. This concerns us in terms of this being a novelty product where people's purchasing habits are one and done.
Also, it will be difficult to achieve the fundamental law of growth metric: 4-1 LTV to CAC ratio as AOV seems to be hovering around [$ - $] range.
Unfortunately, we view [______] as a durables company (Away, Warby Parker, etc) but with lower consumable-esque price points.
2. Subscription - Bundles - Recurring Revenue
We were hoping to see more ideation around how to solve the retention/repeat purchase problem with better thought out strategies for launching these types of business models.
Would have been great to see some initial trial data sets or A/B testing or customer sentiments around these models.
3. Lack of Personalization, Self Expressive Benefit, Branding
We really believe there is a huge opportunity to know your customers on a deeper level and there should be some type of assessment that the customer enters into as part of the purchase flow. This can create a super valuable recommendation engine for you to keep you customers engaged based on their specific preferences.
For whatever reason, I don't think the [______] brand is connecting with customers in an emotional or substantive manner. This will be key in creating the organic network effects necessary to lower CAC and create a flywheel for sticky growth curves.
What made Away (and other DTC durable good brands) so successful is, in addition to creating a fantastic (quality-differentiated) product, they created/transformed the culture of their respective products and industries. It's easier to create that culture/image with a product that's so out in the open for everyone to see (e.g. Away suitcases, Allbirds shoes, Warby Parker glasses, Outdoor Voices leggings etc). It may be challenging for [_______] to be able to create that similar, differentiated culture for a product that really isn't displayed so openly.
We would mostly be relying on digital ad spend, which is expensive (and what happens after you churn through all the low hanging fruit customers?) + word of mouth and having people evangelize the brand.
4. Big Vision
We'd be very excited if there were a roadmap/vision for product expansion/diversification outside of just [______]. As a comp, there might be an opportunity to be the 2020 version of Claires Boutique and really focus your efforts on unique identity expression in the underserved <18 demo.
If you went this route, the branding would have to cater to the younger demo, you can’t be everything to everyone and there would have to be a more concerted effort to be omni channel with physical locations earlier on which would be a much more capital intensive business.
Summary
Because of these reasons, we believe you can grow this into a low nine-figure business if everything goes as planned, which kudos to you would be an amazing accomplishment. However, we don't see a path to scale it past that unless you were able to pivot either along the lines above or down another path + knock it out of the park.
In order for our model to work we really need to be able to underwrite each opportunity as a potential 15X-20X net return multiple. So at a [$] valuation, without any of the recurring revenue/subscription models proven out or a targeted effort to adjust the brand to cater to Gen Z as part of a broader vision, it just doesn't make sense for us at this time.
Please let us know how else we can be helpful and thanks again for engaging with us through this process.
Also, know that Atlas is always available to you should you ever want to explore working with Kari and her team on that front.
All the best,
Howie, Jake and Kari
For the founders out there, what information would you most like to see in a pass?