Understanding Your Tribe and Data-Driven Success: Anthony Choe, Founder of Provenance

The Profit Forecast: The eComm CEO's Podcast

Episode #16: Anthony Choe of Providence

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Transcript:

Ben Tregoe: [00:00:00] Hey Anthony, thanks for joining the Bainbridge podcast. Great to be

Anthony Choe: here. Can't wait to chat. Been looking forward to it. Oh, good.

Ben Tregoe: Today we have Anthony Cho, who's the founder of Providence, one of the leading PE funds based out of la. Has a fantastic finance background. Started as a young analyst at dlj, which dates me cause I know what that means.

and then went from there. The Brentwood Associates which, is legendary PE fund also based in LA in the consumer space. And then you started Providence. I'd love to, hear from you what led you down that. , what led you to start Providence, and then we can dive into what you guys do after that.

Anthony Choe: Yeah. Yeah. So thanks for the quick summary on the background. But but yeah, it's been a fun journey starting off as a [00:01:00] financial analyst in New York in the mid nineties at dlj. As you had mentioned, great place to, to be. Still have a lot of friends from that era and lots of whom are doing super interesting.

I'm lucky to have been part of that, but yeah. Originally started by getting a random call when I was at my desk when I was at dlj. Somebody from Brentwood called me, asked me if I wanted to interview, and my first response was, Who I had no idea who Brentwood was but I heard two things.

I heard LA and private equity. And since I had originally grown up in Southern California I knew I wanted to get back to LA and do private equity at some point. I wasn't looking to leave New York at that red hot moment in my career, but, Back in 1996, you could count on one hand how many private equity firms were in la.

So yeah, said, don't look at gift horse in the mouth. This is a pretty fun opportunity. I went there in 96 and was fortunate to risen through the ranks fairly [00:02:00] quickly there. And by around 2006, I became the right hand to the founder and. I had some very specific views on how I thought the consumer space was going to evolve, and I had a very firm view that it was gonna.

The all about omnichannel I'm not even sure the word omnichannel existed back then. Maybe it was just starting to be used. Yeah. Yeah. I think the way I described it was a mouthful back then, which was multichannel brand selling direct to the end consumer. Which omnichannel's a much easier way to say that

But I was so passionate about this. I focused the entire firm on that strategy and to try to explain this strategy to our LPs. I wrote 120 page white paper deck explaining why we thought the world was gonna evolve in this direction. My guess is all of maybe two LPs actually read the white paper deck.

But most of the LPs I think gave us the benefit of the doubt that we had. We had done our [00:03:00] homework and even though they didn't quite understand it, that it sound, it sounded compelling and they just believed that we believed it. So it was the right strategy? Very much we became known as the first firm to really specialize in that area.

And it was, e brands doing everything from physical retail to e-commerce to catalog. Wholesale and put, trying to put all those things together and the whole thesis was and still is today for what we're doing at Providence, that omnichannel is really complex and it's really hard for any one company to master every channel.

And so our view was when I was at Brentwood that any great brand that we come across is gonna need help in at least one, but likely more channels that they're looking to expand into. And if we can be helpful in some of those areas where they're looking to expand, then we could differentiate ourself.

So that worked extremely well. So for the next [00:04:00] 10 years, we went from being a 400 million fund to a 700 million fund. And come 2016 we had a pretty good idea that the next fund would be a billion plus. Nice. I was very strongly of the opinion though that while Omnichannel was taking hold at the same time, what was happening was brand fragmentation in every category of consumer.

And I felt like that was gonna be a permanent state of things. Part of that was what digital was enabling customers or companies to do in terms of reaching their end customers. But what really started to happen in my view, was that brands were really starting to form around tribes, not categories.

And to me that was a whole new Set of circumstances that was gonna change what brands needed to be in in the minds of their consumers. Omnichannel was still gonna be the way you have to reach those customers. But but to me that was a fundamental shift that was gonna continue to [00:05:00] give the advantage to smaller, more narrowly focused brands than.

Bigger brands trying to be all things to all people. So that was a long story on how Providence got started. But it was based on that premise that we we launched Providence that the world was going to, the sweet spot for brands was gonna shift towards a world where you had to go slightly earlier than traditional private equity.

You had to be willing to take minority stake. As opposed to majority stakes but you still had to be value add to your portfolio companies. That's the why we're doing what we're doing. In terms of the how before just launching Providence it spent about six months going into the proverbial lab.

Which was some combination of my garage and man cave. Yeah, stitching together a bunch of the analytics tools that we're using today. So my view was, If brands are gonna be formed around tribes in the future, then you have to be really precise about who [00:06:00] that tribe is and what their behavior is. A lot of the analytics tools that we're using today are with that in mind to help br brands really focus on their tribe and by tribe.

Just to demystify it a little bit, what we're talking about is who your core customer. And not just from a demographic perspective, but also from a psychographic perspective. . So that's why we're doing what we're doing today.

Ben Tregoe: Yeah. Thank you for that. I the first time we spoke and you started talking about tribes, that blew me away because it just made so much.

and I would really love for you to go deeper on that, why were brands always building tribes and they didn't realize it? Or was there something that shifted with the internet that you could build tribes? What caused that insight and what yeah. Is a good tribe or what do you really mean by the tribe?

Anthony Choe: Yeah. So I guess what. Gonna say about Tribe is that when we say tribe, it's really, [00:07:00] there's a demographic and psychographic profile that we see that's created at a pretty early stage of brand. By the time you're about 10 million or so of revenue, that tribe really starts to get locked in.

And what we've seen is. Brands as they've gone from, 10 to 50 to north of a hundred million of revenue, they've expanded their products and they've expanded into a bunch of different channels. We frequently get asked by brands, Hey, can you update some of the analytics you did for us?

We've grown in a lot of different ways. Surely our tribe must have changed. and it almost never does. It's the same group of people. And you're just penetrating them more deeply with more products and more channels. What is a tribe? A tribe is as much of a psychographic as it is an age group.

for example. Lots of times we'll see certain brands have a very heavily progressive customer base and other brands have a very heavily conservative customer base. . [00:08:00] Not that we're political in any of the decisions we're making. We don't care one way or the other. We just wanna know who it is.

But the tribes are being black rifle,

Ben Tregoe: sorry to mean to interrupt, that's black rifle. pin the needle on the conservative, and I guess you get handful. You got it.

Anthony Choe: Progressive. Okay. Yep. With you. You got it. And so it's as much of a psychographic a mindset. As it is, a certain need. And I don't know.

I go back to Maslow's hierarchy and, it really feels like from a brand perspective, we're now at that pinnacle of the hierarchy, which is it's not about exclusivity. It's not about just needs and wants, it's about self-actualization. And what we see is that customers want to see in brands, A reflection of themselves, what their value systems are, what their sense of humor is what their sense of aesthetic is.

All these criteria that we would use almost to pick our friends, people are using to pick their brands, and that's [00:09:00] what we mean by the tribe. And that's why I think it's incredibly difficult for, Large brands trying to be all things to all people to mean anything. Yeah by trying to be all things to all people, you end up meaning nothing to everyone and Yeah.

So we feel like more narrowly focused brands. Narrow focus doesn't mean you're gonna be tiny, but more narrowly focused brands have a much stronger likelihood. having strong resonance with a particular customer base. And it's that resonance not just on the initial trial, but repeat purchasing, being really loyal to a brand that matters to, to get to scale.

Yeah. And so what we see is that, in every category of consumer spending, it doesn't matter whether we're talking about beauty, apparel, home, Fitness, it, every category is fragmenting into tribes. And it's those kinds of dynamics that [00:10:00] we spend a lot of time looking at because we know those tribes don't change.

And I think the hardest conversation for brand founders to hear often from us is that here's your tribe and you're not gonna appeal to everyone. By staying focused on these folks you're just gonna be a better version of yourself. Yeah. And so we try to talk about that as, you don't have a tam, you have a tribe.

Yeah. And the tribe is your customer base. The entire Tam never is. So stop worrying about all the TAM that you haven't reached yet. Cause nobody ever reaches. can imagine So, yeah. Yeah, go ahead. I can imagine

Ben Tregoe: the that conversation getting a lot of pushback, yeah. Cause you're, when I mean by tribe, you also must have a sense of how big the tribe is or some way to size it, I would think.

Okay.

Anthony Choe: Yeah. Yeah. So we'll know what kinds of psychographic types they're [00:11:00] strongly appealing to across the us. And we'll know how many folks are, in, in that particular psychographic. So yes, we can. We can, we think more accurately size a company and its potential size than just doing a top-down exercise cause, the example I always give to people is, okay, pick apparel. You can say that's a 400 billion market, you're not gonna grab 1% of that. So why does the tam even. What matters is who you are resonating with within that giant marketplace. Focus on those folks. And the other part of what we do is, quantifying the tribe's behavior.

Yeah. So not just identifying who they are, but also saying what is it, what does their behavior look like? And. Most people are surprised when we show them that with our analytics tools, we'll show them that, typically, 30% of their customers are driving, 80% of their profit.

And again, the immediate reaction often is, [00:12:00] holy crap, we have a customer concentration problem. I say no, you don't. Every brand that has any kind of customer loyalty always has this dynamic. Yeah. And we get y so used to looking at average customer behavior that people miss the mark on the fact that there is no such thing as an average customer.

Yeah. The average is us usually comprised of lots of low value one-time customers who will try your product once. Probably really like it, but not fall in love with it and not become part of that tribe. And that's okay. You're always gonna have those folks, you're always gonna have that trial. But your entire business is built off of the tribe cuz they're the ones that keep coming back.

And when they keep coming back, that's what? what drives the profitability and the foundation to, to build into other channels. And most people will still try to resist this notion, right? Until I tell them that I don't know if this is still the case, this [00:13:00] was years ago, but had this conversation with the former CEO of Lululemon and this person said, thank God we thought it was just us, but when we did the analysis, we saw something.

17% of our customers generating 77% of the profit. Wow. And I said, that's exactly what I would expect to see. In fact, the more loyal your customer is, the more of that dynamic you're gonna see. When we talk about defining the tribe, it's not only understanding what their value systems are the types of things they care about, but also what their behavior is.

Yeah. Once you can combine those two things then you have a really tight focus on where you can go, who you can be and what you can expect when, regardless of what channel you go into. That's been the, I think, the unique perspective that we come at it with. Yeah. And. I think most brands find that pretty enlightening.

Cause we're telling them things that usually they've never heard before. Yeah.

Ben Tregoe: All right. You dropped a ton [00:14:00] of amazing stuff there, so I'm gonna, Rewind a little bit. Sure. In this sizing exercise that you've determined the brand excuse me, the tribe. Now, would you come out of that and say, Hey, there's whatever, 330 million Americans, and we think your tribe is, 12 million or something like that?

Does it get like that level of detail?

Anthony Choe: Yeah, for sure. So I'll try to protect the confidentiality of our portfolio companies, but let's just say there's there's one company that we looked at where we said, okay, there's about 71 or so different psychographic types in the us, somewhere between 66 and 71, depending upon when you measure it, how you measure it, et cetera.

Of those 71 types, we showed them that four household types account for 50% of the aggregate lifetime value at the company. And Huh. They almost fell [00:15:00] out of their chairs with terror saying, that sounds really small. Yeah. And we said, no, it's actually not the case. You're actually appealing to the most sophisticated brand buyers.

Across the country, and they're the ones that are most capable of continuing to spend with you. The aggregate number of customers that we could potentially have, we're not in danger of running out of them anytime soon. But what we can do is, because you tribe is so precise, let's talk about all the ways we're gonna go.

Yeah. And how we're gonna do that in physical retail, which site selection we're gonna use to go to the neighborhoods that their tribe resides in and spends most of their time in what wholesale partners they should be thinking about as a perfect fit for that tribe. It was really about refining the strategy and.

They've really not found the end of it. That company four years later is now four x the size of Nice. Of when we invested and they still [00:16:00] haven't run outta customers. Yeah. Even though it sounds really narrow it's not, it's, and it's deep.

Ben Tregoe: And are they maintaining that power law of value, like the 20% or less is driving.

80% plus. Interesting.

Anthony Choe: That part has remained remarkably consistent. Remarkably Their lifetime value has been increasing over time as they've thoughtfully expanded their product assortment. , they've got better at optimizing each of the channels that they're in. So they're, they've gotten better about being more relevant to that tribe in a variety of ways.

And so it's not gotten in the way of scale at all. And not only is it four x the size exercise now, it's very highly profitable and consistently. , right?

Ben Tregoe: It, you said in the Lulu example I think it was like 17% was 77% of the revenue or value. I don't remember which. And then you made the point that like the most loyal the brands of [00:17:00] the most loyal tribes actually.

have even more of a power law. I think that's what you said. So are you saying that , you saw a company that was like, Hey, 5%, 95%, and you'd be like, aha. These guys really nailed it. Or would you, would, that wouldn't make you worried?

Anthony Choe: If it's too narrow, I guess that's That's somewhat problematic as well.

Cause okay, it shouldn't be just 5% of your customer base. Yeah. But that power law is always gonna exist. The most of the profitability is coming in the long tail of. A smaller number of, but extremely valuable, highly loyal customers. Yeah. We've yet to, we've yet to see an exception to that rule.

Interesting. And it doesn't matter whether you're a subscription business, just traditional e-commerce retail it always has existed. It's just we're able to see that very granularly now, my bookshelf back here, there's a book called How Brands Grow. That is, yeah, quite old.

In that [00:18:00] book, and this is, decades old research somebody had actually spent the time to look through the buying behavior of Cocoa Hall, okay? And when they actually looked and spent the time at the customer level, who was buying the most Coke, the same power law. It's just that all of it is masked by the channel level data.

Yeah. But when you're, now that we have this customer level data that doesn't mayonnaise out the an average out just from a channel level, yeah. We can actually see what's happening at a customer level. This all becomes extremely clear and it's always been true. We can just be more precise about it.

Ben Tregoe: Yeah. So then what's the sweet spot for Providence? Is it's identifying these brands with good tribe dynamics, who I guess you believe have headroom. Then, like at some point you, you've, is [00:19:00] there a metric for penetration of the tribe that you're like, ah, I forget it. You guys have done as bad as all you can.

Or is that never? Yeah.

Anthony Choe: Yeah. I think the way our sweet spot tends to shake out is that it's almost always somewhere between 20 to 70 million of revenue is the right time for us to get involved. And it depends on the price points, the categories, et cetera. I won't bore everyone with all the details as to as to why that's the sweet spot.

But the long story short is this for us, we're not venture investors. and we're not traditional private equity. . In fact, I think one of the reasons why we started Providence wasn't just to, capitalize on the tribe dynamic that we were seeing, it was that we wanted to end the tyranny of the barbells of the mentality and find the right middle path for.

So what do I mean by the tyranny of the barbells? Oh, I it's like everybody always asks us, are you a VC or a private equity firm? Yeah. And we kinda say we're [00:20:00] capital that's designed for. Omnichannel brands. Yeah. We always get asked, what do you care more about growth or profitability?

And I say, yes, . It's about how you balance those two over the long run, cuz you're gonna start from high growth and you're gonna evolve to high profitability and it's about managing that transition over time. That's critical. We also get asked all the time, are you hands off or are you value.

And so to me I say neither one of those is the right answer. Traditionally, cuz lots of times when you're hands off, there's no value add. And why do you need capital from somebody who's gonna not add value to your business? But when somebody is value add, you often connote that with being highly intrusive in your business.

We get asked, do you care? Do you believe in digital or physical? What's the future of quantitative or qualitative? What matters more in, in investing in consumer brands? Like all of these things matter. . Yeah. And it's not binary [00:21:00] about one side of the equation or the other. And what we're trying to do is marry all those things, but be very precise about Yeah.

What's happening for a particular brand and not give generic. We always try to give very specific advice based on very specific data that we're seeing. Yeah, so that's all backdrop to say, the sweet spot for us is somewhere between 20 to 70 million for a couple different reasons.

One is that we, and our data becomes incredibly precise is around 20 million of. Huh? Where and what? The tribe gets locked in pretty early, as I had mentioned. Maybe as early as 10 million of revenue we can see that get locked in at that stage. Where the quantitative side really gets locked in is around 20 million of revenue.

Okay? And what I'll tell you about our predictive analytics is that. We've back tested our portfolio companies on this, but our predictive customer lifetime value metrics are accurate [00:22:00] to within plus or minus 4% in a 12 month timeframe. Nice. And, but when you have about 20 million of revenue and that scale, you become, the data becomes extremely statistically significant.

Yeah. So again, when we're giving advice based off of that information, We can be highly confident that we're giving the right advice. Yeah. But the real point at which we like to get involved, and it's anywhere between 20 to 70, is that we call it the awkward, gangly adolescent phase of the brand.

When all this data starts to become locked in, all the behaviors start to become locked in. But it's not a fully formed adult. And just like in real life, the choices you make during adolescence can have a pretty profound impact on the rest of your life. The same is true for a brand. And what we saw in the capital landscape is that, there's lots of early stage folks who, just like.

Every infant, there's no such thing as an ugly infant. They're all, yeah, [00:23:00] they're all cute, adorable, and full of potential. You can say the same thing about brands at their infancy. And then, when we look at private equity, which is where I came from, it's all about the resume.

What have you done? What have you accomplished, right? And we're gonna judge you based on your accomplishments, not your potential. So we try to get involved at that stage where we can have a meaningful impact on the future trajectory of the company, both the revenue trajectory, the profit trajectory, or.

And that's the ideal stage that we can get involved. Yeah. And it's also the stage at which we don't have to be running the company. That's not what we want to do, , right? There's no part of us that wants to run the company on behalf of the founders and their team, but, , it's where we can provide this very specific advice that's both strategic, but also gets into very tactical advice where it's very meaningful to the company.

And and we could have an outsized impact at that [00:24:00] stage.

Ben Tregoe: That, yeah. Yeah. I, that's interesting cause I had those two questions. I was like, why does, why when you were going from Brentwood to Providence, did you wanna go earlier stage and then, , you said minority. And I was like, whoa. Okay. I, that's, I wanna hear the answer for that.

Yeah, .

Anthony Choe: The truth is, look, capital love scale, right? Yeah. Whenever something's working people want to do more of it, have more scale yeah. So all things being equal, whether you're a GP or an lp people want scale. , in my view, in consumer if you're looking to balance, risk and return, in my view, the best risk adjusted return was happening at the stage that we're targeting.

Yeah. It's not that you can't make outstanding returns on the early stage side of things. There are folks who are really good at that. I don't happen to be one of them cuz I don't I don't understand how to take venture risk without the data. And we're basically getting involved as early as we can, while we still have a high [00:25:00] degree of confidence in the data and therefore also are recommendations on what they can be the minority piece.

Again, if we. If we were just looking to deploy the biggest checks we could, we would be looking to do change of control deals. Yeah. Cuz you can just deploy more capital in doing those things. But we felt as digital is the primary channel that most brands really get their start on.

That's what allows us to get access to all this data. If you're starting digitally first, generally speaking, you. When the company's still in a rapid phase of growth, the founders aren't looking to sell. They know they've got something on their hands and there tends to be a little bit of an adverse selection problem if you're trying to force a change of control deal on them.

Yeah. Just because you need to write a bigger check. So we just wanted to have the flexibility to be able to find the. Next generation brands that we could, and to me, I [00:26:00] felt like that was gonna be taking significant minority stakes as opposed to majority stakes.

Ben Tregoe: Yeah. Yeah. Interesting. Yeah. What, as you size the okay, so let me see if I'm getting this right straight.

You, you size the tribe. The goal is maximize the lifetime value out of the. , 20% of that tribe's really gonna drive it, but you still need to attract and win the 80%. How then how does that change? It, that runs so counter to a lot of the conventional wisdom of oh, get into Target and then get in all 2000 doors and then go get in Walmart and do all that, and then and then you've made it.

It's, it's or is it, I don't know. It feels like it's counter, it feels like you're just focus on your tribe and then focus on the 20% within the tribe that are really driving this thing. Am I getting it wrong?

Anthony Choe: Yeah, no, I don't think you're getting it wrong. What we're saying is not that you should fire the 80% of the customers you're always going to [00:27:00] have those customer.

Yeah. But to me, the definition of strategy in consumer is focusing on the core customer. Everything you're doing is focused on attracting the core. You're still gonna attract everyone else. Who isn't as loyal, who isn't as valuable you're still gonna do that. Doesn't mean you fire all those folks, but in terms of how you're prioritizing your efforts, your branding strategy, your marketing your product development, your channel, all those things, it always focuses on the core and then everyone else follows.

. So that's the most efficient thing to. If you're trying to balance growth and profitability while maintaining your brand's soul , in my view, that's the only way to balance all those objectives, is focus on the core, let everyone else come along a little bit for the ride and and but doesn't mean firing everyone else Yeah.

As customers. Yeah, I'm not sure if that was answering your question. I No, it is. I was answering half of

Ben Tregoe: it. No it's it is such a cool [00:28:00] idea that I'm interested in exploring it cuz when you were talking, you just, you made me think like, how do you know, like you're doing customer acquisition right?

As a brand and you've acquired the cut and you're like, okay, so now. Power law, this is still an 80% act cuz they've only purchased for me once or twice. How do you know when they've moved into the 20% of lifetime value? Because can they ever catch up to the people that came in earlier who are producing so much lifetime value?

So there's a metric or an idea that you're able to move your new people into the core. Like how do you know you're doing that success?

Anthony Choe: Yeah. Yeah. Generally you won't know until they've made their next purchase. Okay. So it could be

Ben Tregoe: a simple of two or three purchases and then,

Anthony Choe: okay.

Yeah. So when you're being really accurate about that, like how and when they make that next purchase. Has a big impact on their predicted future [00:29:00] value. So I won't bore you with all the details on how all that works, but the statistical jargon on it is, it's Bayesian updating. I'll leave it at that.

But how and when that next purchase happens has a profound impact on that. I think some folks are working on. A machine learning, artificial intelligence approach to trying to predict in advance before they've made that second purchase. Yeah. Who's most likely to based on other data inputs?

I'm not sure yet, but I've seen enough that's gonna be highly predictive, consistently across a lot of different companies. Machine learning needs a lot of training. And every situation is different. By the time we're getting involved with brands, there's no time to train a machine on all the data inputs.

Yeah. For as long as we need to to inform those things. But I do think the world is moving in that direction where eventually you'll be able to start to predict a little bit better, even before they've made their second purchase. Yeah. [00:30:00] And frankly, even before the first. Who's likely to be a better customer, but I don't think we're at that stage yet, but people are working on that problem.

Ben Tregoe: Do you think that the act of making that second or third purchase changes the customer's perception of the brand? You know it, or, one way to look at it would be like I really liked that sweatshirt. I bought another one cause I really liked the sweatshirt and I wanted it in blue. , but another way would be like, Hey, the fact that you, I had one interaction that I liked.

I now had another, am I building a relationship? Does it change the tribe dynamic or is it just so I'm a blue one, if you can .

Anthony Choe: Yeah. The answer is it depends. I think if you're thinking about it purely quantitatively, I think it's. It's more of an indicator that brand love exists.

But how that second purchase happens does have an impact. Just to give some examples in the case of Marine Layer one of our companies the company started off at, in 2010 [00:31:00] as a T-shirt business. They just wanted to create the. Most well-constructed t-shirt possible.

They pioneered some fabrications to, to make that happen. People fell in love with the t-shirt. But now t-shirts are a fraction of the business. Giving the folks other things other than just the world's best t-shirt. Yeah. Was profound in what the brand has become today. How people engage, what is the next product that they get to fall in love with.

Yes. Those things absolutely matter. And you know how that's done, I think. There's lots of different ways to keep drawing the customer in. You can do it with product, you can do it with deep engagement on a number of different levels. There's lots of different ways to. To draw that customer in once they've made that even deeper, once they've made that first purchase.

But the answer is yes, it does have an impact both on how we think quantitatively about what their relationship looks like, but more importantly from the [00:32:00] brand's perspective, like making the customer fall more in love with you. Interesting.

Ben Tregoe: Anthony, for the founders or people that are early, they haven't quite hit 10 million, let's say.

what's, what are some of the key things that they should be thinking about to get to 10 and then be in a good position to get you guys interested?

Anthony Choe: Yeah, so I'm, excuse me, I'm obviously biased, but I would say as early as possible, start figuring out who your tribe is and who you think they are. And even if you don't have some of the toolkits that we have available to us start figuring that out really quickly as best as you can, because that should shape everything you're doing from then.

In some cases if you need our help we're happy to help friends of the firm on that front. But if you want to do it on your own, please do try to focus on that cuz that's what a brand is all about. Yeah, it's [00:33:00] about making an emotional connection with the end customer and you have to.

how you're doing that and with whom you're doing that. The second piece that we see that is often overlooked by founders in the early stage is that margin is incredibly important. And not just product level margin, but what we call for shorthand shift margin. . What does it cost to deliver that product to the customer?

Yeah. In, in the case of digital directly to their doorstep. So we, we see that historically founders have focused way too much on growth and not enough on margin. Yeah. And people often underestimate how profoundly important that margin is to be able to sustain that growth. The third thing, Which is very much in your control, typically as, as long as you have reasons for the customer to keep buying is the best.

Businesses are always built on the foundation of the customer coming [00:34:00] back to repeat purchasing. And so again, we, I think in the prior five years we've seen too many people trying to add to the top of the funnel as opposed to focusing on retaining the customers they already have and making the customers that they already have that much happier.

All those things are to say, Focus as much as you can on profitability first. Cause once you know what your profitability profile looks like, then you can be rational about how you wanna drive the growth. And I think too often in the last five years, people have been focused on the growth first and deferring the profitability equation to later saying, that's a scale problem.

We'll figure that out when we're at scale. Yeah. And. oftentimes that's too late cuz the wheels start coming off when Yeah. You've deferred that focus for too long.

Ben Tregoe: Yeah. That's in ha. Has, so have you ever had a portfo perspective company come to you with all three of those wired?

Anthony Choe: I'd [00:35:00] say that all of the investments that we've made so far, Have all those fundamentals in place.

I'd also say that none of the companies we've ever invested in has been fully optimized on what they're doing. Yeah, we always see that there's meaningful low-hanging fruit that they haven't gone after yet. And that's our job is to help them go after that lower hanging fruit. In some cases it's on the profitability side.

In other cases it's the. Customer acquisition side and other cases, it's the retention side. Everybody has areas of opportunity. Cause I don't know it's like there's never been a perfect human being, right? Like why is it our expectation that there should be a perfect brand even if it's the perfect brand and how it's positioned for a particular category.

It's really difficult to expect, a rapidly growing company with a founder as you're trying to keep up with the growth to be [00:36:00] nailing the execution on all levels. Yeah. So that's why we actually enjoy helping because we don't view it as a shortcoming. It's of course you're gonna have that.

Like, how can somebody have a fully optimized business? From inception, it's it's, yeah. It's too hard. There's too many things you have to do too well for that to be the case. So yeah. But we don't do what we would label brand turnarounds. Yeah. Where, the brand doesn't mean anything to anyone.

And then we're desperately trying to find ways to make it mean something to someone that, that we're. Arrogant enough to think that we can create, because I think there has to be some real magic there or some real authenticity about why it's resonating with that end customer. We can't create that.

That's what the founders and their vision create. Yeah. We can't

Ben Tregoe: create that. It sounds like I was gonna ask you what you get, you have the opportunity to see so many brands and founding founders and leaders. It sounds like [00:37:00] one commonality of success is a really, , great feel for the tribe. Like an innate sense of what that tribe needs.

, what other commonalities of success in those teams or founders do you see?

Anthony Choe: This is gonna sound really basic, but there has to be a passionate. in what it is you're doing and why it is it matters. So I think in my career 26 years of doing this, there's been one investment that I've ever had that sort of resembled a straight line the entire time.

Every other situ. Has been a wild winding road of certain things didn't go your way, certain things went way better than you thought. It was always about reacting to those things. And it's really hard cause building a brand somewhere along the line, I don't know where people got the expectation that brands are supposed to be built in three to five years.

Great brands are built [00:38:00] over 10 plus years, decades. Yeah. . Yeah. And it takes a lot of fortitude to see your way through all the ups and downs that come over a decade plus of different macro conditions, different supply chain conditions, different competitors like so that. Singularly focused belief on what we're doing matters.

Yeah. And we're making a difference how, whatever the source of that is, I think you, you have to start with that. And otherwise people will wanna throw in the towel at the first line of a bump in the road. And that's . I think we joke about it. It's When we're investing, we always say you're not really close to closing unless it feels like the deal has almost died at least once.

And every founder will also say that at the end of it, even if it's a highly successful journey, they'll tell you the story about how they almost went [00:39:00] bankrupt. Yeah. And they had to get really creative on how to. Yeah, and thank so. It's it's that fortitude that, that has to be there.

And usually that fortitude comes from the found the founder who then propagates that same belief to the senior team who then propagates it to the rest of the team in terms of what we tend to look for as a predictor of. People always assume that we start with LTB to C. That's our first metric that we're gonna look at for a digital business.

And what we actually say is it's the shift margin for their category. And it's so profound that we we've coined certain things in certain categories, like in apparel, we tell everyone there's a 50 50. . And that 50 50 rule means this if you have a 50% shipped margin. And by shipped margin, what would we mean is contribution margin before marketing expense, [00:40:00] okay?

So all the variable costs that goes in, but before the marketing expense if you have a 50% shipped margin and you're gonna be truly an omnichannel business. With all the complexity that comes along with it, you probably won't really start generating meaningful EBITDA and profitability until you're north of 50 million of revenue.

Interesting. I've seen that very consistently over the last 20 years. Digital has not changed that. Interesting. It really has not changed that dynamic. There are certain exceptions when certain brands just catch fire and they don't have to spend a dollar on marketing and they're just, they're riding a wave of consumer awareness and demand.

Those are the exceptions, not the rules. I'm talking about everyone else who actually has to have some combination of the word of mouth and some combination of building it brick by brick, whether it's digital, physical, or what have you. That 50 50 rule comes into play a [00:41:00] lot. Every brand we've ever invested in, typically has a very high net promoter score.

And net promoter score isn't something that we live and I buy. Yeah. But we care more about the behavior and the customer loyalty piece and what that net promoter score actually translates into. Yeah. But we've never invested in a brand that has one less than 70. . We've invested in brands that have scores as high as 88.

Wow. But there has to be a lot of customer love there. and there's a lot of indicia. We look for that. Cause again, that's the magic that we can't create. The data's not gonna create that . It's the founders who create that magic. With those things, I think the other things that are within founders control it's a firm belief in team building.

The team and culture matter. If founders don't believe in that, then I don't think they can really have an omnichannel business successfully. Interesting. So it's so [00:42:00] complex and hard to manage. Yeah. And the final thing I think we care about is a deep sense of alignment around what it is we're trying to accomplish and what the definition of success is.

Yeah. So for us, that means One thing we've become known for that's a little bit different than most other folks out there is we use our data to start to craft what we believe is the best risk adjusted growth plan for the company. And we take that and it's not just in isolation. We present the first draft of that with the company, they'll tweak it.

But once we have alignment about that's when we know we wanna do the. because it's not just about being successful or not, it's about what risks you're willing to take to get there and what work you have being aligned about what work is required to get there. Yeah. And who's doing what and who's gonna help on what.

We also care about founders who care deeply. alignment of those outcomes. [00:43:00] And yeah, it's usually having a, also sharing a common vision around when everybody defines as the right time to exit. Not that you can predict the future and predict what market conditions are gonna be five to six years out, but at least directionally you have to be aligned about.

When you can be satisfied with the success you've had and when you can start to talk about those exits. Yeah. So I know those are all incredibly generic. But it truly is how we measure like the likelihood of us wanting to do something. Cuz it's not just the quantitative metrics, it's not just the size of the tribe.

It's about how we're gonna get there from point A to point B that defines. You know what our relationship is gonna be like. Yeah. Yeah.

Ben Tregoe: That's awesome. That's what is that, like 30 years of experience? 20.

Anthony Choe: Yeah, it's incredible coming up. It,

Ben Tregoe: Insight right there, like to craft those.

That's really cool.

Anthony Choe: Yeah. I'm very fortunate [00:44:00] cause our team here is super passionate about all the things I just talked about. Not just the data piece, but also passionate about wanting to help the companies. Cause look, it's easy to look at helping the companies as an annoyance and a, as a time suck.

But we don't view it that way to at all. We view it as we get the privilege. To actually be invited to, to help our companies and when they want our insights, when they want our help we view that to be flattery, not a necessary evil, let's put it that way. Yeah. Yeah.

Ben Tregoe: Anthony, thanks so much.

This has been terrific. It's really fun and inform.

Anthony Choe: Thanks so much for the good questions, Ben. I wasn't sure what to expect from this, but thank you for asking some super provocative and interesting questions.

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