The Fusion of Past & Future Shopping Experiences, Insights from Brand Capital Fund's Consumer VC Benchmarks Report with Diana Melencio at XRC Ventures

Diana Melencio
Malls. Growing up as a kid of the nineties was really seen as like a community center. You walked around, tried to see what people were wearing. You tried to meet other people there, because the future of the store is everywhere. That's actually an area that we're spending a lot of time on, XRC.

So what can they do that actually brings people to the mall? We're also looking at ways to take advantage of this unused or less productive retail space, you know, figuring out ways and technologies that can optimize some of the pain points that we're seeing from mall operators and retailers. Because I do think people are still gonna go, people still wanna interact with products in store. So it's not going away. It's just how they do the transaction that differs.

Mike Gelb
Hello, I'm your host, Mike Gelb, and this is the consumer VC podcast brought to you by propeller Industries, the leading strategic finance and accounting partner for venture stage companies. On this show, we discuss the intersection of venture capital and consumer innovation. And if you're enjoying the show, please subscribe on YouTube or whichever platform that you're viewing is coming. Content and if you're really liking the show, I highly recommend checking out the newsletter@theconsumerbc.com. Dot.

You'll know when every new episode drops for this podcast. You'll also know the latest fundraising updates and all the consumer deals that are happening over the past week. All content and episodes are for informational and entertainment purposes only and is not investment advice. Our guest today is Diana Melencio from XRC Ventures. Diana manages the entire XRC Ventures investment process across three different investment vehicles, their accelerator fund, Brand capital Fund, and opportunity.

Some of their investments include Solowave, Naked Sunbaze, and Billy. They recently released their brand Capital benchmarks report in beauty personal care from pre seed to Series A, which we talk about on this podcast and as well as we talk about different opportunities within beauty personal care and within the future of retail. So if you're interested in those, either two categories, I highly recommend this one. This one. Without further ado, here's Diana.

Diana, thank you so much for coming on this podcast. How are you doing? I'm doing well. Thank you for having me. Thank you so much for being here.

And this is going to be going to be a lot of fun. I know we've been meaning to do this for some time. I know. You know, I've heard you speak on a number of other different shows and has read as well some of the articles that you've been featured in. And one thing that really stuck out was your thoughts around what the future of the mall is and what the future of retail is?

And when I wonder, could you paint us a picture maybe of what a mall you think that would be successful in this kind of new digital era where you, where, yes, people are maybe going back to stores in a post COVID environment, but at the same time, the mall isn't quite maybe what it used to be in terms of maybe like the place to hang out or the place to kind of come together as it once was when you, when you like, envision of what a mall would look like in the future that you think would work from like a, from a financial business perspective in terms of the type of stores that are offering and as well as bringing back some of the coolness factor? Well, I guess that if it's working from a business aspoint, then it's probably working from as well that aspoint, too. Since you're driving, people gain a lot more in store traffic or through traffic there. But what's your take on what the future of the mall or picture of, of what the mall will look like in the future? Yeah, I mean, I think malls growing up as a kid of the nineties was really seen as like a community center.

Diana Melencio
You know, you, you walked around, you tried to see what people were wearing. You tried to, you know, as teenagers or kids, you tried to, you tried to meet other people there. And I think it's really going to be an effort on mall operators and retailers and brands to find ways to bring that community aspect back, because, you know, there's all sorts of digital communities. You know, consumer vc is an example of one. But what is something that you want to, or have to experience in person, such as the touch and feel of, of clothing or seeing what a blush looks like in real life, or tasting a beverage in real life before purchasing it online.

So I do think there needs to be an effort to be made around to answer the question, how can we bring communities together again in the mall? Because the future of the store is everywhere. It's the ability to, when you're at a coffee shop, you know, drinking out of a cup that you can, you can, you can purchase that cup either through like a QR code or there's retail media networks that are proliferating everywhere. That's actually an area that we're spending a lot of, a lot of time on at XRC. So what can they do that actually brings people to the, to the mall?

Mike Gelb
So what, when I think about a traditional mall, you have kind of like your anchors, right? You have like your big department stores in like the different, you know, areas. Growing up, I was also, I was also a nineties kid growing up. For us, it was like Hex, if you remember Hex, you know, JC Penney, Nordstrom, kind of like those. Those were kind of like our hour, I think three.

Diana Melencio
Or like Sears. Sears had everything. It had the tire center, it had a photo store, and then it also had clothes and shoes. I mean, it had, it had everything. But now we can get that on Amazon.

Mike Gelb
Exactly. Sears, great, great example. Also like old Navy comes to mind too, for some reason. But like you have these like big, like kind of like department stores or some ways Sears maybe an everything store, right? But how do you think about maybe the future of malls when you have these big kind of stores, big anchor stores, and then you have maybe smaller stores?

Because I know that a lot of people have talked about this digitalization as well and maybe of commerce and how we're trying to put together. And I imagine this is where you, and you spend a lot of time in a number of areas and relating to retail, whether it's brands or kind of future retail. But how do you think about store size overall in terms of, do you think that we're going to see a lot smaller stores in the future? That's really kind of focus on optimizing per every square foot and seeing how we can actually, and really thinking about it from that perspective, less department stores or are we still going to have, in terms of the overall structure, it being quite similar, but maybe it will be a few immersive experiences here or a museum of ice cream or something like that concept. That's all that's in the mall.

What are you seeing in terms of overall? Are we going to see malls that have a lot more stores or is it going to be maybe similar, but there's going to be some like innovation when it comes to different stores, actually help drive that through traffic, TSP, people through the door. Yeah, I think it's, I think it's all above. So I think for the past decade or more now, there's too much retail square footage out there, out there in the US. As a result of that, retailers, mall operators are finding ways to optimize revenue for, for that excess square footage, whether that's shrinking the actual stores that customers interact with and making room for kiosks that do, you know, buy online, pickup.

In store or like a happy returns or something like that, you know? Exactly right. Or like the Amazon lockers, all of those things. So I do agree that there is too much square footage. Perhaps there's, you know, I think the, the mall of the future is really more showrooms of the future where you can, you can interact with the products online.

Diana Melencio
Maybe they stock some inventory there, but a lot of it is really more from an interaction perspective, because when you watch people actually shop in stores, they have their phones in their hands, typically price comparing or for some, doing some, doing some research. So I do think that brands and retailers alike will have to be more creative about how they use that space. If you do an analysis of the most productive stores in a mall, it is actually those mini kiosks. The productivity levels in those kiosks is very high, higher than the average retailer and brand in those malls. That's really, really interesting.

Mike Gelb
I mean, just from an inventory perspective, I think you kind of touched on there and it reminds me a little bit about bonobos and their story with big fan, the guide shop model. Like the guide shop model, right, where you go into the store, you can go and try on all their products, but they don't actually hold inventory. Right. You actually have to go and you actually buy it online, which is very innovative. And I mean, could you imagine where you actually go into malls just to buy on products, but you actually walk out of there with no bags.

You literally go in like, try on products, but you actually, you actually, you actually do the transaction in the mall. You actually, you actually make the purchases, but it's all kind of shipped to your, but it's actually shipped towards your home and you actually transact online, still in store rather than actually holding out of inventory or. Yeah, yeah, we're already seeing that. Right? Like Bonobos is one, but there are several others that are doing just that, where it's more like the, the car showroom model.

Diana Melencio
Like you can't get a Tesla off the lot. You have to, you can test drive it, but then it will be delivered to your home. So I do think to optimize for margins, for space, for the fact that more people are, particularly the younger generation, prefers to shop online and have things delivered directly to them. There will have to be some adjustments to how products get to the consumer. As an investor, when you think about the future of the shop, the future of retail.

Mike Gelb
The future of retail, probably a physical location experience. What then do you look for when it comes to opportunities, what to you then becomes kind of interesting when you're looking about what the future of the mall could look like, for example, or like the future of the store. How does it actually relate?

Or then become okay, maybe a thesis that then actually turns into what investment opportunities are that could bring you, knock on wood, hopefully venture like returns. That's interesting. Those are different answers depending on if you're talking about consumer product investments versus what you're really asking is tech enabled. Investments, is that tech enabled investments? Yeah, yeah, tech enabled investments.

Diana Melencio
I'm looking for asset light models that don't require a ton of capex. That can maximize revenue for these retailers and for these consumer brands. Retail media networks, which we touched on earlier, is a great example. So it's retailers optimizing the current assets that they already have in place, emails, tv screens, their own website to bring attention to the brands that they carry through these retail media networks. So that's an area where we're spending a lot of time and deploying capital towards.

We're also looking at ways to take advantage of this unused or less productive retail space. We have a company called Phillogic that does middle mile logistics, specifically taking advantage of unused spaces in malls. And so it's, you know, figuring out ways and technologies that can optimize some of the pain points that we're seeing from mall operators and retailers. Because I do think people are still going to go, people still want to interact with products in store, so it's not going away. It's just how they do the transaction that differs.

Mike Gelb
Yeah, no, that, that makes a ton of sense, I would say. When you look, do you look towards examples like, is there a mall that you see? Then you're like, oh my gosh, like what they're doing, the types of stores or products that they're in, or even the technology companies that maybe have partnered with retailers to create different, different experiences. That is pretty interesting. And maybe that, maybe that type of model of a mall might come to others.

Is there any, any like particular mall that maybe stands out? Or, or are we still pretty early in all this where not so much, or even a mall, or even like a mall itself that you think has done a really good job, like embracing in your mind maybe what the future of a mall could look like? Hey, this actually maybe might be a recipe that maybe others doesn't have to be like the exact same stores, for example, but maybe some of their stores are using in terms of transacting. Maybe you can transact digitally, for example, or really easily in the store when you actually like something. Or you can learn a lot more about products more easily in the mall since it's more in historic, is more connected.

Or maybe you find that the kind of anchor, the anchor retailers are doing a much better job, and maybe the mall is, I don't know, helping them do a much better job in terms of how can we actually utilize space where it actually gets more people through the door and better foot traffic? And that, you see, maybe all this kind of evolves into is maybe, you see, since we're both nineties kids, it evolves like, wow, there's this real community that's being built around this mall. People actually want to actually attend this mall per se. And hey, maybe this mall, maybe this is actually. Maybe other malls could take some of the ideas that have gone to this one or not.

I'm just kind of curious if you've seen an example of, wow, that mall. I actually really enjoyed the experience, and there's definitely maybe a bit of a buzz around it because there really just isn't buzz around malls these days. So I'm just kind of just curious. Yeah, I don't know if I feel a buzz, but as a young. As a young mother, there are two that come, that come, that come to mind.

Diana Melencio
One is the Westfield Century city mall, and the other one is the grove. There's a few reasons why I really like those malls and why they are highly trafficked by other young families. One is they have a family room, and two is they also have. They have playgrounds. So they make it easy and desirable for.

I'll just use the young family demographic as an example for young families to want to come and spend time there because there's something for everyone. They also have. They've also been doing, and this is less tech oriented and more of that community building aspect. They're also building in community events, like at the grove, there was a mothers and baby yoga class in the morning. Or at the Century City mall during the holiday season.

They had those. I don't know if you went to the Century City mall during the holiday season, but they had performances. They cleared out the middle and they had live performances. And then there's also within the. Within that mall specifically, there's also, like, breakout areas and fast Wi Fi where people can come and congregate.

It's also helpful that they have a multitude of restaurants at varying price points, and a movie center and a grocery store and equinox. So it's really like a one stop shop. They also have bumoworks, which is a kind of like a wework for working parents, where they have sitters on site, so you could drop off your little one and then work there. There's also a camp, so you could also drop off, if you have more like elementary school, drop them off and get all your stuff done. So I think they do a really good job of finding ways to foster community and draw, draw parents there as a.

As a way to make, you know, whatever it is they have to do, whether that's working out or grocery shopping or buying things they need in one place. Yeah, I feel like, as well, and maybe I'm wrong, just from the malls that I visit, I feel like there's more gyms now as well, in malls, too, which make a ton of sense. Which makes a ton of sense. Um, do you, do you feel, since we, you know, both grew up in the nineties and, like, I'm just thinking about the movie mallrats. Um.

Mike Gelb
Uh, and, um, and, you know, and also maybe being a raw. A bit of a mole rat as well. Um. Do. Do you.

Do you think that the community and that experience, I know it's looking very, very different now than what that experience was as we're talking, what it was in the nineties. But in the nineties, you didn't have the competition of, you know, e commerce. You didn't have competition of, you know, other ways to actually buy products. You almost needed them all. You almost, you know, the mall was, you know, necessity might be a strong word, but, you know, it was, it was just one of the kind of habits or activities that you did.

Do you see that the community aspect coming back in that kind of scale or format, that it was the nineties? Or do you think that, hey, like, there's already, like, way too much competition here with, like, e commerce or being other ways to, you know, purchase products. And I don't think maybe so many people maybe are focused on that experience outside of e commerce per se, that it's never going to be quite like it was? That's a great question. I don't know that it'll ever be quite like it was, but I do think that the.

Diana Melencio
The retailers and the brands that will win in the future of the mall are making it easier for people to do what they need to do, meaning find and buy the items that they need and then check out as quickly as. As possible while maybe participating in some of the activities that are happening in the mall. So the exact. An example would be, have you ever been to the uniqlo store in New York City? I have not, no.

Okay, so basically, you shop around, there's lots of interactive displays, and then when you're done, you have this. You carry around this bag. You drop it into this bin. It automatically calculates what you have in the bag. And then you pay with your phone and you just walk out.

You just, you just drop and then you go and then, and then you go. And then everything is pretty well labeled in that. This section is for men, this for kids. So if you didn't want to interact with a human and you just want to get in and out, you can, you can do that. Wow, that's, that's really, that's really interesting.

Mike Gelb
I mean, I'm also really curious about the future of those types of things as well, just because I know, like, at least on, like, the grocery side, this is different, but I know on the grocery side, like, Amazon is like, cut back on, on doing that. Um, yes, but that's because their model. Was extremely expensive, like, to run one of those stores. So part of my, part of your job is to go, to go shopping. So, so I did.

Diana Melencio
I think it's in Sherman Oaks or it's in the studio city. Whole Foods is like operated by an Amazon go model. So you take a cartoon, you do all this, you know, you do all your shopping and then you, you leave. It's mostly pretty, it's mostly pretty seamless, but they require, you know, cameras and a check in system. There are technologies that make it easy for retailers to do easier to do that type of, sort of Amazon go models such as the carts or attachments that go into pre existing carts.

Really, I think what's preventing a lot of retail is the high capex necessary to create that level of ease of use for the customer. It's hard for them. It's a huge upfront investment and then there's a bit of an education process. But if you do it with existing, with existing assets in the store, I think that makes it significantly easier for retailers. So, like a reader, like a cart reader that attaches to a cart versus spending money on cameras or spending money on buying a whole set of carts for the amount of customers that come through the door versus ones that you could just, you know, put on existing carts.

And that's what we, that's the type of business model that we really like at XRC is an asset light model. That's really helpful. Well, I know we talked a lot about retail. I know. I know as well.

Mike Gelb
You all focus so much as well on brands too. And I know that you recently released your q one report about beauty and personal care. Can you focus on. Well, first of all, I know that you release these reports quarterly.

What's the history of generating these reports, first of all. And secondly, what has been some of the biggest differences that you found in 2024 versus 2023 when it comes to investing in beauty, personal care from the pre seed area, to series a? What have you seen from the macro, from like a macro perspective in the investment landscape? Okay, there's multiple questions. So I'm going to start with the history, which is that XRC got its start as an accelerator program, even though now we have multiple venture funds that we deploy capital from.

Diana Melencio
But as a result of, you know, sort of our, our beginnings, we invested in a lot of pre seed founders that had questions around, well, what do I, what do I need to accelerate to, to get venture funding? And so prior to this consumer, these consumer focused benchmarks report, we had run just the general one where we did have two columns that split between enterprise, SaaS and, you know, sort of like tech enabled d, two, circumflex. And we found that our product founders weren't seeing that line up with VC's in real time, that there's a large difference between the check sizes, the valuations, the metrics required, not even, just, not even with enterprise software, but with like d to c apps or direct consumer services. And so, and because we heard from founders that that benchmark report was so helpful. And since we launched our brand capital fund, we decided, oh, we're gonna, we're gonna run one just for consumer.

And then as we started to think about the landscape of the type of companies that we invest in, beauty and personal care is one, but we've invested in consumer hardware, we invested in Terra Cafe, we've invested in a new tropics company called thesis. And the sort of sales assumptions, year over year growth, the multiplies, the multiples, excuse me, applied to those companies, the valuations, the check sizes, the investors, they were all so nuanced that we decided to release these consumer reports quarterly and focus on subcategories. I mean, there's even nuance within beauty and personal care, but we just, there's, that's too much work. So, you know, we've made several investments in this space. And so as a result, we've fostered a lot of great relationships, like our mutual friend Odile at Fabcro Creation lab, who participated in this survey.

So we decided to focus on beauty and personal care first. Also, because we were seeing so much m and a activity within the space, it just felt very relevant. To start with that, talk to me. A little bit about what, um, the aspects to why you like beauty and personal care. What are the aspects of the business that you find particularly interesting?

Mike Gelb
Where it makes sense, um, to invest in and, um. And, and also what ideally, um, in an ideal world, when you're, when you're doing your, um, when you're modeling, modeling out your investments, what the ideal return is from money in, money out perspective. Why is beauty, personal care so interesting from a venture perspective? So the answer to that is. So it has some of the highest multiples in CPG.

Diana Melencio
So from an exit multiple perspective, it's usually in the mid to high single digits, sometimes even low teens, very rarely. But sometimes, while most CVG, if you take the average of the past decade of. Investment return, that's multiple based off revenue, right? Yes, multiple based on, call it trailing, twelve months revenue trailing twelve. Okay, cool, thank you.

Yeah. Whereas if you take just general CPG, which includes food and beverage, among other things, the average CPG sales, sales exit multiple is three. And so that's why it is so attractive. One, the exit multiples and that b, actually there's multiple factors, but the top two is really those exit multiples. And the second is the, the m and a activity in the space, the strategics are very active in acquiring new brands, largely because they haven't done so, they haven't been successful launching their own internal brands, and that consumers in the beauty and personal care space demand newness.

And there's also, you know, the science just, just involves, if you look at some of the more successful exits, and by successful, I mean just like higher, higher multiples, they really have like a biotech component, K 18, Olaplex. So it's more of this, like, it's more of these like beauty and personal care brands that are grounded in science, that are grounded in clinical results. How then do you think about, since some of the biggest performing exits in beauty and personal care has been companies, as you say, that has, that are kind of science backed or even founded by scientists. How do you think about founder profile when it comes to beauty and personal care? Is it, are you more inclined to invest in founders in beauty personal care that maybe come from a science background and they're, they're, the product has some type of innovation that is that given like the founder's background, if the founder wasn't, wasn't science or vice versa, maybe you, and not to say this could be both, but.

Mike Gelb
Or a founder that maybe is an incredible marketer, or maybe it's a talent led business where you actually, and again, these are not mutually exclusive things, but I'm making them mutually exclusive for the purposes of this conversation or companies that is much more maybe talent led. Um uh or maybe it's a type of product that's that's um that's appealing to uh a demographic that maybe is, is underserved. How do you kind of, because it seems like on the surface and again I'm I'm an observer I'm not an investor. But it seems like on the on the on on the surface it seems like there has been a bit of a shift when it comes to what type of founders to back in that right now it seems very kind of heavily like science focused in terms of that they want maybe some type of science background there. And I'm just kind of curious when you think about the aspects of founders that to you sound maybe particularly interesting with imbuing personal care.

Diana Melencio
Yeah so that's a great question. I don't think what I look for is necessarily dissimilar from that of an enterprise software company investment in that the ideal founding team would have someone that understands how to make the product or knows the pain point really well so can communicate what they want to see what kind of product they want built and then someone that knows how to sell it. I think those two people it could be one but those two skill sets have to exist in the founding team and I think the lean towards science based founders perhaps is a result of that. A lot of the acquirers in this in beauty and personal care mandate a lot of IP or substantial differentiation in order to acquire a company. And that's important because the majority of I mean consumer products in general, but particularly beauty and personal care, the majority of the liquidity events when you realize your return is through these strategic acquisitions and I think you know, all of these conglomerates, I won't name them because I work with some of them.

But think about the, these big beauty and personal care conglomerates. All of them have, a lot of them have bulked up their, their R and D their R and D teams. So for an incumbent brand or excuse me, an emerging brand to come up with a new and novel technology that their head of R and D can't go oh I can, I can do that. Like we can do that. That's a cool sun care brand.

But we have, this brand has a sun care, sun care angle. I think more and more they're mandating that.

Yeah. Because IP is so important to strategic acquirers. I mean for me I think if you are leading with science backed it would be good to have a science backed founder or team member. But to your point, if you're addressing a pain point of an underserved market, like people with darker skin tones as an example, then that's what you want in the founding team, not necessarily a scientist. That would be great if you had all of the above.

Mike Gelb
Right. Something that I keep kind of going over is, and I'm really just curious how you diligence companies, because you might have companies that say that they're science backed and they have you try our product and voila.

It's incredible. It's something like that that you maybe have seen before on the market. At the same time, you also don't want to mislead consumers in your marketing. And I know that there's one of the big, and I'm sure that they all do. I'm sure that the big kind of acquires are also looking to make sure that for the science pack one, that what they're actually, what they actually preach is actually what happens.

Right. Um, how, so? How do you think about diligent? Diligent in a company where, yes, you want them to be innovative and they, and they want the product to be amazing, but at the same time, not kind of overstepping that line too when it comes to, like, their marketing. And maybe they have a really good person that, that's able to sell the product, but at the same time not being too outlandish when it comes to what actually, if you use our product, that's actually what happens.

Diana Melencio
Yeah. So we do have, you know, our R and D experts that we diligence the products with pay very close attention to clinicals if they have them, studies if they have them, customer surveys if they have them, and benchmark them against, you know, results and research and reports that we have on hand, we're also very, we're very outbound focused. So we identify sort of, these are the largest growing consumer product categories. These are white spaces within strategic acquirers brand of portfolios. And it's sort of like the middle of that Venn diagram that we're like, okay, so we should look at, for example, good example, beauty devices.

The at home beauty device category is the fastest, fun fact, it's the fastest growing consumer product category. Just like, just like, period. And our portfolio company, solo wave is the fastest growing company in that category. And it wasn't solo wave approaching us. We were doing a deep dive into that market, talking to strategic acquirers and then outbound looking for companies that were in this specific category.

Similarly, for our investment in naked sundaes we spoke with, I can't even tell you how many suncare companies to figure out which one that we wanted to invest in. And both of those companies are doing extraordinarily well. How do you break down what companies that you actually want to invest in? For example, you mentioned just previously that, um, that at home beauty devices, it's like the fastest growing, you know, sector within, um, beauty and personal care. Was it, um, to make the investment in solarwave?

Mike Gelb
Was it kind of more of like a top down approach? Oh, hey, this category is really, really fast growing. Oh, hey, let's, let's unsource and find what are the best kind of companies and what they're doing, and then let's kind of be able to pick the, pick the best one and try to win allocation and the best one if they are fundraising. Or is it like a bit more bottoms up where companies kind of come to you all and say, hey, let me actually convince you why this is an incredible opportunity in this space and why this space is really kind of interesting. Yeah.

Diana Melencio
Within our brain capital fund, it's more the former. It's very tops down. So we do a ton of research, a ton of research, and we look at thousands of companies every single year that fit within the categories in which we are bullish on. We diligence the categories that were bullish on with bankers, with Wall street, with strategic acquirers, so that we are, you know, sort of like looking at the, at the right categories. And then from there, we, we have some internal tools that we built, but we outwardly source companies that fit within that wheelhouse.

We do respond to companies that are so they don't, and they don't necessarily have to be raising there. We're just like, hey, can we have a, we have a chat? We like to get to know founders for a time before we deploy capital, because our, we try to be very exhaustive in our competitive research. So when a company does, on the latter side does approach us, sometimes we can't move as quickly as they'd like us to because, oh, this is an interesting category. Let's talk to every other company in that category, because we're only going to make one bet.

And our, you know, our average check size is four to $5 million with opportunities for more. And so we want to make one bet, and then we want to put our full force behind that, not only in terms of capital we provide, but resources that we provide to that company. We're very well networked with executives and operators, so we help seed board members, advisors, people on the team. Some of it is potentially compensated via equity or others is just like, do you just want to talk to the CFO of X company if you're to look at your books? Or do you want to talk to the head of, of retail at this company that's doing really well at Ulta?

Because, you know, you're looking at getting onboarded at Ulta. And so we pick one. So it's not that we don't look at companies that approach us, it's that we want to make sure we're picking the right one. This episode is brought to you by propeller Industries. If you run a high growth business and you're focused on profitability, extending your Runway and improving your operational efficiency, you probably need a finance and accounting wiz that will grow with you.

Mike Gelb
Well, instead of hiring someone full time, what would be cost effective is working with Propeller industries. Propeller Industries is a leading strategic finance and accounting partner for venture stage companies and has partnered with over 1000 startups and high growth businesses across consumer products, consumer tech and enterprise. Some of the brands that they've worked with are liquid death, Alipop, Hymns, Farmer's dog away, movie pass, and Giphy. Propeller also provides specialized support for fundraising and m and a with transaction advisory services. Propellers TA team of former investment bankers and investors can step in on more of a project basis when pursuing full scale financing and m and a there's a link to propeller Industries in the show notes if you want to learn more information in this past report, what's been maybe your biggest surprise when you, when you and your team were kind of putting it together, when it was oh, here's a category that is quite interesting that maybe was, wasn't interesting last year, or maybe this is a demographic that we didn't think that was underserved and maybe they actually are underserved.

I know like a couple, I think, I think like a couple of years ago you mentioned how men's skincare, for example, is like the next big category in skincare. Has there been anything like that on the horizon like this year for you that you're particularly bullish on? So it's interesting because we look at data year over year and we adjust accordingly. So an area that it's not actually beauty and personal care related. So it's kind of off the current topic, but we're spending a lot of time in vitamins, minerals and supplements, particularly new forms.

Diana Melencio
So interestingly, there's more and more consumers that don't like to ingest pills. So we've looked at things from mints to technology, using, like, listerine strips to gums to patches through all sorts of things, in addition to actually, like, also looking at, you know, the traditional pill itself and gummies and chocolates and liquid supplements. And what we're really looking for there is differentiation and IP, because that we've seen, and we've been tracking companies in the category that did really well and are now stalling because the true differentiation isn't like, consumers can't tell the difference. I don't know how it's a nicer way of saying it, but I won't say which ones. But there are, for example, within, like, the women's multivitamin space, there are some large emerging brands that have stalled or maybe are not doing as well because the market just got saturated with all these different options, and customers for these products couldn't, like, tell them apart.

Mike Gelb
Break down a little bit about XRC. You have XRC labs, the opportunity fund, and the brand capital model. Can you talk a little bit about, like, average check size maybe for all three investment vehicles, and how you think about, in terms of when you find a company, which investment vehicle that would actually go into if there is interest on your end? Yes. So XRC got its start.

Diana Melencio
So XRC stands for accelerate retail and consumer, and it got its start in 2015 with the founding partner panel, Anthos, who partnered with the Parson School of Design and Harvard Innovation to sort of address some of the issues that he saw happening in retail. And so for a long time, it was just pre seed investments. I was actually part of the first cohort. That's how I met. That's how I met.

That's how I met Pano and check sizes, their check sizes at the time. And I imagine it was amazing to go through. Right? It was good. There was.

There were pros and cons. I'm very honest about it. And I think one of the things that XRC is very good at is we're just like a human AI. We're just like. We're just like a startup.

We get. We get better and iterate with time because we're not infallible. You know, we. We get feedback from. From our founders and we ingest and we try to make the program better.

And so from 2015 to, like, late 2019, 2020, it was. It was just solely the accelerator program. Now, out of that program, we invest $200,000 and we invest in pre seed, the seed stage companies that haven't yet raised a priced round. Typically, we're the first institutional investor and that ranges from companies that are pre product, sometimes pre launch, I should say. But they have like an mvp, something that they could show us to companies that are doing, you know, making some revenue.

The opportunity fund. So, interestingly, as I said, we listen to feedback, we heard back from our own investors that communicated to us. The investment profile of an enterprise software company is very different than that of a consumer product company. So we created different funds to address the differences in terms of the investment makeup. The LP basis is that probably from like the L.

Mike Gelb
The LP basis. So if an LP want to invest in technology, they can invest in which one's the technology is the opportunity, is that right? Yeah. So the XRC opportunity fund invests in seed to series A enterprise software companies or tech enabled companies within the categories in which we invest. Typically priced rounds where a lead investor has been identified sets the terms we provide.

Diana Melencio
Follow on capital of 300,000 to a million is about, about the average. Some of those are winners, so to speak, of the accelerator, and some of those are just companies that we sort of missed the boat on at the pre seed stage. So that's the opportunity fund, the, the XRC brain capital Fund. Our average check size there is four to $5 million. We lead, we set terms, we take board seats.

I would call it like, seed to series a. That's like really kind of hard, depending on, you know, people call it different things depending on what country, which fund, but we like to see like, you know, 500,000 to a million dollars in annual revenue before we, we invest out of that fund. Cool. No, that's really helpful. And it's, I think it's great that you've split it up.

Mike Gelb
You actually have a fund that's devoted to technology businesses, and then you also have a fund that's voted to brands because I've seen a lot of investors, and of course there's no one right way to do any of this stuff, but I've seen investors that kind of invest both, and it is a different profile when it comes to consumer brands versus, versus technology companies in terms of maybe what the returns could be and also what the overall trajectory is of the company. Um, and I will be honest, I feel like I still haven't gotten like a great answer when it comes to, um, when, when, when someone has invested in both a consumer brand and a technology company, like, like mixing the two, um, like, because obviously it's, in this standpoint, it's, it's one fund. Right. And so how does that actually work? Because, uh, because if they are two different types of businesses.

Right. You have one that's, that's a very inventory heavy, inventory based business. And the other one that is, you know, high margin technology business, not to say beauty, personal care is actually very high margin, even though it's inventory based business. But, but, but you still, you know, have to deal with inventory versus, versus, you know, technology. How do you kind of balance those things when it comes to actually modeling out your fund and everything like that, in your sense?

How do you think about, like, what the return profile should be for, for tech versus, versus brands? I can make my assumptions. Maybe I'll make my assumptions after you say, because I'd love to kind of hear how you think about as well as even when you're pitching to LP's, I know you don't have to give us all your secret sauce, but in terms of what the kind of ideal, what the ideal return would be for each fund, that's a great question. I mean, amongst every fund we have, our goal is to be top quartile. So I'll just start with that.

Diana Melencio
And I can give you sort of the metrics behind that post the podcast. I think Amanda has the information there. But so within enterprise software, one is they have a higher likelihood to IPO. And secondly, the exit multiples are in double digits, so it is easier with a lower equity stake. So you can have a lower equity target as a fund.

To make your fund on a single investment within a consumer product fund, you will need, because of the dilution, typically 20% to 30% every round. And that the average exit is in the, let's call it mid, let's be, you know, generous mid single digits. That's a sales multiple. You will need higher equity concentration in the companies in order to make the fund. So you will need to come in earlier and get a bigger chunk if you are going to get diluted quite a lot in subsequent rounds.

Or maybe you can deploy smaller checks, smaller equity checks. But you will need multiple winners at that point to make your fund, you know, and have it be competitive against other benchmarks. Does that make sense? Yeah, 100% on the inventory based. I'm gonna call the inventory based fund.

Mike Gelb
Or like the beauty and personal care apparel, the supplements, you know, these, these consumables. Well, I guess apparel's not consumable, but these products, the products, physical products. Yeah. Thank you. Thank you.

Diana Melencio
Yeah. It's not a line of code that every consumer can use the same one. It is literally you have a pill or you have a lotion and it has one of those has to go, a different one has to go out to every customer. So first of all, do you have conversations with. Because I would say typically what a successful exit looks like, and you can tell me if I'm wrong, what a successful exit looks like in consumer brands is not a billion, it's going to be less than a billion bucks.

Mike Gelb
It's going to be probably on average, it's 300 million average on 300 million. Okay, perfect, perfect. 300 million in there, which obviously in tech it could be, you know, several billion. From that perspective, do you have conversations with founders and say, hey, look, like, what is your goal when it comes to actually fundraising? The future is it, hey, you want to fundraise?

Like, because I talked to some investors and they're like, you know, we actually love it when the, when the, when the companies raise maybe like a seed Series A, but then don't actually need to go up to BCD and kind of keep raising just because what the exit could be, which, let's call it 300 million, since that's the average of a success, successful exit, it's just you're going to get as a founder, you're probably get too diluted. As an early investor, you might get too diluted. So am I on the right track here? Is this. Yes, I have this conversation.

Okay, cool. So also, when you're talking with founders, is that also part of the conversation of, hey, what is actually, from a financial standpoint on the equity side is that do you actually want to go out and kind of keep on raising and kind of be on this hamster wheel or really, do you want to kind of stop with us at XRC or at a couple and maybe a couple other funds and then we, and then maybe use more creative ways to finance, not that equity financing isn't creative, but like debt financing or other kind of ways in order to actually fund your growth? Yes, you actually teed me up very nicely. So though, okay, I'm trying to think where to start. Where do I want to start?

Diana Melencio
I want to start with that. The average exit is $300 million. And then I also want to say that in order to get to that $300 million, on average, you have to probably get close or have sight length to $100 million. That's where earlier in our conversation, I said the three times trailing. Twelve months, multiple of three, which is the average for these, for these consumer product exits, though, again, beauty is higher than that.

And then on average, these founders own 12% of the company. I'll get you the exact number, but it's definitely below 20%. And so one of the things that we modeled into our brand capital fund is not only leading with an equity check, but also providing working capital loans and then providing introductions for the founders to leverage, for example, factoring relationships when they go into retail. Because the worst case scenario is a beauty company, a very successful beauty company, which I shall not name, where it's incredibly successful, there's books written about it, and this founder owns 0% of the company. It just got way too diluted, and it's incredibly successful.

You see it everywhere. So it's.

As a founder myself, I don't want to see that. Pano at XRC, the founder of XRC, was also a founder. And so we know that investing in consumer products has to be done differently than the traditional venture model if you want to maintain founder equity. That's why I think I'm actually really impressed with investors that are able to manage tech and also invest in consumer in one fund, because I'm like, well, these are quite different businesses when it comes to the actual makeup of them. So really great that you actually.

Mike Gelb
Because on the enterprise side or on the tech side, it's more of a traditional venture capital spot. Yeah. Presuming the company is successful and you're raising strong price rounds, your dilution is not 20% to 30%, or you don't have to go out to market as often as product companies do, because you just need to pay for inventory, you need to pay for stocking fees. Who knows how long your lead time is? The cash turns are like, could be six, could be ten months.

Diana Melencio
And the pain of working capital only gets more acute the bigger you get. I think what's interesting about consumer as well is that in tech, I guess you said this earlier, in tech, you can have one or two. You only have to have maybe like one or two winners. And if those are really, really winners, then that returns your entire fund. It's great.

Mike Gelb
And you'll have a lot more, maybe zeros or a lot more. Oh, and then some multiples of your funds. It's power law. And in consumer investing in brands, it's actually not power law, really. And it's not really kind of like the traditional venture capital.

You will still have winners, but you have to have maybe if you invest in ten companies, maybe you need, like, for to do well, right? Or how do you, well, how do you model it out on the consumer side in terms of how many companies you actually need to kind of do well? Ooh, that's a great question. I'm trying to figure out if I can answer it, but I do model it out. And one of the ways where I think we've created an unfair advantage with our fund is that we have these strong relationships with the CFO's, the head of innovation, the head of M and A, the CEO's, the cmos.

Diana Melencio
I have regular touch bases with these strategic acquirers, these public companies, like on a bi monthly basis. And so I have a lot of information about what they want to acquire, what size those companies need to be, and what multiples they're willing to acquire, acquire those companies when they reach that scale. And so I believe within our own fund, I have strong conviction that we will have multiple winners, in addition to the fact that we've invested such a large check size that our equity stakes in these companies is quite large, which you have to do if you are an early stage consumer investor in order to make your returns. As you think about portfolio management, which I definitely do as a former finance Wall street investor, I think a lot about portfolio construction. Thinking about portfolio management, how do you think about your overall pro rata strategy if you invest in on both the tech side and consumer side?

Mike Gelb
Maybe consumer side, it's just not as much because hopefully, or not hopefully, but maybe the companies just aren't raising like subsequent rounds where, hey, we actually don't need to exercise any product. But how do you think overall about like pro rata as it relates to, you know, the seat that you sit in? Yeah. So on, on the technology side, we try to exercise our pro rata in our winners as long as we can and we set aside reserves for that. That said, we analyze the sort of return profile of, you know, adding that incremental 200,000 to maintain our, you know, whatever it is, 5% equity stake in this enterprise software company versus taking that 200 in a pre seed company because we have a multi strat fund and investing in getting, you know, x percent because it's so, call it 7% because it's so, because it's so early.

Diana Melencio
And so we do juxtapose. We know the founders better when we exercise pro rata. So we have typically more, well, we definitely have more information and we have more conviction in the founder, but we do compare that with, okay, but what our opportunities are in front of us and then we model it out. We have quite a few different models as we think about new capital deployment. What have you learned most?

Mike Gelb
You see these stories today about down rounds and companies that maybe were, once unicorns, go out and raise at a valuation that was well below what they were in the heights of maybe the 2021 era. From your experience, what's your maybe takeaway? Or that that or learnings, if you do have learnings from the 2023 2024 where the market has changed moving forward, and if that's affected how you invest in the future, I think as specialists. And domain experts, I really do believe that we are domain experts in retail, commerce, enablement, consumer products. We know this space really deeply.

Diana Melencio
We have in the past fallen in love with similarly domain experts. And earlier in our, in this, in our conversation we talked about what you look for in founders. I want someone that knows how to build the product, understands the problem in a very nuance, with a very nuanced perspective, and then you want someone that can sell it. I think we did not emphasize the selling part enough previously. Whereas now.

Whereas now, like we, we are, because you could have the best product in the space, but it's like a tree that gets cut down in the woods. Nobody, nobody hears it. And then similarly, you could have the best sunscreen, the best skincare company, the best multivitamin. But if you can't communicate that, you don't know how to reach an audience. It is the same exact metaphor.

And so, especially with customer acquisition growth on the product side just being incredibly challenging all across the board, and we've invested in over 30 plus consumer product companies and we talked to these CPG conglomerates all the time. Everyone's having issues with meta and their cat conversions not being as high as they used to be. And so even more so, it's really important to have these founders that, or if it's not the founding team, someone on the team that understands how to talk to the customer on the enterprise software side, that's your head of sales. If it's not founder led, if it's gotten to the point that it's no longer founder led sales, what's one book. That'S inspired you personally and one book that's inspired you professionally?

Oh, one book personally that's inspired me. One of my favorite books is this book called the things they carried. It's a great one, I think, by Tim O'Brien and Film Night's crazy, but I love shoe dog. And so if you consider that professional, then I would say, then I would say shoe dog. Yes.

Phil Knights. It's an incredible, that's an incredible journey. So shoe Dog is number one most recommended book on the show. And the things they carried, I think. Yeah.

Mike Gelb
And the things they carried, I don't think anyone has, I don't think anyone has, has mentioned that one. So you are original, Diana. You have a book that hasn't been mentioned. That's amazing. Diana, thank you so much for coming on the show.

And I know we're over time, but really appreciate you sticking around. Yes, no problem. Thank you for having me. And there you have it. It was terrific having Diana on the podcast.

Diana, thanks again for coming on the show. If you really enjoyed this podcast, please hit subscribe wherever you're listening, whether that's YouTube or Spotify or Apple. And if you really, really love this podcast, subscribe to the newsletter@theconsumervc.com. You'll receive all new fundraising updates over the past week. And you'll receive, and you'll be the first to know when a new episode drops.

Thanks for listening.

The Fusion of Past & Future Shopping Experiences, Insights from Brand Capital Fund's Consumer VC Benchmarks Report with Diana Melencio at XRC Ventures

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1. Introduction to Future Retail Trends

2. Discussing the Consumer VC Benchmarks Report

3. Vision for Modern Malls

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