In Episode 58 of Earned, Conor sits down with beauty investor Rich Gersten, co-founder and managing partner of True Beauty Ventures—a beauty-focused growth fund that recently partnered with Tribe Dynamics, a CreatorIQ Company, to evaluate investment opportunities in the beauty and wellness space and accelerate the growth of up-and-coming brands.
To start the episode, Rich walks us through his career trajectory, unpacking his transition from private equity to venture capital, before explaining how he wound up investing exclusively in beauty brands. We then learn why he founded True Beauty Ventures at the end of 2019 to provide capital and guidance to smaller beauty businesses. Next, Rich shines a light on the qualities that distinguish a successful investor, emphasizing that the investment business is all about pattern recognition, so specialization is key. We also hear which characteristics of effective brand founders make Rich keen to invest, before learning about the metrics and KPIs that he values most (including Earned Media Value!). To close the show, Rich shares the knowledge he gained from investments that didn’t turn out as expected, and how those takeaways have informed True Beauty Ventures’ brand mentorship program.
We’ve included a couple of highlights from the episode below, but be sure to check out the full video above, or tune into the podcast on Spotify, Apple Podcasts, or Google Podcasts!
The following interview has been lightly edited for concision.
The Qualities of a Successful Investor, According to Rich Gersten
Conor Begley: What do you think makes a consistently successful investor over time? Because if you're not making people money, eventually they stop giving it to you, right?
Rich Gersten: I don't know how people invest that don't specialize. I drank the Kool-Aid back in the late 90’s when I became a consumer-sector-focused investor. So I drank that Kool-Aid on sector focus a while ago, and obviously I dialed that up on steroids about eight or nine years ago by becoming a beauty-sector-focused investor. The reason you do that is because it's easy to get duped and fooled in our business, right? If you're trying to understand too many different types of industries and categories, it's tough to become proficient in any of them.
The investment business is ultimately about pattern recognition. You see the same thing over and over and over again, and you begin to develop a view on what good looks like. You know the mistakes that are often made, and when you see them being made early, life's too short and you just go on and pass. So I think part of being a good investor is the pattern recognition and the wins and learns you get from being an investor, because not every investment works out. And even some that work out don't always go according to plan, so you learn along the way in terms of what went wrong and how to fix it.
We post mortem everything we do at True Beauty Ventures. If it's working well, if it's not working well, we always go back and post mortem. But when you think about what makes for a good investor, at the end of the day, especially in early stage investing when you're investing in fairly nascent brands, trust your gut. That gut is for both the brand and the founder, but it's mostly the founder. If every time you encounter a founder and you hang up that call and say, “I love that founder,” but the numbers may not look so good, you probably should still invest. And that's where we struggle, right? Because we're very analytical at the same time. But you've got to trust your gut. You've got to be skeptical, because people are selling you, too. And you know how hard it is to scale a brand in this space successfully. And then finally, trust, but verify. Always trust, but verify as best you can.
The KPIs that Matter Most to Beauty Investors
Conor Begley: You mentioned “trust, but verify” with regard to the investments. What is that verification for you? What are the KPIs that matter to you? If I'm an up-and-coming DTC brand or an up-and-coming beauty brand and I'm trying to present myself to investors, what are the metrics that I should really be focused on making better?
Rich Gersten: We'll often get asked, “Why do these metrics matter to you?” And I'll always say, “Your metrics tell me a lot of things about your business that you may not be fully appreciating.” So when I look at your sources of traffic and revenue, how much of it is coming from organic and direct channels versus paid, right? Because if you're only reliant on paid to drive traffic and revenue, I would perceive you as having a brand health problem or brand awareness problem. If people aren't searching for you organically, there might be something wrong with your brand. So sources of traffic and revenue inform us about something, right?
Then we go to your retention or your repeat rates. If your consumers are buying once and not repeating, maybe you have a problem with your product quality or your product experience. You may not realize it, but your data may be suggesting that. Now, if the brand is too young and it's a limited SKU assortment, you may not get all the data you want, but product reviews are very informative in terms of the quality of your product.
Then there’s Earned Media Value and social following. Are you building a community and are they engaging with you? All those things help us understand the health of your brand and the quality of your products overall.
Another thing we'll look at that we have the luxury of doing as beauty investors is, if you're in retail channels, your retailers give you your retail sales every week generally. So we can measure the health of your sell-through, because most investors value businesses off of sell-in or the company's net revenue. But again, the health of the business is driven by the sell-through and the replenishment. We want to see what the sell-through is, and is the retailer replenishing? Those sell-through statistics we focus very heavily on.
And then again, little things like your gross profit margin profile, because most brands are going to be unprofitable at a small scale, especially if they're investing in team and marketing. But one of the ways an investor gets comfortable that this thing can have a path to profitability is as the revenues grow, is the gross profit flow-through significant? So there are lots of financial and other metrics or KPIs that we'll look at.
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You can watch the entire interview here, or listen to the full episode on Spotify, Apple Podcasts, or Google Podcasts. To catch up on our other 57 episodes, featuring leaders from brands like Milk Makeup, Gymshark, Gucci, and Summer Fridays, visit our Earned Podcast page.
Tribe Dynamics has moved to creatoriq.com
