Invest Like the Best with Patrick O'Shaughnessy - Jason Karp and Rohan Oza – The Power of Brand - [Invest Like the Best, EP.199]

Starting point is 00:00:00 This episode is brought to you by Coifin, one of the fastest growing fintech startups. I discovered Coifin earlier this year when I asked Twitter for the best Bloomberg alternative, and the overwhelming winner was an intriguing new product called Coifin. Coiffin is a web-based platform that lets you analyze stocks, ETFs, mutual funds, and other assets all in one place. I now use it daily to track what's going on in the market, and I think if you try it, you will too. Coifin has tons of high-quality data, powerful functionality, and a nice, clean interface. If you're an individual investor, research analyst, portfolio manager, or financial advisor, you should definitely check them out. Sign up for free at coiffin.com. That's k-o-y-f-f-in.com.

Starting point is 00:00:37 This episode of Invest Like the Best is also brought to you by Ladder Teams. Ladder Teams is a modern personal training experience that takes the guesswork out of working out with expertly designed workout plans, one-on-one access to some of the best coaches in the world, and the power of community all delivered to your phone. I personally use the app for my workouts and I'm an investor in the business. If you're looking to switch up your fitness routine at home or if you are back in the gym and looking to refresh your training plan, Ladder Teams has a program for you. Check out Ladder.fit slash Patrick to download the app and get started. Hello and welcome everyone. I'm Patrick O'Shaughnessy and this is Invest like the Best.

Starting point is 00:01:18 This show is an open-ended exploration of markets, ideas, methods, stories, and of strategies that will help you better invest both your time and your money. You can learn more and stay up to date at investorfieldguide.com. Patrick O'Shaughnessy is the CEO of O'Shaughnessy Asset Management. All opinions expressed by Patrick and podcast guests are solely their own opinions and do not reflect the opinion of O'Shaunacy Asset Management. This podcast is for informational purposes only and should not be relied upon as a basis for investment decisions.

Starting point is 00:01:51 Clients of O'Shaunoshae Asset Management may maintain positions and the securities discussed in this podcast. My guest today are Jason Carp and Rohan Oza. Jason is the founder and CEO of Human Co, a holding company focused on building businesses that help people live healthier lives. Jason formerly ran the hedge fund Turbion Capital and was a popular guest on the podcast several years ago. After watching Jason lay out the vision for Human Co, my family and I became investors in Jason and his team. Rohan is the co-founder of Kavu Venture Partners, one of the fastest growing venture funds in the CPG space, which has helped

Starting point is 00:02:26 grow brands like Beyond Meat, Hems, Vital Proteins, and Buy. You may also recognize him as one of the recurring sharks on ABC Shark Tank. Our conversation covers how to think about investing in brands, what makes for a great brand, how partnerships with influencers and celebrities can turbocharge a brand, how brand ultimately gives you pricing power, and how Rohan and Jason tried to, in their words, add sizzle to the brands that they work with. I really enjoyed this conversation with two of the smartest people I know on this topic and hope you will too. So, Rohan, since it's our first time chatting, I think the best place to begin this

Starting point is 00:03:02 conversation between the three of us is with a bit of your background. I'm going to go all the way back to your time at Mars working on M&Ms. Can you talk about your very first experience working in this industry and this vertical and kind of what lessons you still think about looking back on the early parts of your career? I described to Drake song because I definitely started at the bottom. I was working the morning, the afternoon, and the night shift nine days straight and then you get four days off, but your body clock was completely whacked, but I was 20 years old, so I rebounded pretty quickly. And I was working in the factory floor putting Snickers in boxes because the Snickers nine had not been fully automated, so I was still manual packing. And then I would have to go

Starting point is 00:03:48 clean the actual machines, which obviously was an amazing job in some respect, but also didn't help with my waistline because you ate what you cleaned, frankly. Cleaning chocolate was fantastic. But yes, I definitely learned the business from the bottom up and I learned the importance of manufacturing and inspiring operations. And then I moved into sales and marketing. And I suppose the first thing I learned at Mars is the power brand, especially with chocolate. There's, I mean, there's not much of a difference. When you want to put chocolate, nougut and nuts together with a little bit of caramel, it's not that difficult to do. But creating a billion dollar powerhouse brand like Snickers is tough to do. And I think the power of branding and customer loyalty, retail presence,

Starting point is 00:04:36 and retail impact is something I really learned at Mars. And that has kind of stayed with me throughout. And especially in the UK, because in the UK, Mars actually dominated the retail shelf with their candy lineup even more than they do in America. What was the first? What was the first episode that you can remember where you were the person responsible for some change in direction or step up in a brand's image where there was some creativity behind it that you spearheaded. What was kind of the first big break you had as the person controlling the direction and the brand equity itself? I'll probably give you two experiences.

Starting point is 00:05:15 Actually, for me, that happened more at Coca-Cola than at Mars. Because Mars, I was in learning mode, let's put it that way. Coke, I went into action mode. Again, learnt the power of branding because you're selling sugar water, but you're doing it with a feeling and an image that sort of excites people. So the first two was when I worked on Sprite back in the day when we launched the Trust Your Instincts campaign, and Sprite went from a bit of a sleepy lemon line soda to one of the hottest sodas amongst urban males in America.

Starting point is 00:05:49 And we were doing a campaign and we had to pick two athletes and a rapper because it was all about how rappers want to be ballers and ballers want to be rappers. We had a limited budget. So we picked two guys. One guy just graduated college. I think it was Wake Forest.

Starting point is 00:06:05 And the other guy had just graduated high school out of Philadelphia somewhere. The woman was actually the biggest name and she was Missy Elliott. And we combined Missy Elliott with Tim Duncan, the Wake Forest guy, and Kobe Bryant, the high school graduate. We had no idea that Tim would go on to become top 50 of all time

Starting point is 00:06:26 and Kobe had gone to become the legend that he did. But I think with that came together, it was creating stuff that did not happen. It was disruption. And that's where I learned, basically, began to learn about creative disruption. Jason, I think it's probably worth updating the audience who's heard from you before last time as a long-time successful hedge fund manager now as something very, very different.

Starting point is 00:06:47 Can you describe the transition from one to the other, both around Hugh but also Human Co? I guess fast forwarding from then, we returned all of our capital to our investors, which was a pretty significant sum. And I had decided at that point, having been in the hedge fund industry for 20 years, that my true calling and my true passion was within health and wellness. And if you remember, Patrick, I had a very difficult personal journey. related to my own health in my early 20s when I was diagnosed with several autoimmune diseases, one of which they told me I would be blind by the age of 30. And I've had to live a very specific way for the last 20 years to sort of keep all of my issues in remission. My family and I started a restaurant and healthy food products company called Hugh, as in human, back in 2012. That has

Starting point is 00:07:41 turned into quite a large company now. And around that time when I was doing, Hugh and was busy managing a hedge fund, I became fascinated with health and wellness as a megatrend. What were the companies who were actively thinking about health and wellness, doing it in an authentic way, and recognizing that a lot of the most powerful, a lot of the best products were done by entrepreneurs who were really good in certain areas, but perhaps needed some experience and wisdom, particularly in the area of investing. I started spending a lot more time on companies both public and private in that area. And then ultimately, the culmination of all this was we created a holding company called Human Co. And the idea was to take all of my

Starting point is 00:08:31 learnings and mistakes and wins over the last 20 years and try to create a next generation holding company where the entire ethos and the entire mission is around allowing people to live healthier lives through what they consume, whether it goes on their body or in their body or even if it's technology, the aura ring as an example, which I was an early investor in, that helps people understand their own health in a way that we weren't able to do a decade ago. So that's sort of the last year and a half, we've been building Human Co. We've acquired two brands and we're building a third brand from scratch that is going to be in the frozen space.

Starting point is 00:09:12 And our goal, it's similar to Rohan and Kavu in the philosophy, which is why Rohan and his partner, Brett, have become good friends over the years with us because they're two of the finest people we see in health and wellness consumer space. But unlike a fund, we're doing it as a holding company structure where our intention is not necessarily to sell. It's to build a next generation, a house of brands, similar to companies that have done a spectacular job over. the last 50 hundred years like Mars or Mondalese. I'd love to talk now for a while about the dimensions of a good brand. And I like Rohan, how you described chocolate and nougat and caramel or sugar and water, like the sort of commodity components that are used to build these things. I know we're going to talk about health too, and those aren't the most healthy snacks.

Starting point is 00:10:02 But the importance of brand is paramount. So let's start with investing in a brand. So something comes to you. What sorts of things that you might see would get you really excited if you didn't build it yourself personally, you're seeing it for the first time. I'm not that smart. I wish I would have built some of these brands myself, but then I'd have a fancy house like Jason, but I find smart entrepreneurs. So what do I look for? I look for a founder that has a real story. I look for a product that has a real need in the marketplace and is causing a degree of disruption. So I'll give you a

Starting point is 00:10:38 few examples. Buy. I want to drink a flavored beverage. America love favorite beverages. Yes, likely flavored beverages are out there, but people like full flavor in America. It's how we are as a nation. Japan, different. But nobody wants sugar. But then I also don't want artificial ingredients. So how do you deliver to me a product that tastes great? That's low in sugars. That's not artificially sweetened that makes me feel slightly better about myself. Buy was an example that did that. I saw the brand early doing a million dollars in sales. I love the vision of the founder. And I felt that there was a real need in the marketplace for this product to disrupt

Starting point is 00:11:16 the giants that are sugar-filled sodas. So again, it met the criteria that I felt that if we put the marketing machine behind a real product with a real consumer need and a smart founder, we can turbo charge that to the promised land. So what does that machine look like? Once you've identified those potential characteristics and you've backed something, what is the accumulated marketing machine, which I assume is sort of informed by all the lessons you've learned at all these brands and investing and building, what does that machine then do?

Starting point is 00:11:49 First thing is team. I've had my fair share failure. So you kind of learn from those more than you learn from success. Successes almost. But one, let's get a solid team. One of my former business partners always to say, he looks for a combination of IQ and EQ. Because when you're building a brand, just straight IQ. When you're designing a search engine for Google, it's just straight IQ. I don't think you need a lot of EQ or I'm going around. But when you're doing brand building, both sales, marketing, et cetera, you need someone to balance that. So what's the right team make up? Secondly, I look at route to market and retail strategy. Before I look at branding, even, route to market and retail strategy. Then I say, does the chassis match the engine? If it's got a Ferrari engine, I hope to God it looks like

Starting point is 00:12:35 a Ferrari. You've got a Ferrari engine in a Pinto chassis is you've got a problem. And I've had some of those brands, by the way. The minute we changed up the packaging to match the engine, the brand took off. Before anything else even happened, retail distribution with great packaging and a quality product gets you a long way. And then once you've got that machine going, then you start turbocharging with influences, marketing, outdoor, etc. But you don't put all that ahead of team route to market retail strategy and packaging. All that has to be the turbocharge, not the foundation. What is the retail strategy piece?

Starting point is 00:13:15 That's the only one that I'm not really sure I understand well. What are the options for retail strategy and are there options that you prefer or think or make for more interesting potential outcomes? It's horses for courses. So let me explain what I mean by that. Again, the world has changed today. So when I say retail, I'm aging myself. I should really use route to market versus the word retail.

Starting point is 00:13:37 So root to market means any modern brand today has got to have a strong TTC component, are you from the get-go or you build into it right quick. The second thing then is which retailers do I go to and how? And without giving you the full playbook, who's going to pay for it when I use it to give you the milk free? The key is you've got to pick the right retailers in the right markets to build your momentum and not always take the biggest retailer with the biggest range because you might well be too early for them. Now, product life cycles and consumer acceptance of brands have accelerated rapidly. So what was true 10 years ago is not as true now, but it's still true.

Starting point is 00:14:19 So I think route to market customers and markets is critically important. as you brand build because one in ten Americans influences the other nine, and you've got to get to that one in ten in order to build your brand momentum. Because if you get to the wrong one in ten, or you try and get to all ten without a brand cachet, you will fare. I can give you some concrete examples around this too, because I think this was something that we did with Hugh, where I'd say most of it was intentional,

Starting point is 00:14:50 but we also had just some good luck and some good learnings on how it happened. Rohan is dead right that the world has changed a lot in the last 10 years. And when I was an active public investor, I studied brands for a living. And I was always fascinated with why does Apple command a significant multiple to Samsung, a multiple premium, even though Apple's technology has always been inferior to Samsung's? Why is Tesla worth more than all the other auto companies combined and still has significantly less revenue than them? I've always been fascinated in what is a brand. And there's a lot of kind of marketing 101 or textbook definitions of defining a brand in terms of its sort of intangibles. But for me, a brand really means to me that if you turn

Starting point is 00:15:39 off your marketing engine and you're not splattering the consumer with reminders of buy my product, buy my product, buy my product, do they remember you? Does it last? Does it last in different cycles? Do generations associated with feelings? Do you have nostalgic thoughts about certain brands? And everyone does. And ultimately, brand equity is about pricing power, and it's about repeat, and it's about a warm association with it, where you have a feeling that makes you feel better in some way about yourself and why you're consuming it.

Starting point is 00:16:18 In the case of Apple, Apple really targeted in the early days, it was the creatives who wanted to feel like they were able to create more and better by using Apple than if they were using a generic product. As it relates to the retail strategy, what we chose to do with Hugh because Hugh Chocolate was our first retail product. And originally it was in the restaurant. And then Whole Foods was our first customer. In the first many years, it was my brother-in-law Jordan, my wife and me, who were the only investors in Hugh. And we didn't have outside investors. and the reason for that was because we didn't want to compromise on the brand integrity and the brand guardrails. We never wanted an investor to say to us, why don't you use this inferior ingredient because it's going to improve the margins?

Starting point is 00:17:03 We wanted to be fanatical that we were the most fanatical consumers. If other consumers recognized that we were borderline insane about the standards that we held ourselves to, then we were hoping what Rohan calls the one in ten, we call the fanatical. few. We were hoping that the fanatical few would recognize our enthusiasm and strictness, but as the brand was growing, we had a lot of retailers who wanted to take on our product. And we were faced with a difficult decision, which was, do we get easy sales in places that may compromise the authenticity? There's a reason you never see Chanel on discount. And there's a reason you never see super premium brands like Hermes or frankly, Apple is very rarely on discount.

Starting point is 00:17:54 And there's a reason behind that. And there's a logic. If you oversaturate the consumer too quickly with the brand that you're trying to build as being authentic and iconic, it loses that luster. And we had to make some very tough decisions that had we had a lot of certain types of investors who wanted to have a quick exit, they would have been very angry with us and said, what are you doing? How could you say no to a new store? We had gas stations that wanted to put our chocolate in there. And I think at some point that might be the right market. But we wanted to have a very clear strategy of which retailers and which places would Hugh be available. And even now, the demand for Hugh exceeds the supply. And in some ways, that's a negative because we've delayed

Starting point is 00:18:40 our potential revenue growth. But when I think about it in terms of brand equity and staying true to why we created Hugh and why we're now doing this with other brands. I think the retail strategy, which Rohan and Brett have mastered in terms of not oversaturating too quickly and making sure that that organic brand love can build in a way that feels natural and real. I think that's a real art to that. What are the biggest mistakes that you've both seen, maybe Rohan and companies that you've invested in, where you worked in marketing and Jason, maybe companies that, whether it's Hugh or some of the other portfolio companies at Humanko. What are the biggest errors early in a brand's life cycle that you've seen people make?

Starting point is 00:19:24 One week or junior team. So they rely on either people they've known, which is in some respect, good. You want a degree of trust. But in a manner respect, it's bad if they don't have the right skill set. EQ comes back into play. You want someone who will charge the mountain for you, someone who bleeds the brand. So in the early days, you definitely want brand messiahs, But you also want them to understand how to grow your business.

Starting point is 00:19:48 You've got to combine this. So when you have a week or weakish team, that's problem number one. Problem number two is gross margins. You better have good gross margins or get to them real quick. Because if you do not, you're going to continue to burn money. And if you don't have a line of sight, at some point, your investors. And I've been one of them will end up losing faith in you. and it's the deals that we have lost money on,

Starting point is 00:20:16 you know, we're generally pretty good in terms of 80, 90% winning versus 10% losing is because there were gross margin issues. They didn't get to good gross margin quickly. What is good gross margin in this category? I'm so used to the software world where it's insanely high. What is good gross margin in the physical CPG world? You kind of want to be north of 50%.

Starting point is 00:20:39 See, the price we're able to get for your brand, is one thing, obviously, is a differentiator enough. And then secondly, what can you make it for? If it costs you a little more to make, but you can charge your premium price, but then you're in great realm. But just the worst case scenario is when you're manufacturing is high, but you can't charge a premium price, and you don't have elasticity to raise that price is when you get in trouble. When did things change from the kind of early story you told, Rohan, about effectively commodity products with extremely strong global brands on top of them, I'm thinking Coca-Cola here, Sugarwater, to the market carrying much more about the actual ingredients,

Starting point is 00:21:17 the product itself, of course, the brand too. But it seems like there's been a pretty notable shift away from a willing acceptance of just kind of undifferentiated core product and towards consumers carrying more, especially the fanatical few, about what's in the product itself. What has caused that change? When did it happen? Well, I mean, first of all, I don't think it's undifferentiated. These guys would argue that products are very differentiated. But I think they were differentiated, in my opinion, predominantly on marketing, branding, feeling. They weren't differentiated on nutrition and function combined with taste. I think that what's happened is the access or the democratization of information. Before, you didn't know what you were eating or drinking.

Starting point is 00:22:04 There wasn't enough data out there. And remember the early 90s? And everyone said, oh, guys, the big problem is fat. Fat's the major problem. Who cares about sugar and carbs? And you had the emergence of snack wells. Remember that one? Oh, yeah. Those are delicious.

Starting point is 00:22:20 Those are delicious. No fat. That's the good news, guys. Bad news loaded with carbs and sugar. I would trade fat for carbs and sugar all day, but I would be the size of a house. It was really a lot of which today we have it in other round. There was a lot of, let's call it, fake news. But today, there's a lot more information out there.

Starting point is 00:22:39 your millennials and Gen Zianials, we call it in Kavu, have really embraced in a big way better for you products, maybe because I see some of their parents taking to it, maybe because the marketing, maybe because the influencer strategy, maybe because the packaging, maybe because they don't want to be eating their parents or grandparents' products, but they have driven the growth of the better for you functionally, nutritionally superior products that still taste good because in America, we're not going to sacrifice taste, and they've driven that momentum. And I think COVID has actually probably helped accelerate that even more. It's one of these things where I don't think there was a single moment in time or a single

Starting point is 00:23:22 event that you could point to and say that was when it turned. I think most trends follow an exponential curve where they build really slowly. And then as that foundational base increases, they accelerate in a convex fashion. And I think with this, I kind of compare it to the scene in the matrix where once you're aware of how unhealthy a lot of modern products are, and I don't just mean food and beverage. I mean, I'm talking also about personal care, household products, things that are in the environment. Once you're aware of it, and I think a lot of people think it's a conspiracy theory, the science

Starting point is 00:24:00 around a lot of the toxins in modern living is indisputable. The illnesses, particularly with America and other developed countries, we are literally sicker than ever. At a time when we are the most financially secure, at a time when we are exercising more than ever, at a time when we spend more on health care as a percentage of our income than in human history, and we're still sicker than ever. There's no dispute among scientists who are studying this that modern living, using some of the older approaches to producing products, which, again, was a 50-year culmination of basically public companies getting pushed and bullied by their shareholders to increase margins,

Starting point is 00:24:47 increased shelf life, increased distribution, and to do that, and it wasn't their fault in the sense that I don't think there were many companies that were outright malicious. There have been a few, but most of them were just trying to make more money. And in doing so, they substituted real ingredients for chemical ingredients because real ingredients have variability and chemical ingredients can be made in mass, mass, mass, mass, mass scale. And I think a lot of consumers are now aware of all this. And I think the younger generations, millennials and the Gen Z, there's almost a pride and a badge of honor in how they live and the choices that they make.

Starting point is 00:25:25 And I think when they see that they feel better, they look better, they sleep, better, they perform better. I think when they see all that, and they recognize that big public corporations in general didn't always have their best interest in mind. There's been a growing skepticism over the last 10 years, and it's become viral where everyone's becoming more aware of it, and they're willing to spend more money for trust, authenticity, and quality. And I think that trend is going to continue for the indefinite future because the health outcomes are indisputable in terms of how much better it is for people's health. And even if you're spending more today for higher quality food and products, the amount that you save in the long run by avoiding

Starting point is 00:26:11 health care and sick days, all those things are more than worth it by being more conscientious about what you consume on a daily basis. You both mentioned the importance of finding and appealing to the fanatical few, the one in 10 that influenced the rest early on in the brand's life cycle. How do you know who those people are and where to find them? It seems like it would be a different group. The few would be different in each brand's case. What have you learned, maybe Rohan, starting with you, about identifying those people and appealing to them? Zero chance I can tell you that, because that is like asking me for the Coca-Cola formula. I can tell you how the Coca-Cola product tastes. You've got to figure out the different means

Starting point is 00:26:53 by which to hit that target audience. The single biggest one, obviously, today is Dejirati. So based on your products, there's different people that have followings and reach. And then the issue within that is defining loyalty and influence. So two people can have a million followers each. One of them has greater influence and impact than the other. Your magic solution is going to be figuring out which one has more of that because I can send you out to Instagram and you'll find me 10,000 people with

Starting point is 00:27:29 followings of 100,000 or more. What we have done at Carvoo is build a really strong network of understanding which influences actually influence and impact versus those that simply reach. And I think the same thing applies to people with blogs and the same thing applies to the digirati. There's the reach and then there's influence and impact. And I I think you've got to, through either the right partners, trial and error, or insight, build up a database of the people that you think can be that one in 10. You're never going to get it right completely. But with a limited budget, I've got to make sure that my million dollar budget gives me

Starting point is 00:28:12 $10 million of impact, not a million dollars of impact, because one to one is no bueno, one to 10 is bueno. We've talked about this in the past, and we have a data science effort at here. Human Co, where we try to using data figure out this question. I think, unfortunately, there's a lot of art to it. And we've spent a lot of time thinking about this. And oftentimes, they're not famous people. What they always are is authentic. They always are true to their story. Because what happens is that you have a lot of, I can give examples without giving brand names. And Rohan certainly knows some of these, where you had a top 10 celebrity promote a product, and it didn't really help.

Starting point is 00:28:57 Consumers have very good bullshit meters, and people can see, like, that's not how they live. That's not authentic. They just got paid $4 million to do that. Whereas if you have somebody, and I think some of the success of Hugh as an example, is if for the people who know my brother-in-law Jordan and the people who know me, they know both of us are literally insane with how strict we are and how we live. And that's a positive and a negative. But if you want to know and be confident that we spent the time as founders in making sure that the product had these certain guardrails, you know that we did that.

Starting point is 00:29:34 And I think with Apple, people knew that Steve Jobs did that. They knew that he was insane. If it was good enough for Steve Jobs, it was good enough for them. And I think the most important people out there who are ambassadors or influencers or endorsers are. are the ones that the public can look at and say, they really walk the talk. They live that way. They understand it. The reasons for them starting that company and making that product were authentic and not just about making money. And I think that's the underlying threat of all of this is the entrepreneurs who do it because they care about the craft and they care about why they're making

Starting point is 00:30:12 that thing more than the money. And the money is just sort of a benefit of doing it well. Those are the products that are epic. The products that are built to make money never are epic. And so that's where I think it comes down to it. Makes me think of like Steve Prefontein and Nike in the early days, clear alignment of the celebrity in that case and the brand and kind of what it stands for. Actually, then the last part that you're missing, which is very relevant to today, was brand. It was function because Bowman was the function, the waffle shoe that was designed by Bowman for pre is what gave him the grip and there was functional superiority, which is a big part of what Nike is trying to do throughout their career. But it's always been there in a athletic apparel.

Starting point is 00:30:55 It's a lot more there now in food and beverage where people are looking for what can your food and beverage do for you sort of thing. In addition to this need for alignment between the influential person or entity and the product, which I think is so interesting, makes a ton of sense. Ron, how have you seen the role of celebrity change in the impact? they have and the importance they represent for building and growing brands over the course of your career. There's three things. One, I like to have celebrities in general, not always a case, to help turbocharge a brand versus save a brand or carry a brand. There's a big difference. Brand has momentum. Brands got great product. Brand's cool. Celebrity comes in turbocharged it,

Starting point is 00:31:38 similar to what Jennifer Anderson did on smart water or 50 cent did on vitamin water or Justin Timberlake, you don't buy. Buy was a great brand doing well, Justin helped turbocharge it. So that's one. Two, I think authenticity is critical. And as Jason mentioned earlier, there's a, I won't name the celebrity, but there's a particular beverage brand out there that signed arguably one of the top 10 names in America. If anybody want to name that name, everyone in the country would know that name. Great person, but almost there was no brand fit. The brand fit wasn't there. The product was kind of lagging. And I think that celebrity, did it because they liked the product, but the product was mediocre and that person would have had to carry the brand, did not work.

Starting point is 00:32:21 So authenticity is critical. And so some celebrities have actually founded brands. And so that's where the authenticity comes in in a critical fashion that it's got to feel real. When Jessica Alba did Honest Company, that was real. When Jennifer Garner did Once Upon a Farm, that was real. And you can see that in the consumer testimonials, in the feedback, in the PR. But you can also see where it's fake, where celebrity just gets attached to a brand, and audience is bullshit meter goes up pretty high.

Starting point is 00:32:53 So I think that turbocharge one, picking the right celebrity, two, fit, and three, authenticity are the big three for me. Patrick, I think there's something else that's really important to touch upon, and I'm not sure we hit it yet. But when you have a good brand and you've all experiences, and I certainly, I'm very attuned to my own feelings and my own emotions when I experience a product or a brand. But when you experience a good brand that you love, it leads to more consumption and not just necessarily of that individual product, but of everything that that brand does.

Starting point is 00:33:28 Think about different industries call it attach rates, but think about it with Apple, how easily they were able to get people to buy an iPad when they already had a laptop and they already had a phone because people loved Apple and they loved everything that Apple made, that it increased your affinity and your desire to just buy whatever they make. There's not many brands that do that well. And I think what Jobs did amazingly well, and this is why Rohan and I hit it off many years ago so much because I've interacted with lots of entrepreneurs and lots of VC managers. but most of them look at products from an investment perspective, and they look at it from a

Starting point is 00:34:11 kind of almost a science engineering perspective. They don't look about it from a feelings, a storytelling, a emotional perspective, because it's hard to quantify that. Investment folks tend to want to live in the quantifiable realm and not so much in the qualitative emotional feeling realm because they think that's sort of voodoo or lovoo, or lovety. dovy or whatever adjective you want to use. And I always come back to, do they make epic shit? I don't have a fancier way to describe it. You can tell that there are a lot of companies on their fourth or fifth iteration of a product.

Starting point is 00:34:51 They get to, yeah, it's good enough. Let's launch it. I don't want to spend more money. I don't want to iterate 20 times. I'm fine. This is good enough. The market's going to like it. We've got a good plan.

Starting point is 00:35:01 We've got good marketing. Let's just do it. You as a consumer, if you consume a lot of that stuff, you can tell. You can tell it's not epic. And when you come across something epic, it's rare. And you feel it and you touch it, you look at it and you're like, holy shit, this is epic. And that is something that's hard to quantify. It's hard to describe, but you know it when you have it. And that's what I think a lot of big companies are missing. And I think, because a lot of times I get questions like, can't everyone start stuff? Can't everyone create a beverage company or a chocolate company or this or that? And the answer is,

Starting point is 00:35:35 yes. And I think frankly, everyone can probably create a computer company at this point because there's just so low cost now to make things in a third party fashion without having to buy factories. It's just really important to touch upon that, Patrick, because I came from the highly analytical, highly left-brained world of everything has to be quantified. And as I did more and more case studies on companies and brands, I just kept coming back to, like you, Patrick, I started off as a quant. And I was always fascinated with, how do you quantify brand equity? I really dove deep into this area, and I just find it fascinating that it's very hard to do. I want to talk now about a couple of things around distribution and then how many of these brands are young and, well, I'm sure big and

Starting point is 00:36:21 growing, probably still not on the scale of some of the enormous brands that we open the conversation with. And so I want to get to that ecosystem a bit. But to begin, I want to ask a question about distribution, which is, Ron, you mentioned at the end of the life cycle, perhaps, once you already have a good product and it's already somewhat successful is when you pour fuel on the fire with big endorsements or the distribution of a celebrity or influencer. Do you think we'll start seeing it in the opposite direction where the starting point will be an existing distribution channel and that products will sort of be tailored to some unique new influencer account or some celebrity or something like this so that the product sort of reverses itself given the direct-to-consumer nature of influence these days? Glossier is a good example. Or Oprah, this is more of like an activist thing, but Oprah's involvement in Weight Watchers, or something like that where it's really the story of a preexisting, if I understand Glossier right, that there was this enormous audience before there was an enormous commercially successful product versus what would typically be the other way around. In my opinion, there's a slight chance of that, but generally not really. Generally, I believe there's influences, for example, who had influence. influence and then created a product off it. So Kylie Jenner had influence and then created Kylie Cosmetics and sold for a lot of money.

Starting point is 00:37:39 In the beauty world, there are a lot of influences that are creating beauty brands through their influence and through their DNA. But it's not to do with distribution. It's a distribution of media in that media has allowed them to create a celebrity platform around themselves and they're now using that platform to monetize around brand creation versus random entrepreneur X creating a product. These people already have built in momentum through their insta fame. But they still have to create a product that consumers want and need. Jason, I'd love to talk a bit about now getting back to some of the quantitative stuff and just

Starting point is 00:38:20 the brass tax of building a business and earning a great return on it. Two aspects of return. fundamental actual sales and earnings and then some multiple attached to it. And I think what's so interesting is the wide range of multiples that we've seen in this space. I think you mentioned me once Casamigos sold for, I don't know, 25 times revenue or something crazy, whereas probably most food and beverage would sell for lower mid-single digits multiples. Talk me through that side of all this. Obviously, there's a lot of big strategic acquisitions from the big players. So I want to talk about what drives that revenue multiple in a brand in this space. Ultimately, everybody who's a buyer is economic in some way.

Starting point is 00:38:59 So ultimately, there has to be some derivation of why does this have a significantly higher multiple for the same revenue as something else? And I think when it's strategic, it was a strategic who bought Casamigos. I studied that one because it was so fascinating to me in how quick it got to where it got. But even with private equity, there's always an economic rationale to how you get to these multiples, which is really optionality towards some future cash flow. And I think what makes a great brand, and in the case of Casamigos,

Starting point is 00:39:30 they had unprecedented key performance indicators around alcohol. And obviously, a lot of it was intentional in terms of how George Clooney and his partner set that up and how they built a lot of the stuff that Rohan talked about earlier in terms of the brand loyalty and the cult following. But what a strategic looks at, and I've had many conversations with many strategics, these large companies, many of whom are public, about why they buy smaller brands.

Starting point is 00:39:57 And they're looking at distribution potential. You have to remember that these large incumbents have had a very difficult time in creating authentic brands in-house that resonate with today's consumer, which is why Rohan has such a great business, because Rohan has been able to identify as a venture capitalists brands that the large strategics are going to want and need to complement their current portfolio. These large strategics have huge distribution, trucks, logistics. They have access to all the retailers. They think about if I buy this brand and they're in 5% of the stores that I'm currently selling my stuff in, what's the probability that when I put this brand on my trucks

Starting point is 00:40:40 and put it on the same shelves as my other brands? What's the probability that it sells well? And what's the probability that it increases in sales on a per store basis. And so they're doing probabilistic calculations about fit and what will consumers think. And on the other hand, they're also trying to measure how do I not harm this brand? Because it does have this authentic origin story of a founder that didn't come from a big corporation. How do I make sure that that origin story stays intact? and there have been plenty of really authentic homegrown brands that have been acquired that have grown substantially since they've been acquired and done it in a pretty good way. Ben and Jerry's has been owned for a very long time by Unilever,

Starting point is 00:41:25 and that's grown massively over the last decade under Unilever. Maybe the brand equity is less today, but certainly the value of the company is a lot greater. And there have been plenty of other brands like Annies. Annes was bought by General Mills. Annie's was very authentic as a better for you started with really mac and cheese, but it's turned into a broad snacking platform. Annie's has become the growth engine of General Mills over the last eight, nine years. I think the reason why some companies trade for much higher multiples is because there is a belief

Starting point is 00:41:58 that they have better pricing power. They have better what some companies call extensibility. Or let's just take OSAM, which is Patrick's fund. If somebody was looking to acquire OSAM, they would think about, could you create more products and how well will consumers or active investors want to consume more of OSAM's products? And it's the same thing. And it comes down to the quality of the brand and the consumer's belief in the extensibility and the quality and the future quality. So in the case of Casamigos, there was a belief and it was an outrageous multiple. It was Diageo, I believe, paid.

Starting point is 00:42:35 there was a belief that they could with their distribution and their trucks and their bars and everything that they distribute to, there was a belief that there was significant demand for Casamigos everywhere and that they would literally, at the snap of a finger, be able to quadruple their sales with their distribution. And that's a function of the brand quality versus a no-name brand that people wouldn't ask for when they go up to a bar and say, do you have Casamigos? It's a triple component of that, Jay. Casa Migos delivered three things. One, brand cachet, which is what Jason's talking about. Take the brand cachet.

Starting point is 00:43:10 Two, it delivered, and alcohol does this, ridiculous gross margins. Say you're selling revenues 50 million, but really your gross contribution is 40 million. When someone says you're selling for 20 times revenue, you're really sending for 25 times net contribution, which is a lot more palatable, but alcohol is such massive margins. And Casa Amigos did it through a smart, smart, smart influencer strategy without spending gobs of money on some of the marketing machines that other alcohol brands did. Again, back to authenticity. There was a triangle offense, Casa Amigos.

Starting point is 00:43:53 Everyone knows about George Clooney because he was the face. Most people know about Randy Gerber because of who he is, the Marysini Co. He was the operational brains behind. because he understood distribution route to market. But the sort of unheralded guy who was the third amigo of Casa Amigos was Mike Maldeman, and it was Mike's distribution strategy and Mike's connection to influences that really allowed the brand to build that rapid momentum and, to Jason's point, the brand cachet that then was turbocharged with Clooney, that meant that when you went to a bar and you were confused what

Starting point is 00:44:30 tequila to order because tequila is now the in vogue liquor, you would no longer order Patron because that's now wavered, you would order Don Julio, but now the cool kid on the block became Casemigos. So you've got to be able to bring quality product, interesting story, brand cachet in at the same time to capitalize on what is a already growing trend that they didn't do but was tequila, and now you have a winning formula. But it does all boil down to brand because there were 100 other tequila brands that were not bought, and they could have got a damn side cheaper. But to Jason's point, they knew the velocity of Casamigos could be replicated as they expanded

Starting point is 00:45:12 the distribution. So overpay, which is a brilliant smartic with Diageo, overpay for one that you know is going to be a winner versus underpaying for ones that you can get cheaper. And it's exact conversation that Jason and I had with a friend of ours recently, which is where things go wrong a lot. is when either bigger companies or roll up brands try and bottom feed. And when you bottom feed for cheap stuff, you will get stuff that is not a winner. I would just add to that that what we do at Human Co and what Rohan does at Cavoo,

Starting point is 00:45:48 we're very hands-on in terms of when we invest in a company. And we've had plenty of mistakes and learnings over the last decade in both public and private companies. but there are a series of variables in the same way that you look at quantitative investing, Patrick, there are a series of variables that dramatically increase the probability of success around building brand equity. And what we do every day with the brands that we control or invest in is we work with the founders. If it's starting with what we kind of deem as a B plus or a B, we will work with the founders to get it to an A on these other variables where we think that their pricing power will be better, the brand equity will be better. There's this belief with most VC and even smaller private equity.

Starting point is 00:46:37 There's this belief that VC investors just sort of spray and prey. They bet on lots of stuff and they have a few 20, 30 baggers and they have a bunch of zeros. And there are some people who do that. And they'll have 50 investments and it's hard to really. pay attention to any of them. What we do, and from what I understand, what Rohan and Brett do, is we take a much, much more hands-on approach. And a lot of that has come from the amount of time and effort that they have put in to adding, and this is a term that Rohan and I use in a positive way, but the market, I think, thinks of it as a negative. I think it's a wild positive sizz.

Starting point is 00:47:17 And Rohan has spent a tremendous amount of time on adding sizzle. That's what made Apple what it is. that's what makes Tesla what it is to these brands. There's a process around that that does increase the multiple and does increase the brand equity. Are any of those variables, Jason, things that we haven't yet discussed, the things that sort of bend that trajectory? We actually created an in-house agency at Carvoo called the Uncommon Agency. We've got a really smart lady who heads it up for us. The uncommon agency is what gives us the edge because that's what helps our portfolio companies get their edge. And that's what Jason is talking about.

Starting point is 00:47:53 Sizzle to me is a bad word if there is no steak. So when you get an empty sizzling hot plate with no steak, it's kind of no-bueeno. But if you're getting a great steak that is sizzling a la wolfgangs, then you're on something. And we always invest in brands that have steak, and then we help those brands develop that sizzle. And that, to me, is the ultimate winning formula. You have to have steak. And every brand Jason's mentioned, whether it's Tesla or Apple, You've got to have great steak.

Starting point is 00:48:22 And then you add the sizzle on. That's your brand cachet. That's the X factor. That's what gives you pop culture connection. And that's what it gives you human connection and loyalty. What categories, especially in the health and wellness space, do you think are the most right for disruptive new brands? I think everything. I think beverage, hydration is huge.

Starting point is 00:48:43 You've got billions and billions of dollars and products that are kind of useless and nasty for you. and it's like a big bucket of money that's just kind of leaking and it's never going to get plugged. It's not going to just disappear. It's going to be leaking billions of dollars that could be leaking. I think you've got snacking and disrupting snacking to deliver a plant-based snacking is huge. I think nutrition is being redefined. I give Nestle a lot of credit. I think they're one of the smartest strategics out there in terms of their understanding of the importance of nutrition and human performance.

Starting point is 00:49:18 and body defense. I think personal care and what people put on their body is super big in terms of why people are changing up and Jen Zennials are changing up their skin and beauty regimen and personal care regimen from the brands of yesteryear. And I think that human performance, look at Peloton, you look at WOOP, managing your body and tracking it is going to be a big thing. At the moment, people track Instagram like Hawks, because that's your image. They're going to want to track their actual body performance, which is kind of a big bet that's Apple making, but it's not just Apple, but a bunch of other players are making out there. How do I treat my body, fitness and wellness, and how do I monitor that?

Starting point is 00:50:02 And when you look at a brand like Calm, that's a meditation app worth over a billion dollars, people are going to spend more time on themselves in a much bigger way than ever before. Just to add on to that, I think this concept of personalization, this concept of permitting yourself to be a little more selfish in the sense that if you're not taking care of yourself, you're not doing any good for your employer, your family, and everything around you. And I think if you go back 20, 30 years, when I was growing up 35 years ago, there was this incorrect assumption of wake up at 5 a.m., go to bed at 11. there was a glorification of workaholism.

Starting point is 00:50:48 And for a long time, that was the American work ethic. And it was glorified. And a lot of people got very unhealthy and had very problematic relationships with their spouses, with their kids, with their own personal health, because there was sort of this view that you have a duty to just work until you die. And I think in the last 10, 15 years, there's been kind of two prongs that have changed that, one of which is that the science is out, that humans need eight hours of sleep and that there's nothing cool about sleeping five and a half hours a night, which I used to do, and it made me very

Starting point is 00:51:23 sick, and that you're not going to be good to anybody if you're not mentally balanced, if you're not healthy, and if you don't feel good every day. And I think there's been some negative aspects that have come out of that, where there have been some people who felt overly entitled to just spend all day meditating and not actually working. But by and large, I think it's been a good realization that taking care of yourself is valuable and it's important and it's not selfish. And I think this idea of personalization around everything, personalized nutrition, personalized tech is going to be a mega trend because we all are different on the inside in terms of some foods are inflammatory for some people and some foods are not. And some products

Starting point is 00:52:07 create issues for some people and some do not. the advice of everyone should follow the exact same guidelines, we know is not true. So personalization, I expect to be a huge theme going forward. Last question is around before closing thought is how scalable some of this is into huge public businesses. It seems like the story often has been, you gave the Ben and Jerry's example or the Annie's example, young upstart brands that followed the trajectory we've talked about at nauseam here, but then ultimately get acquired by one of these big players.

Starting point is 00:52:40 and their distribution advantage and their kind of centralized services win the day. They win a lot of the dollar return that's created by these brands. Do you think that that will change in the future? Do you think we'll see more independent Peloton-like standalone public brands from these more modern stories? I've had a lot of conversations, Patrick, with some public executives about this. The issue within consumer package goods or health and wellness historically has been that to be authentic, you have to be small. And that as you get, quote, big, you start taking on methods where you're, quote, selling out.

Starting point is 00:53:20 It's very hard to be big in consumer and still have the authenticity. And historically, for the last call of 20 years, that has been true. But if you look at other sectors, that's completely not true. Apple is literally the largest company in the world. And they still have probably the, if you measure their brand equity, it's probably as good as it's ever been. And it has not lost its cachet as it's gotten gigantic from 2001 when it was a $500 million company on the precipice of bankruptcy. And Tesla's obviously gigantic and still has the brand cachet. Think of Nike. You do have plenty of examples of gigantic companies that have been

Starting point is 00:53:58 able to preserve their brand cachet and their authenticity. But it hasn't happened much in the consumer space. And so I think it is, of course, doable. I think a lot of larger companies need help, and they are attached to some old legacy businesses that we're selling unhealthy products. And it's very hard when 90% of your revenue is unhealthy stuff and you're trying to spend organizational time on the 10% that's better for you or healthier stuff. You think about how a public board has to operate. It's very difficult. But Peloton's a great example where Peloton last. I looked was, I don't know, $35 billion company. I think the future is going to be that there will be some large, well-run public companies that are in this space that we're talking about. And I think

Starting point is 00:54:48 it just requires some newer people and some newer methods. But there's nothing in the data and there's nothing in the sort of sample set that says it's not doable. Is there anything we haven't covered Rohan and Jason about what you think is kind of most interesting about building these brands that you'd like to share with the audience in closing. I'm going to just refer to the last part of this question that you raised, which is a little bit where the brands of tomorrow are being developed today, especially in food, beverage, and personal care. And the difficulty that the brands of yesterday have is the lack of functional slash nutritional,

Starting point is 00:55:29 superiority. So let's take the Nike example Jason used. Nike today is not the same shoe that was Nike when Prefontein wore it. Is the Coca-Cola today the same as a Coca-Cola from that same era? Yep. Yes. There's no evolution for Pepsi Cola or Coca-Cola or Frosted Flakes or brands that are there's no product functional evolution. Nike has been evolving it every day. day since Phil Knight started the company, it's not like they're starting to functionally improve their products 20, 30 years in. Where food and beverage is different, and I think the brands of today could well be the brands of tomorrow that are being developed, is because they're coming in with functional superiority. And if you have a strong foundation and base and you continue to

Starting point is 00:56:24 innovate with functional superiority and performance, I think you have much great. great a long-term sustainability because your DNA is that of evolution, not a DNA of a static brand. I love that. Such an interesting place to close the concept. It's not just brand. It's also the evolution of the product itself. Steak and the sizzle. I love it. Rohan, Jason's been on before, so he's already been subject to my traditional closing question. So you get to take the honor this time. The question is, what is the kindest thing that anyone's ever done for you? I'm going to go with the best thing someone did for me. Your whole podcast is really about learnings. It was actually firing me from my last job in corporate America. And what that did was it didn't feel very

Starting point is 00:57:09 kind at the time. Ironically, both the people who were at the top of the company when I got fired are actually super close friends of mine today and actual guys that I would do business with and guys that I would respect. But by then pushing me, out of what was not my destiny, it really helped me to define the future for myself and allow me to become the venture entrepreneur that I am today. It was only a matter of time that I wouldn't last in corporate America, but they did me a true service by pushing me into the world of entrepreneurship and the brands of tomorrow, which I don't think I'd have taken the leap for myself. I love that. Well, guys, this has been a welcome departure for me from my extreme focus.

Starting point is 00:57:56 on software and hardware and technology lately into something that everyone can relate to. I've learned a ton in this conversation. I really appreciate the time you've given us today. Thank you. Thanks. Thank you, Patrick, for your time. Appreciate it, buddy. If you enjoyed this episode, you can sign up for a new email newsletter sent out each week called Inside the episode. Each week, I condensed that week's episode to my favorite big ideas, quotations, and more. I've been recommending books to members of this email list for years, and we'll keep doing so in this weekly email. You can sign up at investorfield guide.com forward slash book club.

Invest Like the Best with Patrick O'Shaughnessy - Jason Karp and Rohan Oza – The Power of Brand - [Invest Like the Best, EP.199]

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