Staying the course: key lessons from 15 years of consumer investing

VMG partners have helped shape many visionary ideas into iconic brands. With their investment and expertise, Six brands have been able to bring their passion to life and impact the lives of millions.

VMG Partners’ investment portfolio is led by General Partner and CEO Wayne K. Wu. Wayne firmly believes in the company’s core philosophy of “Velocity Made Good.” In a recent episode of Brick by Brick: Building Insurgent Brands, hosted by DSG Consumer Partners, Wayne explained how this philosophy is at the heart of what VMG does and why it’s so important for founders to succeed.


A Basic Framework for Investment Decisions:

The discussion started with Wayne asking what everyone wanted to say. How does VMG evaluate companies and decide where to invest? Wayne says VMG is not concerned with growth figures. Instead, they look at the big picture.
First, they measure the addressable market (TAM). Too small a TAM, which indicates a very narrow audience, is not good news from an investor’s point of view.
Second, they evaluate the speed of the company’s purchases. How often do customers repeat their purchases?
Third, they look at the company’s gross margin and the economics behind each transaction. Every sale should generate money for the business from the start.
Fourth, they evaluate the suitability and orientation of the founder, their values and vision, and the strength of the founding team.
In addition to these basic criteria, Wayne also emphasizes trademark protection. 

Things like NPS, social media, and the likelihood of customer referrals all indicate the strength of a brand, and VMG looks at these metrics over a long period of time to monitor the sustainability of a business. Indicators such as a strong supply chain mechanism, no need for discounts to increase sales, brand ownership, etc. all point to building a healthy brand that has garnered customer support and love.


The Most Important Trading Metrics:

To ensure that they are making the right calls and that their portfolios are moving toward their goals, Wayne and his team focus first on the metrics that give them a good sense of health about business.

The first is gross margin. A 30% gross margin is considered healthy, and ideally, they expect that number or more. For VMG, less than 30 percent means bad business, wrong management decisions, and risky investment.

The second is unit sales per store per week compared to the brand’s closest competitor. A good store turnover per week indicates a good sales rate and repeat purchases, which are important for brand growth and sustainability.

The third is profitability in relation to the first purchase. The VMG team doesn’t justify customer acquisition costs (CAC) with product lifetime value (LTV). The company should make a profit on the first sale. If it is not, they would like to know how far they are from it. VMG should not have to wait very long to validate the certificate.

The fourth is gross profit in relation to CAC and LTV. Sometimes, large returning products can have low gross margins, resulting in poor profitability in the short to medium term. This can be justified if the life expectancy is greater. However, companies with a shorter operating history cannot rely on high LVCs because they are more likely to depend on raising funds in the future to continue operations. This is a red flag.
There is a correlation between the profitability of a company and the size of its profits.

Companies that are not yet profitable are often assumed to be valued at some multiple of earnings. Wayne says that’s far from the truth. When a strategic buyer buys companies, or when a company buys an IPO, the multiplier is just a function of the math, and the real driver is projected discounted cash flow and EBITDA.

Value maximization is indeed the triangle of growth and profitability. The best US IPOs have at least 10 percent growth and 10 percent EBIT margins, not 50 percent growth and poor EBIT margins. Typically, VMG expects 15 percent growth and a 15 percent EBITDA margin mix or better. A strong EBITDA automatically means a higher gross margin, which leads to a higher “income layer.”


Profits are lost as a result of the following common errors:

Wayne outlines the three most common reasons why consumer brands struggle to turn a profit. The biggest one is poor gross margin. Companies should take unit economy seriously. They cannot rely on scale to achieve high gross margins. Most brands rarely understand the benefits of scale.
Another is to overmarket these products. Brands should avoid creating a culture of consumerism and should first try all possible ways to generate demand organically. Tactical and strategic marketing is the way to go instead of blindly spending money on channels like digital marketing.
The third is building a great team, when instead you should be focusing on building the right team. Founders should focus on a small team that is passionate, has the right skills and experience, and is willing to get their hands dirty and do the early stage work.


Common characteristics of the most successful founders include:


The first is the quality of self-awareness. Wayne emphasizes that founders with exceptional self-confidence who are aware of their skills, strengths, and weaknesses can quickly build great teams and great products.
Second is the ability to evolve, identify gaps and changing business dynamics, and build teams and experts in areas that are not their core strengths.
The third and most important is to be good people who represent the highest standards of business and work ethics. Leaders known for their work ethic also attract the best teams, which further helps build the business.


Common mistakes founders make when building companies:

Wayne warns founders against unrealistic optimism. A healthy level of paranoia is necessary to ensure that no accidents occur on the road.
Redundancy is another inefficiency that he identifies and recommends eliminating through a structured and simplified approach.
Companies need to build a supply chain that can survive a rainy day and thrive.

But above all, founders must be aware of the ecosystem they operate in and respect its standard practices and protocols. For example, suppliers and retailers must be treated as partners and respected for what they bring to the ecosystem. A threatening, defensive, or oppressive attitude can make the system work against the company.
 Brick by Brick: Building Insurgent Brands is a monthly discussion series hosted by DSG Consumer Partners that features the world’s smartest people on everything it takes to sustainably build sustainable consumer brands.


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