No. 334: The Relevance of The Letter

BoF

This week, The Atlantic’s Kaitlyn Tiffany wrote a nuanced and worthwhile report on the history of the newsletter industry. The length of the history depends on whom you ask. To her point, Substack would like you to believe that their team pioneered the movement. She argues, correctly, that they’ve successfully adapted it for a different audience. They’ll likely see great, longterm success. One glance at Substack’s paid leaderboard screen and you may understand the point that the author made throughout. In her piece, she writes:

“[Newsletters have] been a thing,” says Ann Friedman, who has written a weekly newsletter since 2013, has 40,000 subscribers, and is widely recognized as one of the leaders of the first newsletter boom.

In many ways, Tiffany’s article was relevant to a few thoughts that I’ve been managing for some time. She aptly stated the argument that while Andreessen Horowitz’s $15.3 million investment into Substack signaled a beginning, it became a useful tool to make newsletters “cool” to other groups. She provides a bullet-by-bullet history of some of the most important names in the newsletter industry’s history. The report is worth your time.

Backstage at September’s Destination D2C, a dozen or so colleagues convened to chat about the professional world, a passion that each of us pursue in our own ways. We each shared a few things in common but the most important was our interest in the direct-to-consumer industry. Now memorialized in Modern Retail‘s “The Rise of the DTC Bro,” that backstage scene was a significant moment and one that would not have been possible without the aid of the mainstreaming of newsletters as a media platform, to Kaitlyn Tiffany’s earlier point. Cale Weissman began:

It started with Paul Munford, founder of the luxury newsletter Lean Luxe, alongside Web Smith, founder of the site 2PM, who sat beside Helena Price Hambrecht, the founder and CEO of Haus. Then came Marco Marandiz, a DTC strategist and consultant, who sat down and joined a conversation about their clients. After that, Nik Sharma, whose Twitter profile describes himself as “the DTC guy,” joined the fun.

What, perhaps, the Modern Retail reporter didn’t see in that scene was the disproportionate amounts of rejection tolerated by each member of that seated group. Helena Price Hambrecht, a now well-known direct-to-consumer founder, began as a creative. In her own right, Hambrecht is a master communicator.

She proved herself quickly but for those of us who knew her before the bottles shipped, she was already proven.

But before Haus launched to a sellout crowd, the brand that she cofounded faced an uphill battle. No one wanted to fund her idea. Early on, reporters privately panned her concept and approach. I know, personally, that she pitched over 500 times to complete her $1 million seed round. That’s an extraordinarily high failure rate. Traditional VCs consider: geography, industry, age, gender, and more. Pattern matching provides comfort and a bit of insurance. Hambrecht was not a pattern match. However, the next round that she raised would close within days. In a comment to 2PM, Haus founder Helena Price wrote:

Our first $1 million took eight months and about 500 pitches. We heard a lot of no’s. There were plenty of dark points and moments of doubt. That said, if you truly believe that there is an audience for what you’re building, you’ll find those people in VC too. I tell people raising, now, that they probably haven’t met 90% of the people who will ultimately invest in them. You just have to keep getting intros and sending cold emails and you’ll eventually find your people.

She proved herself quickly but for those of us who knew her before the bottles shipped: nothing had changed, she was already proven. She just didn’t match the idea of a retail executive and manufacturer. As for the idea of a eCommerce industry leader or thinker, few of those of us who sat backstage matched that pattern either. Marandiz, Sharma, Munford, nor I are the prototypical resources for the higher rungs of the commerce and media industries. You wouldn’t find a single one of us on this list of industry insiders. There are several of the list’s members who subscribe to 2PM or Lean Luxe, however.

In an industry that glazes over contributions of those who don’t match the proverbial pattern, the newsletter movement has provided a platform. What each of us shared in the moment was memorialized by that paragraph. Before we were publishers, we were operators at some point: founders, directors, managers, builders. And that hard-earned experience was the wind the pushed our personal projects forward.

Sharma, once the Director of eCommerce for Hint Water (and then Vaynermedia) is often a co-writer to the prolific David Perell. A public relations executive by trade, Munford launched Lean Luxe within months of 2PM launching. Marco Marandiz made his name publishing now-famous Twitter analyses of DTC brands like Away and Glossier. He began doing so while leading product at HomeAway. And before I managed commerce for media publications Gear Patrol and Uncrate, I cofounded Mizzen + Main. Still, those credentials often fall short.

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Sherrell Dorsey, Dan Runcie, QuHarrison Terry, and Web Smith

Just three months ago, 2PM was featured on a National Association of Black Journalists (NABJ) panel with successful (and lucrative) newsletter publications: The Plug, Inevitable Human, and Trapital. The topic was on “building paid subscription media companies.” But the common thread throughout was easy enough to observe: without the critical mass of a newsletter audience, our ideas would likely be re-packaged at a traditional outlet through on-the-record or off-the-record conversations with professional reporters. Newsletter publishers strive to own the distribution of their ideas and the communities around them.

So when I read the article by Modern Retail, I wasn’t upset. Weissman is a great writer and he likely meant no harm. But I was confused by how no one saw what we did. I am not sure that many readers understood how proud we were to be sitting there in the first place. Just three years prior and that scene wouldn’t have happened. To me, the moment felt like an enormous privilege. In each instance, we found our own ways to deliver our practical and experience-driven ideas to a very competitive ecosystem. And on that day, the founding team at Yotpo recognized the validity of them all. It was an important moment.

The Pre-Substack Era

Goal: publish 180 letters. Reassess. Launching 2PM, Inc. in 2015 was a hail mary of sorts. In December of that year, I was no longer co-running a DTC operation. Instead, I was advising and / or building eCommerce operations for publishers. As a side project, I started 2pml.com as a way to maintain accountability to myself.

2PM was a simple proposition: understand everything to get better at the one thing.

I wanted to get better at my profession. At the time, my focus on one task was leading to more blind spots than tangible progress. As such, I was missing out on the practical knowledge that follows reading, thinking, and hard analysis. The first 2PM email published to 11 people; I’d monetize it after 180 letters out of necessity. Building this company became my full time job.

By understanding how 2PM’s commerce-adjacent industries interact to negatively or positively impact one another, I was able to map the best steps for the projects that I was attached to – then and now. With 2PM, I hoped to duplicate those same abilities for other industry colleagues. It is a simple proposition: understand everything to impact that one thing.

If there were any blindspots in Tiffany’s Is Anyone Going to Get Rich off of Email Newsletters? [1], there may be one. There is a growing collective of former operators who spend the majority of their time honing their publishing skills. They understand commerce and marketing and branding and logistics and data science. They’ve shipped packages, negotiated distribution deals, and led performance marketing efforts. And readers appear to be drawn to the raw perspectives of those who are discussing industries from within the walls. Whether you’re reading Emily Singer’s Chips and Dip, Magdalena Kala’s Retales, Richie Siegel’s Loose Threads, Jenny Gyllander’s Thing Testing, or Paul Munford’s Lean Luxe, the presence of operational experience is felt.

The Operator-First Publisher

So yes, Substack left out relevant history on their July 17th “A better history for news” blog. Of course they highlighted Ben Thompson and Jessica Lessin, luminaries of the indie paid subscription industry. But Substack may have missed another trend. Substack concludes their homage to publishing with:

One hundred and eighty-four years since the New York Sun first went on sale, we are standing on the cusp of a new revolution in the news business. The time for mourning the loss of the old media model is over. Now is the time to look ahead to the next two centuries.

The revolution itself is not new. But it is reaching new types of thinkers looking for a platform to move their industries forward. Will it make publishers rich? Maybe, maybe not. But publishing as a platform is altogether different than sending newsletters alone. Gyllander just completed a sizable angel round from many of Silicon Valley’s best and brightest. Her subscription-based approach is fresh, credible, and engaging. Siegel just successfully held a one-day retail conference that wouldn’t have existed without his Loose Threads newsletter. Munford fills Lean Luxe social events each time they are held. While not a paid-subscriber driven platform (for now), he’s successfully monetized through weekly sponsorships. And 2PM is launching its first members-only forum for commerce and media executives: Polymathic. Each company has tremendous opportunity ahead of them.

The era of the operator-first publisher is a fascinating one to observe. In some ways, it’s leveling an exclusive playing field within media tables. But at one table, in the backroom of Yotpo’s well-appointed venue, a group certainly stood out – literally and figuratively. We carried ourselves differently and we looked different. Non-traditional voices in business-adjacent media are positively impacting traditional media circles. And the hope is that those newsletter-turned-platforms continue to provide new ideas to the executive levels of established digital industries. 2PM is once again observing a quiet movement from within.

Read the No. 334 curation here.

Report by Web Smith and Edited by Tracey Wallace | About 2PM

No. 331 Part One: As Seen on TV

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In a private New York City dining room sat a few dozen executives across digital media and retail. Of them included companies like The Chernin Group, Cameo, Instagram, Barstool Sports, Stripe, Digiday, Seat Geek, theSkimm, Andie Swim, 2PM, and Zola. These companies ranged from venture-backed DTC brands to digital media companies that are valued well into the nine figures. Everyone had a particular problem to solve. We discussed industry-wide concerns to include: advertising efficacy, margins, scale, and sustainable growth.

On this night, Instagram wasn’t the center of the universe. At least not at first. A rarity given the social media giant’s surroundings. The moment that quieted the room wasn’t one devoted to the foretelling of a new marketing technologies, innovations, or hacks. Rather, it was an anecdote about traditional marketing channels.

Andy Khubani is the CEO of Ideavillage, a holdings company that pumps out well-researched, highly marketable “power brands.” Flawless, a hair removal system for women, was the brand name of his latest success.  A power brand tends to be asset-light, high growth, with high margins, manufacturing leverage, logistics prowess, and a sustainable competitive advantage. 

In 2018, he sold Flawless to Church & Dwight for $450 million (or 2.5 times revenues). In year two, his company grossed $180 million with a 30% EBITDA margin, according to a March 2019 press release. 

To scale the company, he used a traditional style of advertising and promotion. 

Backed by print advertising, ads on New York City taxis and blogging campaigns— to go with the full-scale DRTV campaign— Flawless has quickly become a top-selling retail beauty product in As Seen On TV sections and in-line beauty and shaver departments. [1]

In a room full of digital advertisers, platforms, and merchants – everyone was likely asking themselves the same question: how did he reach critical mass so quickly? With no outside capital raised and no performance marketing spend alloted, Khubani built a brand worth nearly half of a billion dollars in just two years. Absolutely no one in DTC is doing that. The most recent acquisition was of Oars & Alps for $20 million. They raised nearly $7 million. This week, Tristan Walker recorded his episode of “How I Built This.” He sold his company to P&G for less than $40 million. Greats Brand sold to Steve Madden for less than $30 million. I could go on.

Khubani’s magnitude of exit is incredibly rare in the DTC space. Since 2007, fewer than seven DTC brands have exited for a price as high as $450 million. Flawless’ early profitability contrasts most in an industry where LTV:CAC optimization is a law akin to the Old Testament. The widely held consensus is to spend heavily now, despite a lack of profits, to earn a customer for a lifetime. This method extends the horizon and heightens the capital requirement but it also absolves executives of the near term pressure to achieve scale early. The LTV:CAC optimization theory is one that I have found to be disingenuous at best. Markets change, competition arises, technology improves, and consumer sentiments shift with the gusts of pop culture and the zeitgeist.

From No. 310: The DTC Playbook is a Trap

As long as DTC brands attempt to follow what’s been done before them, you too should be skeptical of the industry. Many investors seem to look for a DTC Playbook to hand their portfolio companies. As if to say, “Here is how it’s done. Now execute the game plan!” But it’s likely that it will never be that way. As digital-natives begin competing in traditional retail’s territory, heritage brands should serve as a reminder. They had unique paths to critical mass, very few encountered the predictability that the DTC era seeks.

There seems to be two considerations for challenger brands of today. Either optimize for the early exit or settle into growth over a 15+ year horizon. Venture capital doesn’t typically compel either outcome. It is the pursuit of the uncomfortable “in between,” the 5-10 year horizon, that may be a root of DTC’s liquidity problem. For many companies in that space, there is a lot to learn from power brands. The ones that scale fast and exit. Flawless is but one of many.

As Seen On TV / As Seen In Stores

Over the past weeks, several data points suggested that the days of DTC playbook are long past. As traditional brands adopt the technologies and the web-first approaches to growth, many of them have widened their advantages between their own companies and the challenger products vying for the same shelf space.

eCommerce is a tremendously challenging, frequently unprofitable business. It also doesn’t take into account how much consumers still want to be in person with brands and products and people.

Andy Dunn

In an interesting breakdown by Yotpo VP Raj Nijjer, the retail executive presented a few surprising metrics [2]: Sealy Mattress’ direct to consumer sales surpassed Casper’s total revenue in 2018 despite Casper taking the mindshare of online retail advertising and consumer chatter. He also noted that Madewell: a brand that is primarily driven by physical real estate, traditional advertising, and traditional brochures – will do $534 million through online retail channels.

[Dunn] said that, in the case of Bonobos, the brand’s “most profitable business” today is its partnership with Nordstrom. Bonobos now also boasts 66 brick-and-mortar stores known as “guides shops.” [3]

When Khubani detailed how he built Flawless into a relative powerhouse, he made it clear that part of the problem with the DTC era is the inability to truly compel purchases. In short, few DTC executives know how to actually sell. Many are dependent on the superficiality of the impression as a metric rather than the depth found when executives target more than a consumer’s eye balls.

I don’t really like digitally native vertical brands. What gets me excited are brands that are really strong and direct-to-consumer, but also have got omni.

Andy Dunn

He believes that he has it down to a science. And it’s hard to argue that he’s wrong. When the typical DTC brand or digital media operator considers the word “targeting”, it instills a sense of modernity. “Television ads are inferior to the quantitative capabilities found with Facebook and Instagram,” a refrain that you will hear from the typical media agency founder. Khubani suggested that brand managers should reconsider the definition of “targeting.” While television advertising espouses a broader approach to reach, it targets a different part of the consumer.

Screen Shot 2019-09-16 at 3.32.01 PMThe consistent approach to an Instagram or Facebook ad is to engage the eyes. We visit the app to mindlessly consume images. Rarely do we stongly recall what we’ve seen after we’ve left the app. We don’t tweet about it; we rarely talk about it. That collection of targeted, inline advertisements are calculated impressions. They are visuals that spark a mental consideration by capturing a consumer’s eyes – if only for a second. It’s why you see scrolling .gifs of coupon codes, diagrams with price incentives, or photos of marked with fabric qualities. On social, brand advertising is often a science and not an art. Brand managers are working to compel the sale through the logic of price and comparison. Television is different. It inspires the heart. When we consume our favorite show, we talk about and we spread the joy of consumption through social channels.

On this night, Instagram wasn’t the center of the universe. At least not at first.

Just as a physical billboard that is uploaded to Instagram or Twitter becomes a social ad; a consumer good that we discover on television accelerates the growth curve through social and distributive channels. Those crude “As Seen” advertisements have been known to compel purchases so well that stores devote aisles to the category of products. But in this era, the benefit is even greater for brands like Flawless. Early traction, often fueled by television can equate to wider physical and online distribution. This perpetuates affiliate deals, social influencer participation, and earned media. These are all key performance indicators of DTC marketing traction for many brands.

The Two Andy’s: Dunn and Khubani

It’s been rumored that for that $180 million in 2018 sales, Flawless paid for less than $2 million in traditional advertising. With a $450 million exit + incentives, the return on advertising was clearly remarkable in size and in velocity. But surprisingly, that wasn’t the key takeaway.

As DTC brands improve their ability to sell, they will advertise more like the original direct brands, ones that intrigued consumers through their televisions. These brands compelled the sale via phone, computer, or that distinct shopping aisle in Walmart or Target.

The report, which synthesizes information from 125 top DTC brands representing 52 different categories, found that DTC brands included in the study spent 60% more on television ads in 2018 than they did in 2017, totaling $3.8 billion in television ad spend last year.  [4]

Consumers are due to see more television ads from brands like Away.  But for some categories of products, the production style will shift away from brand statement and towards the longform style of selling that you’ll only find on TV. This new era of retailer will be slow to use television in the longform manner that marketing executives have mastered. The traditional television demographic may not be suitable for many new brands or their products.

But, for certain categories, marketing and distribution strategies will continue to evolve in that direction. These will include many of the cues found in those hard-selling infomercials.  There are new tools available to brands that are looking to adopt more of the merchant’s DNA. As television, billboard, and QVC-like platforms feature more DTC brands, these selling strategies will make their way to digital-first platforms.

In this way, Andy Khubani’s thoughts were prescient. The direct-to-consumer industry commonly appeals to consumers through two styles of media: (1) the lofty brand statement or (2) the coupon code value proposition. The style of advertising that drove Flawless from $0 to $180 million was a combination of both styles, designed to carry the potential customer from discovery, to intrigue, to conversion, to evangelist. As Andy Dunn noted, digitally natives brands will continue to struggle without an omnichannel approach to growth.

Brands are using traditional retail sensibilities to achieve half billion dollar exits by year three. Nearly $534 million in DTC revenue by Madewell, a J. Crew-owned private label headed towards IPO. Walmart building their own brands rather than acquiring digitally natives. And the godfather of the term “DNVB” noting that being a digitally native is now a disadvantage.

In the coming months, DTC brands will build around the aforementioned style of television advertising. They will test it on platforms like Instagram, ads will playfully mimic the cadence and tone. They’ll build the processes out on newer platforms tailor-made to achieve efficiently scalable levels of reach and engagement. The two Andy’s seemed to be advocating for similar best practices. By 2018, the cloud-based technologies commonly used by online-first brands had been widely adopted by legacy retailers. For challenger brands to regain their competitive advantages, they should look to the proven advertising and distribution strategies of the old guard. And then, they should make them their own.

Read the No. 331 curation here.

Report by Web Smith |About 2PM