20VC: Dollar Shave Club's Series A & B Lead Investor, David Pakman on The Requirements For A Successful Subscription Business & Why A Lot of Investors Do Not Like Consumer

David Pakman is a Partner at Venrock and the man behind Venrock’s leading of the Series A and B rounds for Dollar Shave Club. Prior to Venrock David spent 12 years as an internet entrepreneur. Including being CEO of eMusic, the world’s leading digital retailer of independent music, second only to iTunes. Prior to eMusic, David co-founded Myplay in 1999, which he later sold, in 2001, to Bertelsmann’s ecommerce Group. If that wasn’t enough David is also the co-creator of Apple Computer’s Music Group. In Today’s Episode You Will Learn: How did David make his way into the world of VC with Venrock? David invested in Dollar Shave when subscription ecommerce funding was largely out of favour. What was it that excited Dave about Dollar Shave and why did he choose to invest? To what extent do we see the existence of party rounds in today’s funding environment? Venrock took the rather unusual position to lead both the A and B rounds for Dollar Shave. What was the internal conversations like within Venrock towards this decision? Dollar Shave was growing at phenomenal rates with impressive growth, what was behind the decision to sell at this time? What were the incentives behind selling to Unilever? Will we see other large e-commerce exits in the future? What does the future M&A environment look like for consumer businesses? Items Mentioned In Today’s Show: Matt’s Fave Book: Mindset by Carole Dweck Matt’s Most Recent Investment: Pearl As always you can follow Harry, The Twenty Minute VC and David on Twitter here! Likewise, you can follow Harry on Snapchat here for mojito madness and all things 20VC. Eve make 1 perfect mattress – made with 3 layer technology and next generation memory foam. It comes packaged in a beautiful box and arrives the day after you order. You get 100 nights to try it with free return pick-up – it really is the perfect mattress for everyone. Just go online to evemattress.co.uk and enter the code 20VC for £50 off. Everybody deserves the perfect start with Eve.

Speaker names marked ? are inferred from speaking time and the show’s known hosts — they are not voice-verified.

• 0:00Harry Stebbings?

  Welcome back to another episode of the 20 Minute VC with your host Harry Stebbings and you can add me on Snapchat at H Stebbings with two Bs for all the backstage footage and passes into the top VCs offices. But for the show today, we're celebrating the acquisition of Dollar Shave Club. And when we thought about this episode, we thought who better to have as a guest than one of Dollar Shave's biggest advocates and lead investors in the A and B round, David Pakman. You might remember David was one of our early guests on the show, and if you haven't listened to his episode first time around, then that really is a must. But back to David, and he's a partner at Venrock, having spent the past 12 years as an internet entrepreneur, including being CEO of eMusic, the world's leading digital retailer of independent music, second only to iTunes.

• 0:42Harry Stebbings?

  And prior to eMusic, David co-founded MyPlay in 1999, which he later sold in 2001 to Bertelsmann E-Commerce Group. And if that wasn't enough, David is also the co-creator of Apple Computers Music Group. But before we discuss the incredible Dollar Shave Club journey with David today, another incredible direct-to-consumer business making waves is Eve. Eve make one perfect mattress made with three-layer technology and next-generation memory foam. It comes packaged in a beautiful box and arrives the day after you order it. You also get 100 nights to try it to make sure it's perfect for you with free return pickup. It really is the perfect mattress for everyone. Just go online to evemattress.co.uk and enter 20VC for an incredible £50 off.

• 1:25Harry Stebbings?

  Everybody deserves a perfect start with Eve. However, it's now time for the show today, and I'm so thrilled to welcome back to the show my good friend David Pakman, partner at Venrock.

• 1:44Harry Stebbings?

  David, welcome to the 20 Minute VC, a second time, a very special guest and for this very special Dollar Shave Club episode. So thank you so much for joining me today.

• 1:53Speaker 01

  It is great to be back, Harry. Thanks for having me again.

• 1:55Harry Stebbings?

  Now, I'd love for those who haven't heard the first one, which you must listen to if you haven't, but for those that haven't heard the first one, and just a bit of context, how did you make your way into the VC industry?

• 2:05Speaker 01

  I think my path is a pretty traditional one. I'm a computer science engineer. I went to work at Apple for about five years. I did software product marketing there as a product manager, and then I started the music group. After Apple, I left and either worked at or started two or three different internet companies. Some were successful and got sold. And after three internet entrepreneur episodes, I joined Venrock about eight years ago as a partner and I focus on early-stage tech investing.

• 2:36Harry Stebbings?

  And one of your investments was Dollar Shave Club. So I want to dive straight into that and discuss the investment. So Dollar Shave raised when capital for subscription businesses was slightly out of favor, particularly subscription commerce businesses. So what got you excited and what really made you make the investment?

• 2:52Speaker 01

  Sure. Well, first, I have run two different subscription services in my life as an entrepreneur. The most recent was e-music. You learn a bunch of things about subscription services when you run them. They are generally very math-based. That is, they have a whole bunch of inputs and outputs that are eminently predictable and govern their likelihood for success. The key metric in all SaaS or subscription businesses is churn rate. The lower the churn rate, the easier it is for the company to grow. And over the course of running a few different subscription businesses, I came to believe that the only way to build really big subscription businesses, Netflix or internet access companies, is to have very large market demand.

• 3:35Speaker 01

  So you have to sell into very large markets as opposed to niches like magazines, which are generally niche-oriented. And you need to have really low churn rate. That is, the customers are very loyal and will stay around a super long time. When I saw the Dollar Shave Club launch video, just like everyone else did on their launch day in March of 2012, I was blown away by the comedy. I thought the marketing was fantastic. I loved the value proposition. But what intrigued me the most was, hey, this is a huge market where churn is likely to be really low. So I asked Peter Pham, who was at Science and was an early seed investor and had helped incubate the company, for an introduction to Michael Dubin. He provided it.

• 4:17Speaker 01

  I flew to LA quickly and sat down with Michael and his team and started to go through the numbers. And I was very specifically focused on, let me see churn, let me see what the early cohort churns are. And they were extraordinarily low. So a bunch of other things I liked, but really was some key metrics about the business that got me excited early on.

• 4:35Harry Stebbings?

  And you said about their incredibly low churn actually there, but but I have heard, and you said before that it was it was quite hard to raise capital for the company in the beginning. I'm really intrigued to hear what you mean by this and and why this was the case with such impressive figures.

• 4:49Speaker 01

  Well, in the case of Dollar Shave, there were a couple of things that were interesting about its origin. It had raised its about a million dollar seed round from many well-known VCs, sort of a party round, easily 10 or 15 investors involved, a bunch of them very well-known VCs. So when I saw a cap table, I was super nervous because to to someone paying attention, the growth was really strong and the early numbers were very promising. I was scared that I would trigger a bidding war for the company by showing interest before they were officially out raising a series A round. But surprisingly, a number of the firms who were already seed investors either did not engage with the company around its series A or took a look and passed. It wasn't terribly competitive round for me to win.

• 5:34Speaker 01

  There were some outside investors who were interested, but I moved quickly. But it was a signal that there's something about this company or category that investors don't love. And that's generally true of e-commerce. Like, a lot of people, investors, don't love e-commerce for a number of reasons. It's it tends, it can be a low-margin business. It tends to have low multiples. Amazon is ever-present and can compete with you in many, many categories on price and convenience. So it's pretty hard to find a path to giant exits in e-commerce. And I think I was the beneficiary of this sort of lukewarm interest in the sector from from others.

• 6:10Harry Stebbings?

  I'm I'm certainly there. Party rounds are such an interesting debate for me. Do they still prevail largely in the funding environment today? Or have we seen a quelling of them in hopefully more rational environments?

• 6:23Speaker 01

  Yeah, I don't have the data to tell you for sure. It does feel like it's a little bit less noisy and popular to, you know, for everyone to pile in. I think now we're, you know, six or seven years into that into the last cycle. And larger VCs have already, many have already tried and some have abandoned the seed strategy. So I think there are just, there are some fewer major VCs willing to do blind seeds, many, many seeds a year, like, you know, twenty, thirty, forty. We occasionally do one or two a year under very special circumstances, but we don't have like a big seed fund. I think there has been a little bit of pullback from that, but I do think seed rounds in general are still very much multi-party, right?

• 7:02Speaker 01

  And I think that's good to spread risk out, but the concern for me was with all the larger series A, series B type venture funds in the seed round, I was worried that they jump.

• 7:13Harry Stebbings?

  You, you did speak obviously about Venrock's investment in Dollar Shave after you met with, with Michael, thanks to Peter's introduction. So, and Venrock took the lead in both the A and the B, which, which is quite rare. So walk us through the conversation with your partnership there on, on Venrock's leading investment status in both rounds.

• 7:30Speaker 01

  Well, when it came time to raise the series B, the company had made some nice progress. You know, they did about seven million in revenue the first year and they were on track to do twenty million in their second year. So really nice three X growth or so, what you hope to see. We expected to be able to go to market and have an outside lead and then Venrock would have done our pro-rata or maybe a little bit more. But there was no lead to be found. Michael pitched, I don't know, probably at least a dozen firms in the series B. There was some investor interest, but no one who would catalyze around, no one who would lead around. I was still super bullish on the company and I had the benefit of having worked with the team now for about a year, year and a half. And the team is extraordinary, particularly the leadership team.

• 8:13Speaker 01

  They never missed a number they put in front of the board. They executed with amazing proficiency in so many different areas, marketing, operations, customer service, technology. And of course, you know, seeing Michael's creativity around marketing was, was brilliant. So I happily stood up and said, oh, I'll lead the round. I mean, we will, we'll fill it out with some of the other investors, but we'll be happy to read it, lead it. And we were able to increase our ownership. Now, the conversation internally at Venrock was, you know, was detailed. Of course, in a situation where there's no. No outside interest to lead, you're resigned to the fact that the company is likely to continue to have trouble raising capital. Uh, which means that we are on the hook for even more, maybe in the future again. So I had to articulate.

• 8:58Speaker 01

  One, again, my thesis in the company and why I thought it could be very successful. But two, I had to articulate a funding strategy. That if the company needed to raise lots more money, you know, Venrock is not a mega fund. We could not. Fund the company through to its exit. So we had to articulate a financing strategy of how to bring other investors on board. I would say I had full support for my partnership to continue, but there was concern as there should have been.

• 9:23Harry Stebbings?

  I'm intrigued. At what point did the transition come from Venrock being the absolute lead and the sole believer in terms of funding? To the wider external macro, realizing the potential for Dollar Shave to be a truly billion dollar company?

• 9:36Speaker 01

  You know, I think that is a great question, Harry, because my experience as a VC and very much a Venrock strategy. Is to believe in places that other people do not. Uh, so we, we talk about being non-consensus at the time of our investment. Provided it is consensus later, right? So if you believe early and no one else does, as long as everyone else comes to believe later, then it's a success. So we need to move from non-consensus to consensus. This is a great example where the series A and series B were non-consensus investment opportunities. But by the series C, there was consensus. We had multiple term sheets for the series C at really great prices. We, uh, we chose, uh, TCV. Woody Marshall, who was fantastic as a great partner and he led both the series C and the series D.

• 10:21Speaker 01

  So he, uh, got two bites at the apple also, um, uh, although there was strong interest for both rounds.

• 10:28Harry Stebbings?

  So was it just increased stats and increased customer base that allowed you to get the macro interested and get TCV on board?

• 10:36Speaker 01

  I think one, yeah, just the massive success and continued growth. So we went from 20 million in year two to 60 million in revenue in year three. We had expanding margins, um, which I think demonstrates that this is not a low margin e-commerce business, but this really was. A consumer products company. And finally, we had launched a number of different products, not just razors and razor blades, that demonstrated that we're a multi-product men's grooming company that can acquire a customer for things like razors and razor blades, but can then sell them other things, which expands the lifetime value of the customer and makes for a great arbitrage between the price you paid to acquire them, but what they're ultimately worth. So I think we just had more proof points around the core business thesis.

• 11:20Speaker 01

  And then the capital really becomes expansion capital, right? It's really like, okay, well, there's not a huge amount of risk. It doesn't feel like the company can go to zero. The question now is truly how big can it get? And then you ask questions about what's the competition doing? And Gillette had not, still to this day, has not reacted in a competent way that put any pressure on Dollar Shave Club. And also, Amazon had not, still has not, entered this market meaningfully. So I think that probably gave new investors confidence.

• 11:48Harry Stebbings?

  As an investor, do you look at a proposition and say, if Amazon did subscription men's grooming, Dollar Shave would be ruined when it was in its seed in Series A? Or do you not approach it with that kind of incumbency mindset?

• 12:02Speaker 01

  In consumer products, we have an investment thesis about consumer products. It has a number of different attributes that we need to see in order to get excited about a company. Dollar Shave had the overwhelming majority of those attributes. So did Nest. So did a company we invested in called Pearl. They're all different companies, but tick the boxes of our investment thesis in consumer products. One of the areas of that investment thesis is, will Amazon Amazon you? By effectively commoditizing the category, by launching an Amazon Basics, or an Amazon branded commodity version at extremely low price, at extremely high convenience? For a bunch of reasons I won't go into, we concluded that Amazon would not be able to do that in this category.

• 12:47Speaker 01

  They are able to do it in a whole bunch of other ones, which is something that often keeps us out of a lot of other categories. But it was a concern. Other investors had that concern too, but if you dug in, you could learn that that was highly unlikely for a number of reasons.

• 13:01Harry Stebbings?

  Also another massive differentiator between your Amazons, you know, Dollar Shaves is Dollar Shaves brand. And you mentioned Michael Dubin's brilliant marketing strategies. And we all know about the Dollar Shave Club initial video, which was brilliant. But what was some of the other things that they did right along the way in the marketing? That allowed them to make the significant leaps in revenue that you mentioned from B to C and A to B.

• 13:25Speaker 01

  So I think Michael really understands what makes a compelling story that consumers respond to. He's a storyteller, right? I mean, he was, he literally has comedic experience and, um, and built viral videos for companies before. So he sort of understands how you tell a story. I think he really understands his customer base. He's great and you kind of knows what guys, the way guys think. He believes you have to, you need, the guys are generally smart and want to do the smart thing. And, you know, paying three X for the same product is not a smart thing, right? So, uh, I think that he is a brilliant marketer, yes, for sure. But it's largely because of his great intuition about the way guys think and, and the way to reach them through humor.

• 14:09Speaker 01

  The big video that everyone's seen 23 million times, that's what he's most well known for. But if you, you watch many, many, many more videos that he's produced over the years, they're just as hysterical. And they tell different parts of the story, like, why is there so much security around? You know, they, they build these razor fortresses in drugstores to almost prevent you from buying razor blades. Why should you tolerate that, you know? Why should all of your, uh, dollars go to, um, you know, to support Roger Federer? He doesn't need your money. So I, I think he really felt, found these unique ways to, to point out some of the absurdities of the way we were all buying razor blades.

• 14:45Harry Stebbings?

  I'd love to, I'd love to discuss actually then the, the exit for Dollar Shave. So Dollar Shave was growing really nicely, roughly breakeven. Was now the right time to sell and, and how did that conversation play out?

• 14:57Speaker 01

  Michael, from the beginning, and I think I showed, uh, slide three of his series eight pitch deck, was going for like domination of this category. He wants, his dream is to be a multi-billion dollar in revenue. Men's lifestyle grooming brand, you know, operating in scores of countries. That's going to require a lot of capital. You know, marketing is expensive, setting up distribution in all these countries is expensive. And so we, we want, our job as a board is to really help fulfill Michael's vision, the CEO's vision. His dream was to get super big. Uh, we were likely to become a public company, really as a financing opportunity to add,

• 15:38Speaker 01

  you know, many more hundreds of millions of dollars to the company so we could expand internationally into more products and into more territories. Unilever offers that right now. You know, as an acquirer, they are, they operate in every country. They, you know, have massive distribution and marketing resources. They've got great production ability. They basically offer that to the companies they acquire. In fact, it's really brilliant at what they do. They, they buy a company and they say, congratulations, you just acquired Unilever. What they mean by that is, you know, you will continue to remain an independent company and operating, but you now have all of the resources of Unilever at your disposal. Which ones of them would you like? And we'll help provide them for you. So it's a really powerful model.

• 16:18Speaker 01

  And Michael and the management team were ultimately convinced, hey, we can get so much bigger, so much more quickly by working with these guys than continuing on the independent path. And we like them. So, uh, that was really what led to the decision to, to undertake the transaction.

• 16:33Harry Stebbings?

  And, and talking of the transaction itself and moving it to, to the macro, do you think there'll be other big e-commerce exits to come, potentially maybe as a result? Or just, uh, in the future? Are we bullish on consumer exits in e-commerce?

• 16:45Speaker 01

  So I think the, you know, the key investment, um, thesis for us in this category of consumer products is that because of the splintering of attention away from legacy media to digital media and social streams, you know, where we're, there's no dominant, um, single source of media anymore. And due to the declining foot traffic to physical stores and the massive increase in, in Amazon and online buying. You can't be a consumer products company and not be direct to consumer. Like you have to know your customers, you have to sell directly to them. You may sell through other folks too, but you have to offer a direct channel to purchase. And you need to have direct conversations with your customers. You can't let retailers be your proxy anymore.

• 17:30Speaker 01

  Otherwise, you're just not relevant on social media. No one wants to talk to you because they don't really know who you are. Because of that, you look around the landscape in so many consumer products categories, not just CPG, but even automobiles. Almost all of these hundred-year-old companies do not have any capability to sell direct. And when they try, they aren't very successful. Look at Gillette and their incredibly originally named Gillette Shave Club. You know, not very successful. So I think there is pressure now on all of the large consumer products companies to become DTC. And you can either buy or build, or both. And so, yes, I think we will see more transactions as a way to import knowledge and get ahead in this important category.

• 18:15Speaker 01

  But I think Unilever was super smart because they went out and bought the leading one, right? I mean, Dollar Shave is among the best, if not the best in the world right now, at selling consumer products direct to customers, at least selling CPG products direct to customers. So I think, yeah, I think there'll be some more transactions. I don't think you're going to see thousands of e-commerce companies get bought. Because as I pointed out earlier, I think there are margin concerns, there are Amazon concerns, there are a bunch of other issues in e-commerce in general.

• 18:42Harry Stebbings?

  What other areas of consumer products are really interesting to you? We said about some sectors being killed by Amazon potentially in their early phases. So what other areas excite you in the way that they're not in that segment?

• 18:55Speaker 01

  Well, we had a great experience with Nest where we learned from an incredible team that you can take a very popular, very large consumer products category, in their case thermostats and then, you know, smoke detectors, that effectively have not been innovated on in 50 years. And you could not just innovate and advance the state of the art, but you could actually create a premium product and own sort of the premium segment, build and own a premium segment that didn't exist before. That was a very interesting lesson for us and... In addition, the Nest experience taught us that you could basically put sensors in your devices that you sell to consumers that gather data and then your products can

• 19:36Speaker 01

  get better over time by processing the data using machine learning. So we really like that playbook and we are making investments in that sort of thematic way. One example we're really interested in is the automobile space. There's going to be massive disruption to the legacy automotive manufacturers for a number of reasons. One is electrification, that there's going to be a shift away from oil, you know, internal combustion engine cars to electric cars. Cars are going to drive themselves and autonomous vehicles need really good software and lots of data, two things that income and car companies aren't very good at. We think cars will be sold direct to consumer, the way Tesla is doing it, much better experience and fits with the things I was talking about before. But one other really interesting thing about automobiles are that traditionally, the only

• 20:20Speaker 01

  way to get new features in the car is to buy a new car, which is kind of nuts. I mean, the iPhone model we're also used to and the software model is you buy a device, but it gets better over time. You download more apps, you download more software. A car doesn't do that. So we're intrigued by the idea of cars that can get better over time and we made an investment in a company called Pearl that is selling direct to consumer add-ons for your car that bring you safety, convenience, and eventually autonomous driving features that will work on your existing car and their devices get smarter and better over time because they're like miniature iPhones. They download software updates and can add new capabilities. So I'm really intrigued by the auto space.

• 20:58Harry Stebbings?

  And I'd love to dive into a quick fire with you now. You've done this before. I say a short statement and you give me your immediate thoughts. How does that sound?

• 21:05Speaker 01

  Okay, let's try it.

• 21:06Harry Stebbings?

  So let's try it again. I'm always looking for new books. What's your favorite book and why?

• 21:11Speaker 01

  Carol Dweck's book is my absolute favorite from I would say the last two years. It sort of taught me the growth mindset that so many people talk about now. The brain is available for growth, right? That you're not born with everything you need to know and you're certainly not born smart or dumb, but that because of neuroplasticity you can grow. So I think a lot about self-improvement through the growth mindset and I might as well come back and read that probably once. A year. That's my favorite.

• 21:37Harry Stebbings?

  That's interesting. What are your biggest then productivity tips and tricks to make you as efficient as you can be?

• 21:43Speaker 01

  I don't think of sort of specific hacks that make me productive, but I think about what I want to be and how do I get there? I'm definitely focused on not letting anything stand in my way mentally, not letting myself to be self-defeated. If I want to achieve greatness, that I can do it, but I have to, you know, generally work harder than everyone else. I have to try to work smarter and figure out a way to play, play my own game, play a different game. And really focus just on a massive amount of personal self-improvement, you know, just have this mindset that every day I'm going to learn something that's going to make me a little bit better, a little bit stronger.

• 22:19Harry Stebbings?

  And then one from Christian at White Star. What makes Dollar Shave unique in the commerce space?

• 22:24Speaker 01

  Uh, okay. Well, I think a number of things. They have high margins compared to e-commerce companies that sell someone else's product because they sell their own products. Their subscription service with really low churn as we talked about, so really high loyalty. They acquire you for, for one expense early on in your customer lifecycle, but not only do you stay with them a long time, but you buy more and more products as they introduce them to you. So the LTV expands over time. They are super unique marketers that really understand how to have conversations with their customers.

• 22:54Harry Stebbings?

  And then what type of role does a studio light science play in Dollar Shave's success? Again, Christian.

• 23:00Speaker 01

  I think they were extremely helpful early on. I don't know how to generalize about studios, but in the case of both Peter Pham and Mike Jones, they were an amazing yin and yang. You know, you have Peter, who's this incredible networker and biz dev, sort of partner oriented person. Who can I introduce you to? How, how can I help connect you? And you have Mike Jones, who's extremely focused on company strategy, pricing, value proposition. They were very, very helpful early on. They, I mean, I can tell you that they brought in even just before I made my investment, a COO named Kevin Datu. And Kevin, it was in many ways a super overqualified COO at the time. Like you wouldn't see a 10-person company hire a COO in most cases.

• 23:45Speaker 01

  But this was a complex logistical operating company that had a lot of moving parts to deal with. He was so crucial and still is to their success, and that came from Mike Jones and Peter Pham. So I think they were essential.

• 23:56Harry Stebbings?

  Let's finish on your most recent investment and why you said yes.

• 23:59Speaker 01

  So the most recent one that I've made is Pearl. And as I just mentioned, I told you what they do. They are an incredible team. I think there are fifty three people from Apple, seventy total people now. That built and managed and delivered iPhones, iPads, Apple Watch and iPods in use by more than a billion people. And they've got an incredible point of view about how to bring the most advanced consumer products, some sort of electronics products to market. And they're going after the auto space. So this enormous team going after enormous market with, in many ways unfair advantages. I got super excited about.

• 24:35Harry Stebbings?

  Well, David, thank you so much for joining us today on the show. Again, it was such a pleasure to have you and amazing to hear the inside story from Dollar Shave's incredible journey.

• 24:42Speaker 01

  Harry, thank you so much for having me on again.

• 24:47Harry Stebbings?

  What a fantastic insight that was into the Dollar Shave Club deal there from a real insider and a huge hand to David for giving up his time today to be on the show. I really do appreciate it. And if you love the show today and would like to stay in the loop, then you can follow me on Snapchat by adding at H Stebbings. Or you can follow David on Twitter by adding Pakman, that's P A K man. Likewise, you can sign up for the newsletter on the site at the twenty minute V C dot com. So you never have to miss an episode or an update from us. However, before we leave you today, how do you find the energy to take on the challenges of the day? Maybe the challenges of running a startup or being an investor. Well, a good start is always crucial, bound out of bed a hundred percent recharged and you have the power to seize the day like a winner.

• 25:30Harry Stebbings?

  Eve makes only one kind of mattress, the very best with three layer next generation memory foam and open cell technology. They even give you a hundred nights to trial it and make sure it's perfect for you with free return pickup. So go to eve mattress dot co dot U K, enter the code twenty V C and you will get an incredible fifty pounds off and it'll be with you by the next day. That's Eve for you. Everybody deserves a perfect start and from perfect starts to the end of say show. And we so appreciate all your support and cannot wait to bring you Friday's show with Adam Nash, CEO at Wealthfront.