In this fascinating article, David Pakman shares his reasoning why he was an early investor in Dollar Shave Club… and why it had massive success so quickly.
When I first met Michael in June of 2012, I had already seen the DSC launch video like everyone else. I saw his site melt down and watched the video explode and actually go viral. I asked Peter Pham for an intro, which he graciously provided, as Science had seeded and helped incubate the company.
What Michael was creating fit a number of my investment theses. I believed (still do!), in the age of social media, brands must become direct-t0-consumer in order to know their own customers. Having run eMusic and a few other subscription businesses, I knew that subscription is a business model that only actually works for a select few product categories, and that churn rates must be very low (well under 5% monthly) in order for subscription businesses to succeed at scale. I believed it was possible to use asymmetric marketing to injure existing incumbents who overly depend on broadcast advertising and distribute only through retailers. When I saw DSC’s early numbers, I immediately knew they were on to something big. There were many well-known seed investors and large VC funds already on the cap table — I was sure there would be a fight. Strangely, none showed interest.
Pakman lists his investment criteria below. I believe every subscription box company could profit from considering them carefully.
Many investors shy away from commerce companies. The multiples tend to be low, Amazon is ever-present, and lots of capital can be required to scale. To us, we didn’t see DSC as an “e-commerce” company, but instead as a model for new full-stack consumer products companies. Our investment criteria for this space is as follows:
Offer highly-differentiated products with high product margins (In DSC’s case, value and convenience were the differentiators and their product margins are very high. Avoid product categories that can be Amazoned.)
Invest only in zero-sum markets (A customer buying your product means they stop buying your competitor’s products. This is clear for DSC, but often lacking in apparel categories, for instance.)
Choose categories where incumbents sell only through retailers and have no direct relationship with their actual customers
Choose categories where incumbents overly depend on broadcast advertising
Choose categories where the CEOs of the incumbents are professional CEOs, not founders (thus are far less-likely to cannibalize existing businesses and adopt new business models)
Look for products and services which gather usage data and utilize machine learning to improve over time