How Should I Invest my Cash? with Mike Beckham and Dave Rekuc

[00:00:00] Taylor Holiday: All right. Welcome back to another episode of the E-Commerce Playbook podcast. Today we have another podcast star joining us as a guest, as well as a regular recurring. Dave, I think you've been here before, right? not messing that You've been here before? Yeah. Dave's a regular. Dave's a regular.

So we got an exciting episode. We're talking ROIC today. Dive in, put on your financial hats. Get out your bean counters. We're gonna dive in right now. 

[00:00:22] Richard Gaffin: Hey everyone. Before we get into the episode, I wanted to make a quick announcement. If your brand is doing 10 to a hundred million in annual e-commerce revenue, CTC wants to work with you. And here's the kicker. If we evaluate your brand and its GQ score is 130 or more, we're so confident that we can win for you that your first month with us, we'll be absolutely free.

So just head over to commonthreadco.com, click the hire us button to get started, and then just let us know in the contact form that you wanna be evaluated and we'll be in touch. All right onto the show. 

[00:00:53] Taylor Holiday: All right, special guest today, all the way from the, another one of the popular podcasts in our industry. Mike, I was just listening to you in the car, and now I get to come over here and get you in person.

Mike Beckham from Simple Modern. You all know him well, but Mike, you wanna give the people who haven't had a chance to listen to you on the Operators podcast uh, a little bit about who you are and what you do.

[00:01:14] Mike Beckham: Sure. A little bit atypical. Been outta college for 20 years, 10 years in the nonprofit world. 10 years basically running e-commerce businesses. The first one was one that I built with my brother that got to about a billion dollars in revenue over a seven year period. And then founded Simple Modern in 2015 with a couple of close friends of mine.

And we've grown that to, to be a, a nine figure business during that period. And so love talk and e-comm, can't believe I have not been on a podcast with you to this point, Taylor, so I'm excited.

[00:01:44] Taylor Holiday: I gotta say, so Mike, I don't know, it was probably like two years ago, you and I got on a call, Manal. It's been a while.

[00:01:50] Mike Beckham: Yep.

[00:01:50] Taylor Holiday: And at that point I would say simple, modern in the social D to C sphere was like, you guys hadn't made your appearance yet. But it turns out, for those of you that don't know, Mike is like the wise mentor advisor to like all of us.

Like he's like the guy that everybody goes to and he is just, Exploded onto the scene, but he's been there all along, just so they know, advising a lot of the people in e-commerce in a way that is all. He's always incredibly gracious with his time and his wisdom and his team is awesome. So excited to have him here for the first time.

Mike, it is long overdue and of course we've got Dave Cook. You guys all know him really well. He is the president of Bamboo Earth and my children's retirement plan. So Dave, you want to give the people a little bit about yourself too?

[00:02:33] Dave Rekuc: Absolutely. Before becoming the steward of your children's rep retirement plan I was in e-comm for about 15 years. Did a little bit of time on the brand side. Spent about a decade on the agency side. So I've worked with a really wide variety of brands mostly in marketing. Came into 4x400 in 2020 was on the marketing side and in charge of the new brands.

And we would, when we decided to narrow our focus on Bambu Earth. Went all in on that and then wound up leading Bambu Earth the last year and a half.

[00:03:00] Taylor Holiday: Awesome. Well, so here's what we're here to talk about today. This is why these gentlemen have joined me is because I was lurking on their Twitter conversation where they were having a dialogue about, How to think about the obligation that a founder or a steward of capital as CEOs are often referred to in terms of how they thinking about making investments.

And how they obligate and measure the return on those investments. So we're here to talk about a principle called ROIC return on invested capital, which is a fancy formula that, to the best of my knowledge, and I heard this once, maybe you can confirm this, Mike, but Bill Gurley took credit for this on a podcast.

I listened to him the other day that this was a mechanism that they developed for. Finding another way to analyze public companies and try and find sort of value arbitrage. And then the formula is not pat net operating profit after taxes over invested capital inclusive of the cost of that capital. And it's just a way to say, is a company finding a way to deploy money and get a good return on it and they used it.

Is that your understanding of where this came from? Am I right on that?

[00:04:00] Mike Beckham: I, I have no idea if Bill Gurley came up with it. I feel like. It's a little bit like Austin Powers where he says, I'm, I made outrageous claims. Like I invented the question mark. I I, I don't know that Bill Gurley invented the idea. But yeah, like, that's, that's the general gist. I, I think that's a good description.

[00:04:16] Taylor Holiday: Dave, do you, you can clarify that year, the history

[00:04:18] Dave Rekuc: Yeah, as far as I'm concerned, it's invented by, in Investopedia when I was going down a rabbit hole, just trying to learn as much as could about this sort of thing. And that's where I first heard the term. And, and since then it's been pretty popular in the, you know, capital allocation type circles where people talk about exactly this allocating capital inside businesses.

[00:04:39] Mike Beckham: The, the easiest thing I think to to use here just for everybody listening is. Return on invested capital is a report card for how good a job is a management team doing of investing resources back in a business. And the reason why that's important is because it has a lot of implications for the type of debt structure that a company should use and where excess cash flows go, whether they stay within a company or if the company's in a place in its lifecycle where they should be distributed to shareholders in one form or another.

[00:05:10] Taylor Holiday: Yeah, that's right. So we are deviating. I think a lot of our conversations on the Ecommerce Playbook podcast sort of orient around. Tactics that are about driving value capture for today. And now we're gonna sort of assume that we've done a pretty good job at it for a little bit as a group as an audience here and with two guys who have done it pretty well for a while.

And what that now affords them is a new challenge. And that new challenge is to be a steward of the treasury to decide, okay, we have extra cash in our balance sheet and I have a choice to make. Am I gonna just give it back to the shareholders because I don't have a capacity to generate a return on it.

Or does my business offer me a vehicle to generate a better than market return or better than, you know, whatever the expectation of the shareholders level is of return. And if so, how do I make sure that I'm diligent about that and thoughtful about it? So maybe Dave, if you wanna set up, what were you thinking about, what was the conversation you started having with Mike?

And tell us a little bit about the position of Bambu Earth and what prompted you to start thinking this way. And then Mike, we'll kick it to you for how simple modern has done this.

[00:06:07] Dave Rekuc: Yeah, definitely. So what I was thinking about, I, I tweeted this out as just sort of a question because it's, it's something that I haven't had as, as you put Taylor, I haven't had the need to encounter significantly yet. I haven't had the need for a rigorous framework yet. But Bambu Earth is now in a position where it's generated over seven figures of cash that are sitting on its balance sheet.

And, and now we're also in a position where we're a low eight figure brand. We've been through a lot of the optimizations that are the low hanging fruit, they're gonna produce the year over year significant gains. So now I'm starting to think about, okay, 2024 2025 how do I continue to push the substantial growth 50% year of year type categories?

And the truth is that I need to build a foundation that is going to, to drive that, not just stay in my own bubble, stay in the own. Set of rules that have been applied for me, but to be able to invest in new things that are gonna be able to change the, the, the ground rules to growth. And so, One fear I have that's lurking in the back of my mind is in 4x400 We went through a period of time, we were pretty public about this. We went through a period of time where we continually produced overly optimistic projections for, especially for our new brands. And at the time I was VP of new brands, so I felt that rather acutely, right? . So we were, we were overly optimistic with those projections and the, the thing that helped me change on top of Taylor coming in with a different perspective and saying, you're being way too optimistic with this.

Like, let's put together a real projection, hit it and be responsible for it, is I also went and not only did weekly monthly projections where we build them up with cohorts, but I've talked about this before. I wound up doing four projections for every single week, a 20th, 40th, 60th, and 80th percentile.

And then I tracked those on how often they were realized and related them back to how often they should be realized. An 80th percentile projection should only happen 20% of the time, right? And so this means I literally made hundreds of projections. And got way, way better at it. It what you measure, you manage.

So now presented with this new challenge where I'm going to start allocating significant amount of money to build the foundation that that Taylor's kids are banking on me for. Right? So I want to do this in the most responsible way. I know I want to create a framework that creates responsibility.

That not only says, does this pass the bar of distribute to shareholders versus reinvesting company, but am I choosing the correct bets? Am I choosing the correct ventures for us? Am I being overly risky, under risky, et cetera? And so I knew there are a lot of operators who are smarter and further along the, the, the journey than I am.

And I, so I freaking tagged every one of them. And and Mike started to speak up and I think that's a good segue into into Mike's experience with this.

[00:09:04] Taylor Holiday: Yeah. So Mike, you are further along. I've had to think about this a lot. And so I'd be curious, what frameworks do you have? How do you approach this problem? And what, how should Dave begin thinking about this?

[00:09:15] Mike Beckham: Okay, so I'll just start at the top and kind of work through my, my logic tree. The first is, is the business in a place where it can continue to make, you know, outperforming investments? You have to kind of start there if you're, if you're generating excess free cashflow. And one of the reasons I say that is my brother and I ran a business at one point where we generated mountains of excess free cash flow.

And we made the massive mistake of plowing it all back into the business when we really didn't have great ways to plow back into the business. I mean, I, I have set wheelbarrows full of money on fire doing that. And if we had just pulled that money outta the business and put in the stock market in 2009, 2010, we would've had way more money.

And so it is very tempting when you're an operator who has been successful. To just believe that you're, you can do better with money than you know, than somebody else can. Or by, by pulling it out, it's not always the case. And I think it takes a real level of humility and, and self-honesty to be able to evaluate your business and evaluate your prospects Also.

I think it's, it's worth asking, do you have highly complimentary ways you can invest that money in the business? Because when if, if we're running under drinkware company and I start using excess free cash flow to buy oil derrick's, it's like, even if it's a good investment, like that's probably not how I should be doing it.

That money should come out of the company. There should be a different llc. And so you'll see that sometimes where people just lose focus and they become kind of this, you know, Frankenstein. So what we're gonna do in this conversation is assume that you do have prospects within, and, and like one thing is we're saying one of the reasons why it is so advantageous to keep capital in a company and reinvesting is that you don't have that.

There's, there's a lot of tax consequences a lot of times when you pull money out. And so there's some advantages to keep it in. Let's just assume that you do have that, and I wanna walk through the way that I think about it, like the framework and how we apply it, and then we can, we can just kind of riff on that.

[00:11:15] Taylor Holiday: Can, can real fast though, before you do it, there's two terms that you said in there that I'm, I, I just wanna make sure I understand and, and think about. threshold for one was this idea of excess free cash flow. So this is a question of working capital necessities and how that relates, like what is the point at which you reach.

Excess. And how do each of you maybe briefly think about that moment? Like where is it like, no, this is not my operating working capital for the next 12 month forecast. Is there some period of time where you've done a cashflow forecast and you have a sense that you're now above and beyond some threshold?

Like what does excess mean?

[00:11:47] Mike Beckham: so Dave, one of the things Dave said that I really liked when he talked about his 20, 40, 60, 80. It actually, we, we sell directly to Amazon. We're a one P vendor and that's how they do all their forecasting. It's actually on a confidence interval where they'll give you several, you know, several different probability curves.

And I do think you have to run your business with enough cushion where if you miss forecast by 15 or 20%, it's not an existential event for the company, right? Like, we're not gonna make payroll if we don't. And so, the other piece with excess free cash flow is that if your business, if your core business is growing organically, then you're going to need to buy more inventory and more things to fund that.

And I don't really think about that as like, new investment. So like, what, what we're gonna talk about today. I, I'm not including like, hey, like literally here in 30 minutes, we've got people giving a line review to Target. They're gonna pitch some additional facings target's gonna order that, that would require us to carry more inventory.

I don't really think about that as investment because it's so straightforward, but that does require more working capital. And so that eats into even, you know, that that takes a chunk out of. Your cash flow and it reduces, you know, free what I would call investible cash flow. So when I, when I think about investible cash flow, Where I would start is, okay, first you, what's your, your kind of EBITDA or your, your taxable income.

You're backing out taxes, you're backing out any kind of obligations you have to shareholders. So I've made some agreements with my shareholders that. Hey, I'm going to get a certain amount of money out of the company. We're gonna do a certain amount of stock buybacks and redemptions. So those two things come off.

And then we're taking off any money that's just organic growth. Hey, Amazon, we think Amazon's up whatever percent next year. We need this much more in inventory to be able to support that. And that number, that's where I start with thinking of like, okay, this is the pot of money that can be reinvested across the business in what I would call more speculative.

Growth investments. And so the, the way that, so if, does that all make sense? I guess we'll start

[00:13:57] Taylor Holiday: Yeah, so the. if I could say it back to you to, so the investible free cash or excess cash is going to be net of your working capital, whatever you determine that to be, net of your obligation to shareholders that you have in your agreements, net of taxes and sort of that delta of what's there now.

Now that gives you start to think about your piggy bank. Like that's what I have to invest here. So Dave, is that similar to sort of how you're processing this,

[00:14:21] Dave Rekuc: Yeah. So the one other thing that I, I, I consider a little bit, because we're we're still a little bit younger on the growth curve, is that we actually have very lean working capital, but there's actually ways that I can trade cash or working capital for profit. And so like those, so like that increased working capital absorption, if I have that on the roadmap, I've also gotta carve that out from investible cash.

Like a good example is like, we're, we're just this week splitting our inventory, bicoastal. And it's gonna save us a bunch of money shipping, but it means that generally you have to carry a little bit more inventory in order to be able to do that. So there's a little bit of cash that goes, that gets reabsorbed back into the business.

But on an accrual basis, your bottom line improves over time, even on a cash basis. It's great ROIC but that's something that you've gotta carve out and make sure that you're, you're not touching that, that increase of cash with your, your free

[00:15:11] Taylor Holiday: So similar to Mike, you wouldn't actually consider that an investment activity sim in the category of what we're talking about because it re, it reflects the core function of the existing business.

[00:15:21] Dave Rekuc: I actually in this case, because it's an so like what I believe Mike is referring to is like the typical working capital absorption of just 50% year over year growth, right? Like, so my working capital absorption rate is this, and therefore I'm going to need X in inventory just to service this growth that I would not, and that's like, that's an operating function.

I'm staying within the parameters. But if I'm intentionally changing the working capital absorption rate and I'm intentionally incurring new levels of working capital, I actually would be looking at that as a bet. It, it's, it's an operational bet, so it has a higher level of confidence compared to like a, a more speculative marketing bet.

And, and that's how I would treat, like assigning a confidence level to it is how I would treat the difference there.

[00:16:05] Taylor Holiday: Okay, great. So Mike, now we have a sense of what do we have to invest and how do we get to a thoughtful process around that? I'm curious, are you gonna go into sort of, you, you started to touch on this idea of hurdle rate, like what's the necessary, are you gonna dive into that more in this? Okay, great. Go for it.

[00:16:20] Mike Beckham: Absolutely. So, okay, I'm gonna just kind of rapid fire a few principles that I think are are important. Number one, your goal is the highest risk adjusted rate of return. And, we'll, we can come back to that, but Dave just mentioned this. There were some things where it's like, Hey, I feel.

95% confident that if I split my inventory on two coasts, that I'm gonna be able to recognize these savings. And so the savings might, you know, my return on that additional inventory to go by coastal is 30%, which is not as high as a lot of my other investment opportunities, but my risk ratio is so low, right?

On the other extreme of things, launching a new product is among the most risky things you can do. But the potential return is so massive and so asymmetric that it still has a great risk adjusted return. So the way that I think about it with our business, one of the things that scale has allowed is that we have a lot of these, we probably, you know, any given year, if I, if I really broke it down, 30, 40, 50, a hundred different ways, we're investing capital and each of them sit in a different place on this kind of risk reward spectrum.

But the goal is that, To, to your point, Taylor, first, I have a sense of what is kind of the hurdle rate of what I want to be hitting. I actually think that hurdle rate is not particularly outrageous. I mean, is it, is it in the twenties? Is it in the thirties? Is it low forties? I don't know. But it's not, it's not an outrageous number.

I, I think if you feel like, Hey, I can invest money and hit a 30% internal rate of return and consistently do that, you should be, you 

[00:18:03] Taylor Holiday: no, no. Shareholder gonna be upset with that return on their money, right? Like you, is is that? Why you say that is cuz you're thinking about a comp to the market or the alternative investment opportunities. Like why, why do you say it doesn't need to be that high?

[00:18:15] Mike Beckham: Well, yes, cuz I mean, where's the money gonna go? Like, I don't know a hundred percent of the company, but like, let's just say that I owned a hundred percent of my company. It's like, okay, so I'm not gonna invest it in the company. Well, where's it going? Is it going in a, you know, a bank account that's earning 5%?

Is it going in an index fund that I think might hit 8%? You know, it's gotta go somewhere. So if those are the alternatives, then like, yeah, 30% internally looks, looks amazing to me, or 25% even maybe looks really amazing to me.

[00:18:43] Dave Rekuc: Mike. Mike, I'm sorry. you mind if I stop for a second? Cuz two quick clarifications. One in the example that you gave where you are the, the sole owner and you're pulling it out, first of all, that's post-tax. So like you ha you have to fax that, right? So like a lot of what we're talking about here, you can either fully expanse or aggressively amortize if it's CapEx and, and write off a good portion of those investments.

So th so that lowers the bar further. In terms of the, the, the, the marginal that's necessary. And then the second, second question I had was actually just quick clarification is when you say like a 30% return, is that already risk adjusted? Like, so if you're saying, Hey, we're introducing a new product, 30% chance of a hit, but it's got a hundred percent return on the investment, therefore it's an ex, you know, I'm, I'm risk adjusting that, and that's a 30% expected return.

If I could go do this a hundred times, that's what I'll e essentially realize.

[00:19:36] Mike Beckham: Yeah. It's, it's always difficult for me to, to your point earlier, Dave, to really know fully what the risk adjusted return of a thing is. And so instead, the way that I think about all this stuff is portfolios that what I wanna do is make a multitude of bets where there's a really credible.

E either there's very low risk and there's a credible return profile. For example, you're a bicoastal example, or where there's a really incredible return pro profile possible. Even if I can't assess the possibility that we hit that, like, this product, if it works, could produce, you know, 20 million in top line.

Is it a 25% chance that it gets there for us? Is it a 15%? I don't know. But if. Over time, I see a track record with my management of being able to make that portfolio blend out in a good place. Then I have confidence, and so a lot of my confidence doesn't come necessarily from feeling like, oh, I know the numbers exactly on this thing.

It comes more from with this management team doing these type of activities. When you aggregate several bets, The numbers historically have said we hit really good numbers and I, I can feel a pretty good of confidence. And one, one other thing that's worth saying, when you run a consumer brand, your, your risk profile going down.

And this is another, like when we launched drinkware, it sells like our risk. And this is an interesting thing about product I'll get into like talking about the different kind of hierarchies and how I think about 'em. But I, to my knowledge, We have never lost money on a drink. We're buying in the history of the

[00:21:14] Dave Rekuc: That's, that's a nice track record.

[00:21:17] Mike Beckham: Cause at the worst, at the worst, we dump it at basically breakeven. And so one of the, one of the analogies that I'll give with people sometimes, imagine you could go to Vegas with $10,000 and you can play blackjack and you know when you busted, you just got your chips back. And you know, but then when you won or you hit 21, you still got paid out.

And that's kind of been our experience with product development, which has made it a lot easier to not have to be as dialed in on my risk adjusted return because we just haven't had those negative 100 s negative seventies in, in the kind of

[00:21:52] Dave Rekuc: and, and.

[00:21:53] Taylor Holiday: Right. And, and because the lar, the larger your customer base gets, the lower the take rate needs to be to pay it back. Right. So like that, that's, that's part

[00:22:00] Dave Rekuc: And built-in distribution, like, cuz that's what a lot of what Mike has is the built-in retail distribution, especially drinkware. Like, I'm gonna bring this to the, to the target buyer, the whatever buyer, and they're gonna pick it up for at least some portion of distribution. So quick question on because the feedback loop is incredibly important to me.

So like, you're obviously further along you've had. You've been able to make a significant number of bets in same category as well as category expansion. So it sounds as though you, you're using whether you're kind of intentional with this labeling or not. Kind of low risk, medium risk, high risk, like rather large categories, so to speak, and, and then just saying, I'm gonna track these similar bets over time to be sure that the upside.

Is is measuring out with the, with the cost for this be, is that, is that vaguely correct for how you're kind of answering to that?

[00:22:48] Mike Beckham: Yeah, so I'll, I'll give you my kind of categories. I would say the first category is where can I potentially speculatively invest more money in existing products and inventory where I think I could produce growth? So, For example, hey, we've been selling this water bottle. We've been selling it with 10 colors.

We think color number 11, 12, and 13 are gonna be incremental, but not crazy incremental. But also my risk profile is almost zero. Like the product's de-risked. I know the, I know the reviews, the distributions established. I just have to buy the inventory. So like that would, that's the easiest, and it probably should be the first tier.

Of anytime you can do something like that, that leverages everything the business is doing, but you're just putting a little bit more capital towards it, that probably comes first. Then the next tier for me is new product expansion. I would probably break that into a couple of sub tiers where it's like new product drinkware expansion is The, the number two thing we can put money in and we wanna put as much money in that as we probably can credibly.

And then I think, like you said, we've gotten into some other things. We've had some good success recently getting into things like textiles and, and bags that, so things that are outside of our core brand, demographic and footprint. Those kind of product expansion opportunities would probably be next.

And then I think investments in CapEx, investment in team acquisitions investment in marketing that's not as performance driven. These are all things that are falling probably further down my funnel.

[00:24:22] Taylor Holiday: Okay, so bringing it back, I have a question about product cause I think this is like a, an obvious one for people. And I'm curious about how we think about the return profile of a new product. Cuz you, you mentioned that it's highly risky and I think there's, I, I've always, Kayla, we used to talk about this a lot.

There's sort of two core. Actions in my head that we would think of when we thought about product. Category one was like an LTD expansion. It was like we have an existing set of customers, what do they love? What's a natural sort of additional thing that where we continue to think that we're gonna sell rings, but we could extract more out of every customer by also selling them X, Y, or Z.

And then there's sort of. Stuff that we think of as new customer acquisition, which is like audience expansion. We're actually trying to enter into a new category of people and that one's like way harder to actually map in terms of what the anticipated return is. So like how, what is the process for each of you?

I'd be curious about thinking about up product and Dave or Mike, you mentioned drinkware, which is sort of a like a, maybe that's more like a colorway expansion or even just a styling expansion, but you could probably do some really clear estimations in that. But how do you think about bags? Like that to me was an interesting one from you guys.

And how did that, how did one, what was the modeling process? And then two, how right were you? I'd be curious. And then Dave, what are you thinking about?

[00:25:34] Mike Beckham: No. You wanna go first or me 

[00:25:36] Dave Rekuc: Go ahead, I've got a dog.

[00:25:39] Mike Beckham: Well, I, I think that the, when we get into something that's truly outside of our footprint, the upside is so enormous, potentially. I mean, it is tens of millions of dollars in revenue and an initial order. It's rare that we buy more than a hundred or $200,000 worth of product on an initial order.

Occasionally we'll get up into the high six figures. I don't know that we've ever launched a product, like an initial order that's been more than a million dollars. We will probably need to, but we haven't yet. And so when you just think about it like, gosh, I'm, I'm putting five, six, $700,000 at play.

I feel like my worst case is I can probably get out pretty close to getting my capital back if I have to. But my upside is potentially creating recurring revenue of millions or tens of millions of dollars. It's so asymmetric, and this is kind of the the point that I make all the time. It's, it's so asymmetric that it overwhelms the math.

And, you know, buffet has famously said, like, people have asked him like, what about your models? You know, your numbers? And he's like, if I have to model it out, if I can't, like on the back of the napkin, make it obvious we don't do it. And, and I kind of feel the same way about product expansion where I, I think the biggest key is that I'm, I'm looking at.

Is there a clear is there enough product market fit in general in, out there already, and is there enough market demand that if we were to be successful, this can be a, a material contributor for us? And if it is, if I think we've got a good product and it can be a material contributor for us based on like what I'm seeing out in the market, if it hits.

I actually don't have to go too much deeper than that. So like when we got into tote bags, our customers were saying they wanted tote bags. And I, I will step back and say here, one of the ways that I build my confidence profiles, we do a lot of internal surveying, we do a lot of talking to customers. But our customers basically told us this is the tote bag we want.

So we went and built that tote bag. And I, I think that based on the early launch thing, launch data and stuff, it's probably somewhere between a five and $10 million product line for us next year, which is fantastic. You know, we bought, $250,000 in inventory. And so that's a, I don't know, you know, like, what is that A 20 x?

You know, who, who knows when you do the discounted cash flows, it's probably more like a hundred x. So, fortunately, Our experience has been that it's so asymmetric that the math doesn't matter. It really becomes more questions of, do you feel proud to associate this with your brand? Because for us, maybe the downside at this point, Taylor is more harming the brand than it is the particular economics of that investment, Like, I'm just not gonna get burned. But if we launched a tote bag and a couple toddlers like hurt themselves on it, or you know, God forbid

[00:28:38] Taylor Holiday: Like a treadmill Maybe that

[00:28:40] Mike Beckham: Right. Yeah. Well, Yeti, Yeti just had $140 million recall because they use magnets and stuff, and those magnets, anytime you use magnets, if if kids get those in their mouth, it can just rip up their intestines and stuff.

And so, So interesting, like the risk adjusted return becomes less about, hey, what's out there? And it becomes more about your kind of brand management and product quality and recalls. You start thinking about some of that stuff more. So we've, our, our experience has been that what product launching is is very asymmetric.

And that's been true basically since, since the beginning. So it, I, I'll, I'll make a point here that's, that's really relevant to where we are as a company. We've, we've been undercapitalized all the way through. And it's built this muscle. I, I think you tweeted something about this recently, Taylor, and I've had a similar thought.

The great thing about being undercapitalized is it really, it's like being hungry. It just, it really focuses and clarifies what is the best thing that you can be spending your money on in a way that when you have abundance, you know, you just, you, you can't do it at the same level. The problem that we are ha, we are, and I use problem loosely, it's like first world problems, but we need to transition as an organization from kind of a scarcity mindset where it's like we have this limited amount of resources and we need to line up all the things we could invest in and compare them to each other and survive all of the fittest, only invest in the top 20%.

Now we're in this situation where I don't know that we can reinvest all of the capital that we have. I don't know that we have enough ideas to get it all back in the company. And so I'm having to kind of rewire people and some of these conversations that, you know, like when you're talking about hurdle rate and some of this, Is coming back to the surface because now there's a lot more cash to invest.

And I've built a team that's been really good at saying, here's the best, here's the top 5% of ideas, here's the top 10% of ideas. And now I'm coming to him and saying, Hey, I need you to now try and get it all at play. And one of the reasons is, I think historically, if you said, Hey, what's been our return on invested capital?

It's something triple figure, triple digits. And you can kind of understand it has to be, if we started with $200,000 and now you know we're selling $170 million a year, there has to have been just this phenomenal capital appreciation that's happened in inside the company. But it's actually becoming unhelpful that my company has this history and legacy of like, we hit triple digits when we invest money.

Because my point to them is, If you can invest 40 million at a 50% return on invested capital, that's way better than 10 million at 150. Right? And so anyway, so those are some of the things that we're wrestling with. But for sure the product we, we have a huge bias towards investing in product and product launches because of the asymmetric nature.

[00:31:39] Taylor Holiday: So Dave, when cosmetics, what are we waiting for? What, what, what are we

[00:31:43] Dave Rekuc: Well, so, so interestingly similarly we have as I started to dig into this, with product development, we have a similar asymmetrical setup, and part of that actually is because we own the production. So, like when Mike was throwing out numbers of what it takes to invest in a product for us it's, it's a 10th of that.

Like we, we, we could break something into market for it. Really, it's the formulation images and like get the, the one-time work to essentially get it done. As long as we're not introducing an FDA regulated product that has to go through longer. You know, like for instance, sunscreen and SPF moisturizers are on the table.

Shaking his head. Those are larger bets obviously because of the time, the time and resources necessary, but we, we could certainly for 20, $30,000 bring something to market and because of the fact that we own that production. The, the likelihood that we can't get rid of that inventory at cost is effectively zero.

Like that. That is true. Will we recoup the the 20, $30,000 invested in the product development? That's the question mark, but the inventory, you're gonna clear that out for sure. We, we actually have a bigger risk of cannibalizing because Mike's in a world where introducing colorways or, or, or skews adds some level of preference capture and some level of preference.

Shufflings, where you just introduced red, they would've bought blue, but now they're gonna buy red. But you know, some of them, you know, some new incremental customers will buy red because it didn't exist before. For us, we can actually, we're, we're mostly solving a problem. We're mostly solving an issue that somebody has that they either have acne or oil, at least skin or, or, or aging or whatever it might be.

And so if we're solving that problem well enough with a giving product and we introduce a second product that is, that is cannibalizing that all we've done is blow our inventory, even if I move it. It's not adding new marginal profit for us, even if I move it. So I'm actually, there's a few SKUs and what made me think of this is like, we had four products launched about a year and a half ago.

I'm probably gonna kill two of the SKUs because I believe all it's done is cannibalize. And all it's done is essentially blow our inventory. And what I wanna look for is how do we do some more of that that opens up new pipes that we can advertise on. For, for meta for acquisition to bring in new customers, cross sell to existing customers.

So I, I actually wanted to have both those characteristics You talked about, Taylor, I wanna cross sell for ltv and I wanna also use it for, for acquisition there.

[00:34:01] Taylor Holiday: Yeah,

[00:34:02] Mike Beckham: It's a great point, Dave. I will just say this. There have been. It's the reason why you can't just in, you can't evaluate an investment just on how that investment does. You have to take it in the context of the larger portfolio. There've been a lot of times where it's like, oh, this color is the new hot color, and we release it, and yeah, it sells really well, but then you look and it's just like, oh, it's cannibalize the crap out of these three other colors.

We're not money ahead. And so I think the word you just said, It's incrementality. You know, when you're investing money, you're trying to create incremental topline, incremental bottom line, and that can be challenging because it is so tempting to invest money where you know you're great, right? But that's also the place that you're most likely to cannibalize

[00:34:44] Dave Rekuc: and I also would add. Just one more point to this is like you, you said if buffet said if you had to do the math or you had to do a model, it's a no. Right? So if, if it's not an obviously yes, it's a no. And I, and I think that their same rule should apply when looking at the returns to an investment.

If it's not obviously producing returns for you, it's a no. And go find something that obviously is producing returns for you. If you have to dig that deep, it's, it's not. Or it's not above the bar for where you should be focusing your time and, and energy as an

[00:35:14] Taylor Holiday: Yeah. Or you're likely to sort of create some maybe fudge information for yourself to validate it in some way. It should be obvious, but, so there's a really interesting thing here. So we, we worked with Color Pop for a long time. Okay. So Color Pop has a subsidiary Giants subsidiary of Seed Beauty, who also is the manufacturer and producer for Kylie Cosmetics.

And we went to their offices and they do all of their production in a giant warehouse in Oxnard, California, and up north in Santa Barbara. And so they have a lab and their production facilities on site. And so what they've done is they've lowered, and Dave, this is something you referenced in February that I think is an interesting event of his pharmacist, which is that they've lowered the risk.

Adjusted investment requirement of every product that they make because they can instantly create it and have it on the site in 24 hours in small samples to determine the demand to then develop the production. And so they would say like, Hey, we could be sitting here, we could watch a product pop off on sephora.com and we could have it on our website in 48 hours.

And that's our superpower. It's like, so product development, we just do exactly whatever happens on trend and we're immediately in market with it right now. And so we never lose, like, so the risk of every new incremental profit, our product is like zero. It's like none, no risk. And so by investing in that underlying system, you actually improve the profile of every future investment ever.

And so it's like an interesting, like compounded versus a one-off investment? No, no, no. This underlying architecture actually improves the investment profile of every bet we make in product

[00:36:46] Dave Rekuc: it, it's underrated that you could adjust either side and get better returns, reduce risk or increase upside. Everybody focuses on the upside only reducing risk as you just put it or driving it almost to the, to the ground. Into the into zero is a great way to produce phenomenal returns.

[00:37:04] Mike Beckham: The one example that we do, we do laser engraving, and we recently bought a UV printer where we can do things on demand. And what's especially interesting about that is that the trend from my point of view in this fits really well with color pop is. The more you get towards trend and the more you get towards individualized, personalized, the more people are happy to pay a lot more.

And there's, there's just way more contribution margin dollars to go around. Like we, we had, it's funny, we, we had personalization on like laser engraving a couple years ago, and then we wanted to move the facility and change everything up and so we turned it off for about a year. We turned it back on this spring and I think we started at $5.

And then we were kind of getting overwhelmed, so we took it to 10 and then somebody popped off on TikTok and we had one that had hundreds of thousands alike, I think we sold in one day, like 10,000 personalized units or something. And so we took it up to $15 and we just haven't brought it back down.

But people are still more than happy to pay it. And so like that's become kind of our standard is like, Hey, it's $15 for personalized. And it's like, man, that is, That is wild. You know, some people are buying units where they're paying almost as much for the personalization as they are for the actual water bottle.

But to your point, Taylor, and, and I guess you can kind of nest this, a lot of times it's either investments in inventory or it's investments in CapEx. We had to buy all those lasers, but that's the gift that keeps on giving.

[00:38:34] Dave Rekuc: For sure.

[00:38:35] Taylor Holiday: Well, and on p and on your p and l, it's just, you're, you're the, the realization of the value relative to the cost because you're capitalizing that machinery is just fantastic. Right. Like there, there, there's just, depending on the game you're trying to play in whatever window, those kinds of things.

And we had a similar thing at Kalo where what happened was there, basically as our cat continued to rise, when we introduced laser engraving, it basically supported the entire next tranche of customer acquisition. By creating that sub additional $4 in margin or whatever, that allowed us to continue growth was all built on that.

And cuz the machinery was. So quickly you can either rent it or you could, you know, pay it off and capitalize it pretty, pretty quickly. It was like just so much pure margin creation so fast. Now there's some labor and other things there too, but that's a really interesting one for sure.

[00:39:22] Mike Beckham: For sure. You know, one other point, this is probably more of a digital crowd listening to this, but it's, it's a point worth making that. One of the easier ways for us at this point to add distribution is to get into an additional retailer or a different spot in a current retailer. And so it's not just, Hey, what can we put money behind, you know, in digital spend?

But we're also thinking about, hey, what, what's a product that maybe gets us in with a different buyer? Or, you know, sometimes we'll have buyers come to us and say, Hey, if you will do this, we will buy it from you. And that de-risks an investment in a unique way also.

[00:39:56] Taylor Holiday: I love it. All right, well, let's do this. We gotta, we've been going deep. This is great. Mike, Dave, let's, let's put you under the microscope here. Let's see if we can't take, take one of your investment. These that you're, Laying around with like, what are you thinking about? And maybe Mike can provide you some poke some holes or some thoughts or some give you the, the green light.

And I'll do my best to just sort of sit back and see what we can do here. So what are you

[00:40:17] Dave Rekuc: Yeah. So one thing I've always thought about is we're, we're in skincare and we're primarily face, we're basically selling a routine for your face. And that's the, that's the main thing that we've done thus far. But what was interesting is that when we acquired the business, it came over with a little bit of a wider suite of products.

It sort of dabbles in body and to the point where it's actually, it's very difficult for us to build a funnel. To a bar of soap that costs 12 bucks. It just doesn't work right. So what I'm interested in doing is replicating some of our success that we have on face in, in some either body or in shower.

And I ran an analysis on our SKUs that said, What is the same unique repeat rate on the same item? So item to item. So cactus concentrate, they, they tried the cactus concentrate in a bundle on a mini, it doesn't matter, and came back and purchased it in some way that leads the pack. But I found that two of our items, two of our bars that are used in the shower.

Are among the highest unique repeat rate on the item, and they're right up there with our face skis. But again, I feel like we're missing sort of a well-rounded shower kit type product. And I was looking to invest in bringing in you know, a, a wet shampooing conditioner or a shampoo baring conditioner into that to make a total shower kit that I can now drive a funnel to and start to sell.

So that's an example of, of something where it's, it's, it's a category, slight side step. And I'm looking to create the acquisition as well as sell to my existing customers on that.

[00:41:46] Taylor Holiday: what do you think? What questions would 

[00:41:48] Mike Beckham: I mean, it seems plausible. Friends with Jeremy Thurswell who, you know, he and his wife run Kitch and I know that the, the dry bar, the, you know, the shampoo bars and stuff like that has been a home run for them. So, I mean, it, it sounds plausible. How much do you. I guess, here's a question for you, Dave.

How much is it I wanna watch behavior and how much of it is I want to talk to customers and hear qualitatively what they're saying? How do

[00:42:14] Dave Rekuc: Yeah, so, so, and again, so we really have not been a company that is habitually creating product for the. Majority of the time that we acquired Bamboo Earth, the product set that we acquired it with was essentially the product set until a year and a half ago. We introduced four products. So this is not a business that has the, the, the muscles built for routinely introducing products.

But what I'm doing today is I'm looking to to create a list of products that I think. Makes sense from a category expansion because they create an acquisition, they create a cross-sell. Then I'm gonna go survey my customers about it. I have a, I have a huge, I have a 500,000 cost, you know, emails that I can ask about this if they're interested in this type of product from us.

I don't really believe in price point surveying very much. I'd be curious if you, if you do that at all. But I can go ask them and get, get back a level of a level of interest or even make them rank a variety of different products for me.

[00:43:08] Mike Beckham: Yeah, I think I mean my experience has been that when we, when we ask our customers what they want and when we really listen to them, it's, we just have not had, we've, we've not gotten caught off guard by the response on launches. I, and on your price point thing, I, I don't know that I'm as big a believer in like telling somebody price points and saying, which one of these we wanna pay?

And, and this is harder to do digitally, but I'm a big believer in if you say, okay, here's option A. Here's what it looks like. Here's what it feels like. That's this number. Here's option B. Here's what it looks like, feels like that's this number. Here's option C. Which one do you pick? That they're really good and really insightful in giving you, you know, and so, When we're doing product dev, we're, you know, we're talking about what is the size, what are, what are the ingredients, you know, and, and the different things that, that will move it up and down on the, the spectrum in terms of cost.

And so what I, I think customers tend to really struggle in a vacuum where you just say, Hey, how much do you wanna pay? For this water bottle. But instead, when you show 'em three different, you know, here, here's, here's three different looks, lids, whatever. And you just show 'em and you say, okay, which one of those are you picking off the shelf?

They're like, oh, I'm, I'm going with B. They're very good at that. And that can be really helpful. So we've started to, we'll do a lot of really broad stuff. Digitally, and then we'll usually pair that with smaller focus groups, which are more time consuming, but have helped us to get some qualitative insight and some of the more dialing in stuff.

I mean, we really, our, our strategy has been to think very little in terms of marketing with how we do product dev. I guess we think a lot in terms of what are the channels that can work for us, where we can get the distribution, we think. About is there, you know, clear market demand, but we don't, and this is probably a weakness even, but we just don't spend a lot of time thinking about, Hey, where does the number have to be in order to pay Facebook and in order to make it all work?

And, and maybe to some extent that kind of counterintuitive way of thinking in today's climate has worked. In our favor because we don't spend very much on marketing and we do get a lot more organic walkup demand because we're creating products where it, it's, it's what our customers looking for and where the price point, it's inherently attractive.

I don't know. I mean, you guys, you could fill the Grand Canyon with everything you guys know about marketing funnels that I don't. But anyway, I, I think your, your thought processes really sound, I mean, probably Dave, the reality is you're under investing. I mean, you've got natural. Advantages in terms of your cost basis to get something out there is very low.

The upside I, I mean, if you added 5 million in top line revenue, it would be dramatic for the, for you, you're the financial performance of your company. And so I think from the outside, what I hear is I would build the internal capability to get a lot of shots on goal to get 5, 10, 15 shots on goal.

Because if you go from. If you develop that capability and you go from 10 million top line to 20 million top line, you're gonna be off to the races and 20 I, I, it's, it's counterintuitive, but it, it may be a lot easier to go from 20 to a hundred than it was to go from, you know, five to 10,

[00:46:25] Taylor Holiday: Well, you're, that is exactly what you're talking about. As the customer file grows, the investment risk of each corresponding product decreases. And so you, you can take more shots that can grow you more rapidly. Whereas there is, like, there's not risk of ruin in being wrong at this point, but there's, there's, there's certainly impediment to growth risk.

But, but Dave, to this point though, like, what do we think? You were talking about the production capacity. Let, let's just use the, the bar of shampoo, which I. Set aside, whatever. I think about that for a second. Let's just use it as a profile. Let's say we're like, yeah, great. What is the actual capital requirement to produce a meaningful batch plus photography, plus marketing, plus like, what are we talking about?

Are we talking about a hundred thousand dollars? We talking about $200,000? Like what do you

[00:47:06] Dave Rekuc: Tens of because Yeah, seriously. It's not, it's not even close

[00:47:10] Mike Beckham: you do it.

[00:47:11] Dave Rekuc: be because,

[00:47:11] Taylor Holiday: Yeah. Then, then to the point earlier, the a hundred x outcome at 5 million in revenue against such a low risk pro, it's like,

[00:47:19] Dave Rekuc: the, the other thing here, Taylor, we can actually separate the test from the scale because like we, we now have a contract manufacturer relationship where we can go to our contract manufacturer and say, okay, we went around these at five, 10,000 10,000 quantities.

What does that look like with you? And they go, okay, here's your pricing. And I can go, okay, let's go make 500 in house. we go make 500 in-house, and I'm buying what is essentially commercial cooking equipment. So like, even if I have to buy something, it's like, oh, okay, here's $750 of CapEx, like , like, I'm not even sure we're gonna expense seven $50 of cooking equipment.

And, and then the rest is the formulation where again, we like, we, we actually currently have that resource. That was that that's something that the founder that came in with did their own in-house formulation. The formulations, as far as the market are concerned, are relatively simple. But they are effective and it's, it's in the, in the space for what our, our brand promises.

So, no, it's, it's tens of thousands investment,

[00:48:13] Mike Beckham: Important point here, just. For everybody listening, it's come up a couple times, the last couple d few days. You don't have to even hit good unit economics on a launch. It's, it, you know, it's, it's not, it's not gonna be material to the company's finances. And so I see our team sometimes get hung up on, they, they wanna make sure the unit economics work and everything, and so they will overcomplicate the launch process of like, well, the o Q on this is 2000.

And I'm like, well, Okay, let's pay through the nose. What are, what's 500 cost? I'm fine. I don't care if it's a dollar more expensive. Like who cares? Like, we're just trying to prove the concept. And so like once, so I, I use this analogy sometimes. I think it's really good for product dev also. Imagine Texas hold them, right?

So Texas hold 'em is basically, When you've got a great hand, you bet heavy to push everybody else out and when you have a marginal to we can you try to pay as little as you can to get more information. That's it. That's the entire game. That's product dev. How can I spend as little resources as possible to flip over the card?

Because once I see the card, I know whether or not I want to put more behind it. And it with what you're saying, Dave, it's like you can put so little money in to, to flip over the shampoo bar card. Why wouldn't you like, and why wouldn't you flip over 10 cards like that? That, that would be my, my piece of advice.

[00:49:42] Taylor Holiday: That's exact. Yeah, that's, that's. Is exactly right. It's like this should become a quarterly part of our process. Especially too, we have these other thing, which is like the burgeoning Amazon thing, which like is just a whole nother part of like demand capture, but it's sort of like, Hey, let's throw up Aesop's nav here and just work through them one by one and take a shot.

You know, like that. We know that there's a demand at a meaningful level for a lot of this stuff. We can make it at a low cost ready, set go. So Dave, you doing?

[00:50:07] Mike Beckham: started here. We started with. Where does Amazon have significant demand that we could launch into? We know there's a bunch of people already shopping for this stuff now that we, we obviously have a different perspective. We're not trying to draft off Amazon keywords, but Yeah, like you guys are playing in product categories where there's millions of organic searches happening and I can, for 10 or $15,000, I can throw my hat in the ring and see if something pops off.

Like,

[00:50:32] Taylor Holiday: mitigation.

[00:50:33] Mike Beckham: I do that?

[00:50:35] Taylor Holiday: Awesome. Well, guys, this has been, I think, a really cool, I, I don't know that I've heard many conversations in this lane, so I'm hoping that it will be a thing for people and that they'll find useful. It's obviously for a subset of people, but I, I will say that I've gone through this experience over the last year.

There is this transition that happens when you go from survival. To a new responsibility of trying to figure out what to do with the money that's in your bank account. And it's a, it's a whole new evolution for founders, I think, to, to sort through. And it's an important one. So I think it'll be a useful thing in the market.

And my last thing though is, Mike, you, you mentioned you've got a, you know, a good eight figure lump of cash sitting on the the old balance sheet. I, I've got a way you could deploy that for about 15, 20 ish or so, get Dave another human resource capture like. Tell me why bamboo earth isn't the right investment for simple, modern.

[00:51:20] Mike Beckham: Well, I tried to, I tried to put some money in Bamboo earlier this year. May maybe, maybe at some point that'll, that'll come on. I mean, what's interesting is we've been talking about this, this as you've got more cash than you can invest. I think acquisitions for the very first time have been something that are actually. They, they could actually make sense. The question starts to become, does it even if the cash makes sense, are you creating organizational pull in different directions when the, the primary golden goose is the simple, modern brand? And I think that that's where we all want to get, and that that's a whole different conversation.

That's really interesting. Like, like, I've got cash in the bank. The company has cash, but 99% of my net worth is in this little mark, this little simple, modern mark. And so that's the golden goose. And everybody needs to understand that. That's where you know, our, our, the bright future comes from. So making decisions, and these are not, these are more qualitative, non-numeric decisions where you're trying to say, How do I maximize the value of the brand and the standing of a brand in people's minds then, and we could listen, I'll, I'll throw one more dynamic out.

This is this, this is classic Mike. As founders, you're trying to maximize for quality of life and quality of life is loosely correlated to your net worth and to your cash on hand. Okay? So I, I've got enough money at this point. So I will make some investment decisions that are not necessarily going to net me the highest quantitative return numer, like in in terms of monetary terms, but they will net me the biggest return in terms of quality of life.

And that's a whole, like if we're talking about a public company where you're a C E O and you've got all these shareholders, like you're never making decisions that way. But if you're an owner operator, Like I am, then that makes a lot of sense, that it's like, Hey, I could invest in that, but I don't want, you know, like, yeah, this company came to me and you know, I'm gonna triple my money on buying this thing, but I'm gonna inherit all these problems and I'm gonna be in this industry I don't love and I'm adding all this complexity in my life and it's not worth it.

And so I, I get really interested in the ways that the, all those other dimensions stack on top of it. The best investors I know aren't just quantitative, but they're thinking about the, the much bigger picture.

[00:53:44] Taylor Holiday: Yeah, and, and I think it's funny, every question you answered, even. Mike, there's a bent towards that. Like what's the actual, is the product actually good ? Do, do the customers enjoy it? Right? And it's like that Rio to anything. Financial tends to be a, a good foundation. So, guys, this is awesome. I appreciate it if anybody's made it this far.

You know, they've, they've gotten some good, rich content, but where can people follow you two? Where's the spot? Is it threads now or are we still following you guys on Twitter? What do you think?

[00:54:11] Dave Rekuc: It's, it's Twitter

[00:54:13] Mike Beckham: I think team Twitter. Team Twitter.

[00:54:14] Dave Rekuc: It's Twitter.

[00:54:16] Taylor Holiday: All right. Okay, so what is it? Dave? Dave Cook and Mike Beckham. Both normal names on there. Mike, you have an initial,

[00:54:22] Mike Beckham: I think it's Mike

[00:54:23] Taylor Holiday: yeah. There we

[00:54:24] Mike Beckham: which somebody pointed out it to me is like, there's, there's other ways that the other things people associate with sm. So it's an unfortunate unfortunate little Easter egg there.

[00:54:34] Taylor Holiday: Awesome. I appreciate you guys both so much. Go forth, make great investments. I hope you all enjoy that episode. Talk soon.