The State of Ecomm Investing Pt 2: The Investor’s Perspective

[00:00:00] Taylor: All right, we are back today with part two of what has been a special look at the state of the current e-commerce investing market. And we've wanted to take a look at it from two different angles. We began first with a conversation with Dave Charn, CEO and founder of Fien. As a founder and CEO that's currently raising as a brand owner and operator and what his experience has been like in the marketplace.

And today we're joined by Jason Bornstein, who's a principal at Forerunner Ventures. And just quick, like log of the Forerunner catalog here. We've got Away, Aura, Glossier, Hymns, Pros, Curology, Ritual, The Farmer's dog. If anybody could give us the insight and what it takes to make venture capital work inside of e-commerce is this gentleman today.

And we have connected in a really cool way, we're trying to share more about in a second because he's not just, a money man and he is also an operator whose real pops can provides insight into his experience on the other side of the fence as well. So I'm super excited for Jason to give us the view of the market from the other way, let's get started.

[00:01:05] Jason: Thanks for having me Taylor. 

[00:01:06] Taylor: Jason, so good to have you man. You and I have connected just recently about a couple months ago and I wanna start a little bit about what connected in, and I think it's gonna help set up for the people a little bit about your experience. Most of a crowd is pretty tactical and on the operative side of things, and I think this will help you get some authority and credibility with them for all the skills that you have in that world.

But we initially connected because you, randomly emailed me after seeing a graph that we put out that was a scatter plot between the relationship between spend and CAC that we use as sort of part of a model for developing the relationship between those metrics, which is obviously critical for most e-commerce brands.

And you said I've never seen everybody else make the graph. I show it to every one of my companies. So I'm curious, like what is it about that graph that is so important to you and what's the point you're trying to make when you share it with brands? And we'll put it in the video clip for everybody to see it right now.

[00:01:58] Jason: Yeah. I'm so glad you mentioned this, I was gonna, lead with this as well because genuinely it's something that I've used for several years, across the 400 portfolio back at my time at Bonovo's on the marketing team there where I led demand planning, acquisition, and insights.

And when I saw you posted, I had actually just put together a presentation for our internal team about our portfolio for 2022 and how things were shaping up and, I've never seen anybody else do it. I'm not saying I invented it. I've just never come across somebody else that has done it, and so I felt like I had to get to know you.

For me, this really comes down to the efficient frontier of marketing spend. 

[00:02:38] Taylor: Where is that threshold? 

[00:02:39] Jason: Yeah, where is that threshold and how are you operating your business? In the context of the broader market. So with last year, we were specifically looking at, in our portfolio what changes had companies made and how did that impact their revenue?

Because there's this conversation going on in the market right now, which is that it's gotten a lot more expensive to acquire customers, a lot harder to do that. Companies like Facebook and Google and Instagram are basically eating the margin dollars of companies because they're competing against each other.

And are those last dollars that you're spending efficient. Could you cut 40% of your marketing budget and only see a 10 or 15% decline in revenue? That's a good insight to know. And there's no perfect science around this, but what I like about the chart, especially as you plot it over time and across brands, you can start to see trends.

[00:03:34] Taylor: So you brought up a point here, the idea of the last marginally accretive dollar that you can spend and the sort of the hunt for trying to identify where that is, and we have a partner that we work with called Retina AI that doesn't work in predictive analytic.

And one of the data points that they surface in their analysis is that over 50% of the dollars that they analyzed were never profit, for brands in our industry. And that's a hat tip to the era that we came out of I would say like growth at any cost and even never profitable cost.

What sort of sets up, I think, a good foray to our conversation today, but before we go there, I wanna just touch a little bit on your experience, cause I think we have shared friend and some another thing that we started nerding out on together. So Jason has a fascinating roadmap, which I would call the, like every young agency employee sort of dream career path.

It's like you went from Publius, then you go over to the brand side at Bonovos, and now you're in the venture side. So you've really seen this world, from all three sides, but at Bonovos you worked with front of mine, Nate Pauline digitally native on Twitter, for those of you that, that fall there.

And so one of the things that we started nerding out about was trying to connect the dots between demand creation, your job inside organization, and demand planning, his job as an operations person and how you guys synced those things. So can you share a little bit about how you guys thought about that process and how rare it is for those two sides of the organization to connect?

[00:04:58] Jason: Yes, it's incredibly rare, it really underpinned my five years. Nate and I overlapped for the majority of my time there, the five years I was there. This underpinned a lot of my effort and time at Bonobos, which was I recognized that the planning team had their stuff together, they were coming actually from traditional retail backgrounds.

They had systems in place, they had calendars, they had an open to buy, they were very precise about what they wanted to do and why. Were they entirely accurate always? No, but they had a whole plan, it was very impressive. And that built influence in the organization. And my concern with marketing is that it owns the largest P&L item outside of inventory typically.

But it's often a service function. It's often that the planning team and or the finance team comes to marketing and says, here's your budget, here's your revenue target, have at it. When in fact, I think marketers, not just because they own the largest flying item, but because they're the ones that are driving the revenue through their strategies, should have a seat at the table and should be informing what that budget is and what that revenue target is.

And what I learned with Nate was that, we each had different pieces of information. He knew when products were gonna launch, he knew what products were gonna launch, especially new ones and ones that they thought that they were gonna do very well and that they had bought deep inventory into. We, on the other hand, knew when catalogs were sending, when they were gonna hit, how many of them we were sending.

And so together we could create a smarter plan, and marketing could be as influential in the organization as planning. 

[00:06:41] Taylor: You were like speaking to my heart in such a very real way. If I could sum up some of my career ambition, it would be to give more marketers a seat at that table because what I have seen so often is that there's this organizational workload that you just described, which is that finance and planning put together some model of the expectation of the performance of the marketing, and it treated like a service function, here's your objective, go achieve them. 

But the constraints that they build into their methodology, misunderstand how marketing works and what levers are available to change the outcome. So often I'm trying to undo what they're really asking for to try and figure out then how we could better deliver it.

And then also, like you said, connect the dots between these siloed sets of information. What is the products that we're making? How long do they take to produce? What is the actual margin on those different units of sale? What is the expectation? How many do we have into, merchandising and ad accounts is a phrase we like to use of like choosing what we're gonna create demand for and why?

Because so often you'll get a media buyer that's just acting independent of that information and they're just driving to the best performing ad, with no consideration for whether there's inventory available for it or whether that's the highest margin scheme, like none of that. And so, often I see that it just gets disassociated or on the forecasting side, The spending CAC expectations from finance don't tend to be rooted in the analysis that we began with, and so you have this unrealistic expectation of performance over time that doesn't have a sound initial foundation. And so these groups unifying feels like a huge next step for the evolution. 

[00:08:12] Jason: It's a challenge that I put out to marketers, because part of the reason that things are the way that they are is because, marketers need to be doing more to prove the case.

It's unfortunate that we don't have that seat at the table, but we can, and that's where being more analytical, being more minded about putting dollars to work in a smarter way rather than just putting more dollars to work and you build credibility in the organization, it is entirely possible.

I have no doubt that it is possible, but with the state of where the market is today and how a lot of the dynamics have taken out on teams, there's a challenge ahead for marketers and that's what inspires me and what connected us, is that opportunity, 

[00:08:58] Taylor: That's right. And when you get it right, it's really powerful, and it almost feels like this like reaching across the aisle to borrow a political metaphor here between ops and marketing to see the value in each other, to understand what each can offer each other to do better at their own job, ultimately ops fails if they're sitting on a bunch of excess inventory and the balance sheets overstocked and that doesn't work for them either.

That's not gonna make them look great. And so this connection, the sy intimacy versus in the worst form degrades the finger pointing, like you ordered their own product, you didn't sell it? You did, and on, 

[00:09:29] Jason: You're all on the same team. It's the thing that you wanna remember is that you're all on the same team, you're all working towards the same goals, and why not set those goals together? 

[00:09:40] Taylor: Okay, great. So we've established that's where Jason and I connect, that's why we're friends and that's why we're here today.

So I wanna now dive a little bit into the market thing that we were talking about. And earlier today I was reading through Kristen Green, so the founder of Forerunner, her sort of thesis statement when you guys raised your most recent fund. And so for those of you that don't know it was your sixth fund, I believe that Forerunner has raised, and it was a billion dollars back in February of 2022.

And I wanna say back a little bit about what I heard in that, and then you tell me how your view on this specific issue of specifically the consumer. It sounds like the thesis of Forerunner and even Forerunner seems to be an avatar or a metaphor for a specific type of consumer, is that Forerunner is connected to the idea of understanding how the consumer will behave, and Kristen referenced a lot the next decade. 

She referenced 2032 a lot. This idea of looking out and understanding what consumer behaviors will change or evolve to over the next decade. And so with that in mind, I think about this past year. So you guys raised your fund in February and today we're sitting, coming off of July, 2022.

Consumer confidence hits an all-time low as measured by the Consumer Confidence Index. Then I see Forerunner pivoting into more B2B investments and a sort of a evolution of the definition of consumer to include corporations and businesses. And it has me worried about the future of the consumer a little.

And so I'm curious, how has your thesis changed and what is your current view of the future of the consumer at Forerunner? 

[00:11:09] Jason: Tell me a little bit more about your worries first? 

[00:11:12] Taylor: So I think that we're all sitting on the precipice of, perceived recession. We have all this data around consumer credit issues. I think I've watched in our industry on the business side, this swing from excess in a period of excess in 2020 and 2021, into a sort of reckoning to now have to realize that we were overstaffed, overspent, overcommitted in so many ways. And it feels to me like there's a lagging indication that the consumer might be experiencing something similar.

And so I wonder if in the near term, and you guys would look out at decades, obviously there's technological innovation beyond that, but over the next year, two, three, are we seeing that the consumer markets and the consumer product markets in D2C might not be the area of greatest investment return for an organization like yours?

[00:11:57] Jason: Ah, yeah. I hear you. So what I'll say is I believe, and we at Forerunner believe that consumers are resilient. You certainly saw this through the pandemic, where people relatively quickly mobilized and changed the way that they were living their lives. And that lasted for some two or three year period, bringing us up to now, and this has happened before. 

You think about the Great Recession, I don't mean to understate the challenges that individuals face, and the difference is the different types of challenges that individuals faced based on a variety of factors, but ultimately we as people adapt.

So that makes me feel more optimistic and I think about this market right now. And you talked about access, the last decade really. To go back to Kirsten's piece, the last decade was really a gradual buildup of excess. People spending more time online, connected to their phones, more time on social, buying more things, spending money on services, spending money on experiences in ways that they weren't able to before.

And it was this buildup that then, the rug was pulled out from under as a result of the pandemic. And now we're getting to a point where reality has set in or a different reality has set in. And it's one of less exuberance and it's one that's more pragmatic, and so that's a word that I like to think of when I think about the consumer going forward as a pragmatic consumer.

And how is a pragmatic consumer gonna be spending their dollars versus an exuberant consumer, and I think those look very different. And so you think back to, really a lot more needs than once. And a lot more of the systemic issues in our society, in our economy, in our culture, rather than those that are innovating around the edges of that.

As far as, brands going, we became, you mentioned this at the beginning, we became known in the market for backing many of the first and second wave digital brands to reach scale. I worked at one of those companies Bonovos had raised a hundred million from light speed, Excel and Forerunner across several rounds.

And we continue to believe that this is a viable business model and we're continuing to make investments. The bar has certainly gone up there, but actually, as we have always done since the earliest funds, we're looking across categories, across business models, marketplaces, software services, products.

We're looking for where people's needs are not being met. Where there's subtle shifts in behavior and mindset amongst people that create opportunities for companies and brands that matter to be built. And so sometimes that's a product company, and sometimes that's a different type of company depending on the category.

So we are continuing to invest there, right? make no question of that. The challenge that these companies face right now is just finding the right source of capital for their goals and for their growth. That's one of the most important learnings because what happened over the last decade was that it became easier than ever to start a brand online or a digital brand online.

You have a playbook, a tech stack. This didn't exist when Bonovo's, started. We had a whole engineering team in Palo Alto. We had to build a lot of this stuff that exists today and that people can use to spin up a business quickly. And that is incredible and powerful. But what that's meant is that there's a lot more competition.

It's a lot harder to stand out, it's easier to build a business, it's harder to build a brand. And so for us it's raise the bar and change slightly what we're looking for. 

[00:15:32] Taylor: Okay. So that's great. That's a perfect step. So what, raise the bar, let's be practical for the founders. Listening, thinking about what is the bar?

Because I think maybe historically there were certain parameters that would define what appeared to be a worthy investment opportunity for people in your world, and now your phrase the bar has raised, can you gimme some specific examples of what specifically has changed. What is the bar? What was it and what is it now specifically and what you're looking for? 

[00:16:02] Jason: Sure, and I think the past few years were a whirlwind and really were typical. And so what I'm gonna reference are things that actually were typical, it years, five-ish plus years ago that are now coming back to the forefront as being as important as they were before.

And so, what I'm referencing, like before and after that's what I'm gonna be thinking about. So number one is that funding rounds catalyzed by inflection points. There's gonna be less of a pull from investors and inbound saying, I'm gonna give you money, you just raised money, and there's gonna be more of what have you learned?

If you have this new money, what are you gonna do with it? How confident are you that you can deploy those dollars efficiently? there's different types of inflection points, but as a founder, you want to ideally be having a round catalyzed by an inflection point. Less so because you are running out of money, hopefully, that you're not in that position.

And unlike that's not great inflection point, it's gonna be to sell, right? Unlikely that you're gonna have an investor pull in the same way that you had. So secondly, founders who can attract resources, and there's gonna be greater scrutiny around this and what that means, that means being out in the market as an ambassador for your brand.

That means raising dollars, that means forging partnerships, and you're a salesperson as a founder on a variety of different fronts, and you have to demonstrate that you can attract those resources on an ongoing basis. Third, and I would say maybe this is, more of one that was overlooked over the past few years is clear unit economics and predictable revenue.

And I wanna underscore predictable because you wanna see a trend, and you wanna start to see control over the levers of the business. 

[00:17:50] Taylor: Yeah. Can I double click on unit economics? So can you give me what is good there for you? What do you wanna see? And obviously it's category dependent, there's a lot, I'm careful to generalize too much here, but is it about, is there, like, when you think about that, do you think about it in relationship to LTV to CAC models and some timeframe? Do you think about it in cash conversion? Like what is the actual sort of idea when you say unit economics that you're analyzing? 

[00:18:17] Jason: Sure, so there's more of the checking the boxes on just what does the P&L look like? What's a product margin, what's a gross margin, what's a contribution margin?

I'm thinking more at the customer level. What are you paying to acquire a customer? How much are they spending with you over some period of time? How known or unknown is that? And what does that mean? LTV to CAC I struggle with because it works for some businesses better than others. It's simple, it's elegant.

I like that part of it, but it misses what's going on underneath. And ultimately this is about cash flow. You're putting cash out to acquire the customer, when are you gonna recoup that cash and start to make profit on that cohort of customers or that individual customer. And I remember at Bonobos we used to get you need to have a nine month payback or a 12 month payback.

And I would say, why? and I was challenging that because fundamentally I understood that it was about cash flow and cash balances, but it wasn't being presented as that. 

[00:19:15] Taylor: One of the big things that we've tried to start educating around is less LTV to CAC and more around return on invested capital relative to the cost of that capital in some time period.

And to try and help our founders and operators and partners think about it like an investment opportunity that the acquisition of a customer is a consideration on, you have some hurdle rate, some idea in your mind about what kind of return you'd be willing to deploy that cash against, and in some time period, depending on your current cash position, the confidence in that number.

And trying to get to people to think about okay, hey, imagine I was your sort of permanent personal financial advisor and I brought you an opportunity that was a 50% return on invested capital in the year, every one of us would leap at that opportunity, that would be an outlandish return on capital.

But in our world so often, either we've pushed the, so far out that the return is actually negative over a year or some range that we have to actually tighten the screws, or in some cases we're so conservative relative to the expectation that we're sitting on this outlandish return, and so we're under capitalizing the opportunity, but just really trying to reframe it from LTV to CAC into thinking about it like an investment.

Of a deployment of cash against some acquisition of a unit, a customer that's gonna provide some value to you at some rate. And then the question from there is not just the current state, but going back to our initial conversation, the elasticity of that, if I were to deploy more dollars, how much is that gonna degrade and how quickly?

And so those two things really become sort of the foundation for how investible is this funnel or this acquisition machine? 

[00:20:51] Jason: What I would add is that, you think about the public markets and we have more consumer companies going, public variety of different businesses. When I say that, broad.

Like I'm thinking Spotify, DoorDash, Airbnb, right next to Warby Parker and Allbirds, Etsy, Chewy, They all have slightly different business models, and when I think about software, there's a very clear and defined set of metrics. That demonstrate whether or not you're best in class. When I think about those companies their business models are slightly different enough that they're all not reporting the same metrics.

That's right. Or they're not reporting metrics that can be used different to calculate, the metrics that an investor would look at. And it's challenging, right? basically cannot understand the CAC of these companies, they're not reporting it.

It's intentional, but also it makes it very difficult to understand what's going on and understand what is best in class. And so that's something that I've been talking about, with our team is how do you start to track those, define those, I think you can do it, moderately well with revenue and sales and marketing spend, but even sales and marketing spend includes a whole bunch of things, that is beyond advertising though. 

[00:22:01] Taylor: We don't agree on that, we've been talking about rewriting gap for e-commerce, like how do we actually create a shared syntax that allows us, because one of the even things is we move as an agency, as you move from business to business, even something as simple as when we all say revenue, in every instance of my a hundred customers, somebody means something different.

They're using some definition of a shared word that means, and count is calculated fundamentally different. So just to create shared language, I think it's one of the things that creates friction in our industry is that we can't, because we can't actually agree on these definitions in some way.

What is contribution margin? Does it include ad spender? Like these little variations 

[00:22:39] Jason: Where do you put customer service? Do you include creative and or brand spend it when you're calculating CAC? You can debate it back and forth and be as conservative or liberal as you want, but it's generally inconsistent.

[00:22:57] Taylor: That's right. And so it creates conflict and I agree. So let's go to the public markets there, cause this sets up, my next question is, 

[00:23:04] Jason: I had a couple more things but we should go to the public markets. No, last I'll summarize it is really, diverse and unique go-to markets. I'd like to see more companies spending their first dollars not on Facebook and Instagram. And you're starting to see that with TikTok or YouTube. There's got to be other channels. You can't be relying on one channel and the way that companies were relying in the past, and part of that too is being multi-channel.

Starting off as a digital brand gives you a lot of power and the ability to choose different directions. And there's different times when you wanna explore different channels, but what does it look like to do drop ship and sell on other marketplaces? Or what does it look like to go into different retailers when you start to see a poll there?

And the last piece that I would say here the final point I'd make is this appreciation for loyalty. So we've talked about CAC and LTV, there's so much more of a focus on acquisition and on how much you can pay to acquire a customer and not enough conversation about this idea of growth by loyalty, growth by improving the LTV metric.

And that has a lot more to do with how complete is your offering and what promise are you putting out there in the market? What expectation does that set with your customers or potential customers? And then how are you delivering on that? and starting to turn the dials on that and having teams think about that rather than this sort of blunt object of spending more money to acquire more customers and then not paying attention to them once you've acquired them.

[00:24:31] Taylor: So one of the things that we talk about, so I'd be interested cause, this idea of loyalty as a movable item tactically is something that I struggle with. So one of the things that we'll often say is that, LTV is a genetic attribute of a product. So in other words, if you sell mattresses, it doesn't matter what tactical marketing you do on the backend, I just don't need that many of them versus if I'm buying a consumable.

So the difference, in product level. So one of the things that we'll talk about often is that LTV growth and you use the race phrase, complete offering, which I like as a product development problem. And the businesses that I'm really fascinated by are the ones that, let's use Aura Ring, maybe as an example, that combine hardware and software and part of the residual LTV or value comes out of at the software layer.

Or another thing that Chris referenced a lot in her article was this idea of digital goods or other ancillary information objects or services. And I think about hymns another one of your examples where you're providing consultative medical services as a model and supplement to product. How much of that LTV, because I think people can misallocate attention to this problem in some ways. How much of it do you see as like a tactical marketing lever versus a sort of actual business or product problem? 

[00:25:47] Jason: More the latter. Okay. I think there's a natural study. Say it's really hard to move retention curves once you start to get out into things asso toting.

I actually really like the example that you shared with me with one of your brands where you all realized that there was a big drop off in second purchases within 60 days and then put together. I think it was a bundle of products that were smaller and it totally changed the trajectory.

That's what I'm talking about and for me, so you have to like, figure out what that looks like for your matches. That's just a tough category and purchases. It's an extreme example but there's plenty of things, that are more in the middle where you can get creative, and that's the challenge. 

When I say about the promise that you put out in the market and the expectation that sets and how you deliver on that's really talking about, those 0 to 60 days or 0 to 30 days and that big steep drop off from the a hundred percent of customers that made a first purchase to the, 40, 50, 60% that made a second purchase, because once you start to get, beyond that, you're, it's really hard to move the needle. Better to focus on that and more of the upfront part of it than to be focusing on the long, tail of it.

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[00:27:52] Taylor: I agree, so what Jason is referencing is front end offer design. So, and many of you have heard me use this example before with Bamboo Earth.

If we sell a single unit of our cactus concentrated site, bestselling skew, the repurchase rate and the timeline to a secondary purchase is really long, it's a pretty good size product, you just don't need that much of it when you use it. And so the LTV to CAC on a short term basis, we'd like to look at it like a 60 day window because again, bootstraps not a lot of cash is not that great.

But when we move to a sample size set of products in a sort of, we call it the, the ultimate minikit, which is just a way to explore a new brand, try a few products, the repurchase rate on that is much faster and the LTV to CAC economics work a lot better. And so you develop this sort of question about what's the entry point into your brand, what's the right way to develop a relationship?

And it's, this is going all the way back to sampling at Costco, right? What's the digital version of creating this sequential purchasing behavior, that deepens the relationship over time versus buy everything from me, you've never tried it all before, here's $700 of all the product ready to go.

Yep. Okay. That's really interesting. So, continued loyalty is a big piece of that. 

[00:29:01] Jason: I would just like share like there's a handful of companies in our portfolio that have sold generally just one product and have reached incredible scale, they could have introduced more sooner and you can debate whether or not they should have, and some of them are starting to do that now, but it just shows you that when you get something right, it works. 

[00:29:22] Taylor: How many of those was subscription, a core component of them enabling that?

[00:29:27] Jason: Almost all of them. 

[00:29:29] Taylor: Yeah. And that's what I've seen is the only way to really produce at a single skew level, that kind of disproportionate return is to have something that makes sense on that purchasing function. Like it's just, yeah, there's no way to get to that outsized level of return and scale without it where you can invest so heavily or aggressively in acquisition because the returns so good.

The that's one of the only levers I've seen meaningfully alter those economics on the LTV side is to introduce that as a purchase type. 

[00:29:56] Jason: And we've seen it with premium products that are quite expensive that I think most consumers would say, that's too much for me, and you just need a smaller group of customers that are interested in that offering.

We've also seen it work with products that are, more middle market or down market, and have more affordable price points. So, price can play into this as well in the dynamics of it, but it's doable, it's attainable no matter what part of the market you're going after.

[00:30:24] Taylor: Just because I saw you guys, kristen referenced it, in this a lot, web three and crypto as part of the consumer trend and behavior that you're watching. I also today was listening to Tyler Haney from Outdoor Voices on a podcast, and she brought up that, community was a big part of her vision for the brand early on, and they asked her like, if you were to do it again, they did a lot of run clubs and early very physical and her answer was that the money that she was spending on advertising, she would redistribute to the participants of the brand and create ownership and reward at the individual, consumer and user level, which felt like a very web three ethos around like watching the hundreds create their sort of NFT program and value creation around an asset for the community and turning them into these super affiliates.

Like what do you see as like the evolution of loyalty out of the like, give five, get five coupon program. And we all, we're running like, what is the next way in which we incentivize the community to actually engage at a deeper level, to create more connection to the brand in a way that fuels that sort of growth?

[00:31:28] Jason: When I think about loyalty programs, I think about some of the largest brands that are in or retailers that are in competitive categories that have created very, large scale and tremendously powerful programs. So you think about Costco's actually a great example of this where it's a membership. 

Nike's done an excellent job for an Alta or often reference here. Target, REI, Starbucks. Those are the bigger ones, then you think about all the airlines and hotels. When I think about loyalty programs for emerging brands, I actually think less about a program and less about points and more about this mindset where you're leading with loyalty and you're thinking about what are the things that I can do for my best customers, my top customers?

What are the things that I can do for that? If you think about your top 10% of customers and they may be driving a large portion of your revenue, the next 10% or next 20%, that could become that top 10%. What can you do for them? And you don't have to come up with a program, you don't even have to have a software starting out to do this.

Just start to see what matters and what moves the needle with this group. So it could be early access. ideally you're finding things that have low actual costs to you and high perceived value for others. That's why airlines and hotels work so well because, when the plane takes off or the night passes, if the seat or the room is empty it's of no, difference to the airline.

Very minimal marginal cost, but it's such a delight for you if you get a free room or an upgraded room or an upgraded seat, that matters a lot. So you wanna find those things. You could do some discounting or some, promotions off of it, you could do invites to events, you could, engage them in creating products with you or trying products as you're developing them.

There's a whole list of options, and I always encourage, like what we were talking about is identify the thing, the place, the moment that you want to try to move the needle on. Ideally, it's something about the promise you're putting out there in the market and, or like that 0 to 30 or 60 day window and then start to try a few things out.

You may ultimately land on a program, down the line once you've reached a certain scale and once you have an understanding of the levers and economics, but so many loyalty programs fail because when you create points, you're creating a currency. Currency has value. You have to be keeping track of that as a company, and the profitability of that.

It's so hard to measure on an incremental basis how you're moving the needle when you've got points factored into this. And there was at one point when, when the markets were upside down at the beginning of Covid, where there was commentary around how Delta's loyalty program was worth more than the airline itself.

It had some value, some book value. Because the points are equivalent to dollars. And so I always caution people, you don't want to go down that path, especially as an early and lean company, try all the other things like get creative there. I was talking to one company recently that has a subscription offering and we were, they had done a lot of really excellent work on what a program could look like for them.

And I said, let's step back and let's think about what are these points where you're seeing people drop off. And they said at the one year mark for this company, it's a bit different what their offering and I said, okay, what would keep people around after that one year mark? How do you do something special for them at that point?

What's going on with them, that they're dropping off and that you are not the right fit for them anymore? And let's talk about that moment in time and try to fix that rather than create a program which can be a lot to manage. 

[00:35:16] Taylor: Yeah, there's something very human about that kind of question too, which is just yeah, what is the issue and what are they experiencing? And maybe the solution's simpler than we think. Like it may not require all of that. Maybe there's something very human about that moment in time that could be solved differently. So I like that. Okay, so we've got two more things I want to go through, one is this idea of what's happening with price in rounds and investment.

And this is where I wanna go back to the public markets and reflect on, one thing we've kept track of is like this index of e-commerce related public entities from the consumer brands, the ones you mentioned to the sort of the software layer that surrounds it. And there's just no hiding that it's been a blood bath.

It's then I think the collective index is down almost like 78% or something over 2022. Now that mimics a lot of the other hyper-growth stuff that got fueled by Covid, and so there's certainly factors there, but there's no doubt that the, it brings into question, sort of the overall ceiling of the price that some of these things reached, and that sort of then flows down into a set of late stage investments and on down the chain.

How are you seeing the market dynamics affect price in the deals as you're looking at them now? And what does that do to a bunch of the businesses that raised under that previous thesis as they sit now trying to think about and making it to their next round? And how much of that sort of zombie brands that don't actually have a path to a next round without taking a massively diluted stake that probably deteriorates the reason for effort going forward. What are you seeing in the market as relates to price? 

[00:36:43] Jason: I would say, the last stats that I had seen and you'll see, law firms like Cooley put these out and other organizations that are working across the ecosystem the resetting of rounds had hit later stage rounds all the way down to B, but not at the series A in seed.

we're starting to see that now. It's going to play out over the next couple of quarters, and that's where we at Forerunner are investing. So we have certainly made some investments over the past year during this market shift, but price discovery is still happening, and that's something that happens on the investor side and on the founder's side.

The reality sets in for a founder of if you need to raise money over some period of time, you're gonna have to take a hit eventually, most likely, you could try to weather the storm, hopefully you have enough cash to do so, and you're operating, in a lean way, but even if you're not, like the idea of taking a hit on valuation just gets you back to reality and sets you up for success in the long run.

So it's a question of how and when you want to do that. I'm not saying every company's gonna have a down round or a flat round or need to, recap their cap table, that's not what I'm suggesting. I'm just saying that there's a new reality and as a founder, you want to think about how you set yourself up for success, and that may be one of the things that you have to consider.

[00:38:05] Taylor: What about governance? What is Forerunners point of view on, I like the phrase setting the entrepreneur up for success. And I've come to believe in being a CEO now for 12 years, that governance actually serves me like authority over me, and submission to an additional layer of people that care about the entity actually creates the constraints for me to be most successful.

I've come to really appreciate that premise, and I think a lot of the last year, not many early stage e-commerce businesses I know have a external board with governance authority over the founder and I think the founder led era set that on the back seat in a lot of ways. And I think what happened in tech spilled over into our industry, and I see that very rarely.

what are you seeing and what do you believe about governance for an early stage business in terms of how they operate? 

[00:38:51] Jason: I think it's important to level set here that from my and forwarders perspective, I, we are on the team of the founder and the company that we are partnering with. And so that's an important foundation to set and to have, ultimately this is a relationship business. It's about building trust, especially early on. 

And this is for the good times and the tough times, and so when you hear a word governance, I think it sounds somewhat technical, a bit like what is this? It sounds daunting, right? There are certainly reasons for that. When we're thinking about early stage companies, we're trying to balance what is the appropriate level of touch bases and information sharing that we are getting as investors, and that we're setting that expectation with founders without bogging them down.

Does the seed company need formal board meetings every quarter? Probably not, series A, yeah, you should start doing that. Series B for sure. You have to get in this rhythm, it's more about the rhythm, what's important about what's going on in the business, what's material, what's going on, underneath not just the top line kind of lagging indicator metrics.

And those are things that you're exploring and learning about as a founder, as a team, and that helps us as investors stay up to speed in the business. To provide guidance where appropriate and where a founder's looking for it. So that's what it looks like for us, and then over time you add more structure around that and it's a gradual process.

[00:40:28] Taylor: Yeah, that makes sense. And I can appreciate the sort of tension between bogging things down in bureaucracy and process versus wisdom and oversight that will informs things. 

[00:40:39] Jason: We also wanna no deal, no company, no founder, no team is the same. And so I try to, look to the founder to take the lead on this and show me what's important to them and where are they over-indexing or under indexing.

And I try to pick that up and I'm very, there's a lot going on my side of what I'm not sharing just in an effort to let the relationship develop, and then have things be shared over time and you don't wanna overwhelm people with too many things. So I'm always thinking about that on my end.

And so it takes different forms. It's important to say that because there's not just one structure that works for everybody. And so you're on a process of figuring out what that looks like as a founder and a new investor. 

[00:41:27] Taylor: Similarly, so, part of this is all just trying to explore how the process of fundraising has changed for the founders.

And it seems again, perception of the market was that there was a lot of momentum raising, meaning people would have a deal and it was there and if you wanted it, you just have to get in now. And there's minimal space for diligence. There's no offering of boards either. It's just there's so much demand for this available deal and it gets so hot and trending that it, like the terms of it seem to be very favorably.

For the founder and brand, it seems a little bit of some of the stories and era that we came from. And it seems now that the difference has changed and that there is more diligence, there's more requests for information, there's more oversight, there's more potential requests for governance. On the diligence side, I'm assuming you guys have a really thorough process, but is the kind of information that you're requesting or the level of access changing, or the amount of time that you wanna spend with the information is that changing at all? How is that dynamic playing out in your sort of process of evaluating a deal? 

[00:42:26] Jason: I would say this is another good example of things, going back to what was typical, five years ago and what has been, atypical over the last few years. Atypical of rounds coming together over a weekend.

Over zoom, not meeting people in person, not having a deck, not having a data room that's gone away. But the return to what we're looking for is what we had always, looked for prior to this situation. And I'm not saying that we undercut our diligence necessarily on deals in this time, it was just a more challenging environment to ask for that stuff and to expect that.

And so you had to make a call as an investor on what were the most important things or questions that you wanted to have answered. Now we have a bit more time to marinate on that, and most importantly, to get to know the founder, I think it's so critical. And if I was a founder, I would want to get to know my investor because as difficult as situations can get down the line, it can be that it's created by the investor or the founder, right?

You just wanna get along, you wanna make sure that you have aligned values and expectations and how can you possibly do that over a weekend period of time? You can't, right? And so what's nice about slightly longer processes that take a, a couple weeks, a few weeks, is that things play out over time.

People show their cards, investors the same, and, founders the same, and this is natural and I think healthy. And so it's not that we're looking for different information, it's that we're able to spend more time with it, we're able to ask more questions about it, we're able to, you get to know the founder and allow them the opportunity to get to know us.

And hopefully that shows how we think, what kind of partner we'd be, what value we can add in a way that would be difficult to communicate just over Zoom and over a weekend. 

[00:44:17] Taylor: So, is it important to you if I'm getting to know you and Forerunner, should I get on a plane? Should I come see you? Does that matter now or is things still happening on Zoom? The actual cadence of meetings and how important is it if somebody's thinking about that? 

[00:44:32] Jason: I typically still take first meetings on Zoom, and I do that for respect, for my time and respect for the founder's time, it's the most efficient way to have a 30 minute conversation, kick it off, go through a quick spin of the deck and see if there's interest peaked on both sides.

Then that is where, on my end, I try to come up with a diligence plan, I try to be transparent around what are the questions that I'm trying to answer, what work am I gonna do to try to answer those questions, and where would I like collaboration from the founder? There's some information that I'm gonna need.

And then along that way you figure out what are the natural points at which the founder gets to more of the forerunner team where we meet in person. And so what I've learned over the past handful of years in this industry is that no deals the same, no setups the same, right? You have to be able to adapt what your ideal process looks like.

Do you need to hop on a plane to answer your question? Maybe, but you wanna see how the conversation goes, unfolds, evolves, right? It's not something that you need to come out of the gate with, but it'll feel natural as you're having the conversations. I might bring it up, you might bring it up, feel it out. 

[00:45:46] Taylor: As two guys that love data and spreadsheets and could nerd out over them forever together. You open someone's data room, what makes you go, wow, this person is on it, and they've provided me really clear sets of information that makes me feel confident in their ownership of their numbers,

[00:46:03] Jason: That I don't have to touch it. If I am seeing the views, that I think are important to get a hand on the business, both the top line and more of the bottoms up, I'm happy. Of course there's different preferences for how information's presented and formatted. I'm talking less about that though, of course it's important and it speaks to who you are and who your team is if you're able to pull this together in a way.

But I often find myself creating a top sheet, for example, of a model where I'm pulling in, okay, here's the number of customers, here's the AOV, here's the CAC, here's the revenue as a result, this is the product margin, this is the gross margin, this is the headcount, this is the netted come or cash burn.

This is the cash position. These are all pretty critical foundational data points that are generally consistent across companies, and usually you're finding it in a much more extrapolated version or on a bunch of different tabs and just roll it up. And when I don't have to do that or start changing things or really trying to identify what are the inputs, what are the outputs, I'm happy.

I think it speaks to, some founders have financial backgrounds, have modeling backgrounds. Get energy from spending time on that, that is not a requirement on my end. What is a requirement is that the levers of your business and you can speak to them intelligently and you can speak to what are your goals and milestones and how are you gonna achieve them.

And so I don't expect that you can build the model on your own always, like you should be able to find somebody, again, coming back to attracting resources find somebody that can partner with you on doing that, but you need to be able to summarize it. What is the view that you would want to have,

For your team, to be able to provide you to say things are going well, we're not going well, they're, we're meeting expectations, we're exceeding expectations. We're not and why? And so I'm happy when I start to see that there'll be some select things that I'll go back for, which will say I wanna see cohort data.

I wanna see that's important too, right? You wanna get underneath the hood. I don't just wanna know what the revenue is, I wanna know what the cohorts look like. I'm trying to understand what's going on underneath, I care just as much about, perhaps more about that than what revenue threshold you're at, because that's a moving target.

And of course, there's some level that's important depending on how much you're raising, but even more telling is what's going on underneath that's driving that, and that's making it a trend and predictable for you to be able to hit those milestones that you expect next year and the year after. 

[00:48:41] Taylor: Data synthesis, as much as data aggregation does feel like an underappreciated area and as a CEO or founder too, that feels like so much of your job is to receive all the inputs and turn it into something simple and actionable that people can understand. So that's great. It feels like that's a pending blog.

Jason, I'd love to read your ideal top sheet broken down, that would be impressive. All right, last one, we're gonna get let you get outta here. I'm a founder, my dream is to partner with Forerunner. I have so much respect for what you guys are doing. What's the best way to catch your attention, to get on your radar in a way that would make give me the opportunity to get to that 30 minute zoom call?

Cause you're a busy guy, I'm sure you're not taking just anybody that emails you. What's the way, how do I get onto your radar? 

[00:49:24] Jason: So we have a policy that we reply to every inbound email that we get. So you'll hear from us if you come in through someone like yourself where we have a connection and I, value our relationship and trust you.

And so I will take a look at that versus somebody that's just gonna email me directly. People are founders putting their careers, dedicating their careers towards this company, and so we believe that we owe them a reply, so you can reach out directly. What is gonna make, capture my imagination is that one is showing that you know who Forerunner is and specifically if you're who I am, right?

And why I might be a fit for what you're building. That's often, I do a lot of outbound emailing to founders actually, and spend quite a bit of time, even though it's a relatively short email, that might be some between five and six sentences. Might take me 15 or 20 minutes to write because I'm looking up what companies have we invested in that connect to what they're doing.

What's the one line or two lines around my perspective or my experience, or what I've seen in the market that talks about what they're building. I did this recently with a company that's helping people sell sell their car not through Verma Carvana, but to get 10 offers on their car and get the best price.

I just went through this two times, over the last handful of years, so be personal. It's generally good right to link to your site, include a deck if you can, so I can try to get as much information as possible to figure out if it's a fit, and that's it. Honestly it sounds simple when I say it.

It's a bit harder to do, in practice, but cold emailing investors is okay. If you have it warm in, that's always helpful, but make it personal. 

[00:51:13] Taylor: Yeah, it's funny. The best cold sales email I ever got was so my first life I played, professional baseball and someone said, there's a Yankees game tonight, I know you played. Here's the spread on the game, if the Yankees win, I'll leave you alone. If the other team wins though, you take my call. And it, I was like, I'm in, that's fun. So they ended up winning. So he did, he understood enough about who I was and what I would care about.

And so, here's my secret for all of you. Go build your spending CAC chart in a scatter plot. 

[00:51:43] Jason: That's how we connected. That is exactly how we connected. Because I saw you, I'd followed you on Twitter for a long time. Yeah. And I saw that, and I reached out at that moment. Did I get to know you before? Sure, but I was, taken in the moment that I had seen that thing, and I'm not gonna miss that opportunity to use that as a way to connect with you. 

[00:52:06] Taylor: And I'm so glad you did, Jason, I appreciate it, man. Thank you for sharing your thoughtfulness and your genuine care for the people you work with comes across so clearly in this conversation, so do it. 

Go try and find your way into Jason's world because whether they end up investing or not, it'll be worthwhile, he's an awesome human and has a lot of value to add to our space, so really appreciate you joining, Jason. 

[00:52:27] Jason: Thank you for having me, it's been a pleasure.