Last September, the direct-to-consumer eco-friendly cleaning product company Blueland inked a deal with venture capitalist Kevin O’Leary on the show Shark Tank. He invested $270,000 for 3% in the company — in addition to $0.50 royalty for each product sold until his investment gets repaid. Now that the deal is done, Blueland is trying to grow.
When the show first aired, the startup boasted $200,000 in sales in only a month. The plan is to, of course, increase that, starting with a new ad campaign featuring O’Leary. In the run-up, the investor sat down with Modern Retail to discuss why he invested in the company, the overall DTC industry and why customer acquisition will continue to be haunting founders’ nightmares.
The conversation has been lightly edited for space and clarity.
What made you interested in investing in a cleaning product sold only online?
I’ve been doing Shark Tank for over a decade. There’s a constant theme, particularly in consumer goods and services, that I found to be consistent. A product [needs] a powerful visual message. In other words, if you can explain what the product is without even talking about it, this is very simple. You take this tablet, you drop it in water, you create a cleaning solution.
One of the big issues facing DTC brands is rising customer acquisition costs. Obviously, you’re in a unique situation given the TV show’s platform, but do you see brands in the space hitting a wall because channels that were once cheap now becoming much more expensive?
Let’s take the sobering facts into account: If we start ten companies today, within 36 months eight will fail for one singular reason: they’re never able to get their customer acquisition costs below the lifetime value. Barriers to entry into new consumer brands are very low. But sustainability of an economic model is almost impossible if you haven’t figured out customer acquisition.
What happens is you’ll raise $5 million to start. You’re promising your investors within the next 36 months, you’ll figure a customer acquisition cost. 80% of the time you can’t. And for most consumer goods and services, no matter what sector you try, you run into this roadblock of customer acquisition.
The power of the Shark Tank platform is the millions of people that see it on the first airing on the Friday night. [Taking initial airdate and later syndication into account], let’s say I can get you 10 million eyeballs for basically free.
But what about the companies that aren’t able to tap into your 10 million viewers? Should they stay online? Go into retail?
The one thing about retail that people forget is basically you’re giving up 30% to 40% of your margin. Then you’re funding 90 days of inventory… even if you’re dealing with Walmart, you’re going to wait 60 days for your capital. That’s very sobering at the end of the day. So I argue to all my companies: Look, let’s see how far we can get online.
If you can build a business in retail and it’s profitable, and it returns at least 15% on capital — at least — then it’s worth doing. If you get anything less than that, you stay online.
For an online CPG company with only one or a few products, what’s the pathway to becoming a $100 million brand? In Blueland’s case, is it to become the next Clorox?
Clorox is primarily retail because it owns the shelf space. Here’s the investment thesis for Blueland: When Blueland gets to $50 million in sales, even if it’s only online, we’re going to get the first knock on the door from a consumer goods service company. I went through the same thing with Plated when we were disrupting the food direct to consumer space. We sold that for over $300 million. This’ll be the same — and it will happen in the next 24 to 36 months. Or it won’t.
Amazon is a very contested topic for online brands. Some love it, some hate it. How do you approach it with your portfolio?
I’ve got a 10-year history with Amazon. Basically 35% of my portfolio sales go through it. Probably this year, 2020, it’ll get up to 40%. We have a very strong relationship with the teams and the various vertical services in Amazon.
Amazon is a great American company. If I have a company that has IP and a trademark, and my product hits $5-$10 million in sales on Amazon and I see 20 knockoffs show up, I have a relationship person inside of Amazon that I could call and say, “Hey, that’s a Shark Tank product. It’s an American entrepreneur. That’s American IP. Here’s our trademark issued, take all that other shit down.” And they will.
I’ve talked with other brands about this issue, and you have a very special position with that.
You’re right. That’s another benefit of being on Shark Tank. I have nothing except good words for Amazon. Now, whether it’s a proprietary relationship or not, I’m telling you my experience and we get this done in hours. I can’t say that for Alibaba.
Where do you see DTC businesses going in the near future?
The one thing I would say that clearly is going to be a hallmark in 2020, 2021, 2022 is that companies are trying to get half of their sales direct to customers. This is for two reasons: you get tremendous research back and feedback from your customers that you can’t get through the retail distribution channel. And you can have a very symbiotic relationship with retailers.
I’m a big advocate for our relationships with Bed Bath and Beyond and Walmart and Target and all the big boxes. We do business with all of them. We have relationships with all of them. We work together. We don’t try and cannibalize. We try and keep the pricing right, but they understand now why we need direct relationships.
The way these companies start is they have to find out what works in customer acquisition. Pour gasoline on that, and when that burns out, get the next idea, pour gasoline on that. We try all kinds of different things — and, frankly, not all of it works after 90 days or 120 days. But if you have not broken even on customer acquisition, you’re fucked.