Magic Mind, Investing Criteria, and North Star Metrics with James Beshara

December 1, 2021
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Magic Mind, Investing Criteria, and North Star Metrics with James Beshara

James Beshara has spent more than 10 years in the tech world. He co-founded Tilt (acquired by Airbnb) and recently launched Magic Mind, a flow state-enhancing DTC beverage brand.

James is also an active podcaster, author, and prolific angel investor, with a personal portfolio that spans Recess, Skio, Haus, Clubhouse, Gusto, and Mercury, among others. We sat down with James to explore his personal diligence process, DTC financing, and north star metrics at Magic Mind.

DTC Diligence Frameworks

When evaluating potential DTC brand investments, James first dives into the following criteria.

  1. Founding team
  2. Product in-market
  3. Traction trend lines
  4. Entire brand experience

While people might be surprised that product experience is included at all, James points out that game-changing products actually aren’t that common, especially in an increasingly commoditized digital brand ecosystem. While there’s definitely room to improve on a product as it receives feedback from the market, it’s critical to evaluate product experience upfront.

In addition to these criteria, James also looks at the ‘brand universe’ and the size of the target market itself. He adds that while some investors back small niches that are growing quickly, he actually prefers to back companies attacking a massive market in a new, innovative way.

“When I’m in the process of buying a product from a new brand, I want to feel like I’m entering an entirely new universe. That’s the secret to someone going from customer to advocate.”

Magic Mind’s Northstar Metrics

When James first started Magic Mind in beta, he prioritized product over growth and revenue. 

While still in stealth mode, his team continuously iterated on the product experience by testing out new formulations on large groups of close friends that mirrored his target users. After handing out enough samples and running through iteration after iteration (50-60 iterations before launch), he landed on a product ready for the public.

However, James points out that even after a full calendar year of sales and revenue growth, he was constantly refining and improving versions of the product (Magic Mind is currently on version 3.5, continually iterating like you would see with a tech startup’s smartphone app). As the business began to grow quickly, data-driven metrics became increasingly critical to track and make decisions off of.

On a weekly basis, James tracks six core metrics to help evaluate overall performance.

  1. MoM Revenue Growth
  2. Customer Reviews
  3. Cohort Retention
  4. Product Margins
  5. Blended ROAS
  6. Blended CAC
“The most important lesson I’ve learned in building startups is that direction is more important than speed, and therefore quality and retention is more important than growth.” 

Consumer Brands vs. Consumer Tech

The few similarities between launching a DTC brand and a consumer tech business boil down to brand and community. Every company should be building an inviting “brand universe” at every customer touchpoint. However, the differences between the two models are quite expansive. 

Put simply, it’s much easier to scale software than a DTC product. In DTC, scalability requires a long payback period and a lot of credit facilities or venture capital to fund continual product inventory (especially if you are growing quickly, where you need to order more of the product every month, even if your payback period is two to three months). On the other hand, the odds of success are comparably higher for a DTC brand, at least in terms of the ability to launch, acquire customers, and scale as a company. For every consumer technology success, there are hundreds of successful, sustainable DTC or CPG (consumer product goods) companies.

It’s rare for a consumer tech business to hit its stride or to build the next Facebook, Instagram, or TikTok. With a DTC brand, you can start selling an MVP quickly with a couple thousand dollars of capital. On the software side of things, you need expensive engineering resources to build something for one, two, or even three years before you know whether you even have something interesting. 

“To put it bluntly, the odds of success for a DTC brand are much higher. Of course, however, that’s entirely dependent on how you measure success.” 

Credit: The Future of DTC Financing

James drives home the point that credit will soon become a major player in the DTC financing space, specifically as a compelling alternative to equity-based capital products. He recognizes that while credit has its own risks, it’s perhaps the cheapest form of growth capital. Venture capital rounds still make sense for large-scale R&D needs, especially for physical hardware products, but venture capital, where firms are taking massive slices of your company, is perhaps the most expensive form of capital.

However, digital brands can get to early revenue much quicker, and they can actually use that revenue to then obtain credit. DTC founders, as a result, don’t need to spend months on end struggling to fundraise when they can spend thirty days talking to different credit shops and secure a line that can help accelerate their business without giving away unnecessary equity to partners that oftentimes then join the board and help govern the company alongside you. 

“Credit is not only much cheaper than selling equity in your company to a VC, but it’s also significantly easier to obtain in a short amount of time.”

Parting Advice: No Matter the Financing Direction, Trust The Process

According to James, there are two types of people who invest in the DTC space.

The first cohort includes more traditional retail investors who dabble in ecommerce. In parallel, the second cohort is composed of venture capitalists — who either primarily invest in tech-enabled companies yet are interested in dabbling in physical products as a bridge to retail and CPG, or are the smaller subset of firms focused directly on DTC or CPG.

For founders looking to raise their first tranche of capital for their DTC brand, from both groups of investors, James recommends optimizing for the best process possible. By optimizing for the process itself, specifically focusing on business metrics first (like 3-6 straight months of 30%+ month-over-month growth), then repeatable inputs with long lists of potential partners, and not taking anything about the process personally, founders will find success.

Initially, it’s useful to go after around  30 investors who’ve invested in your space before, but haven’t yet invested in a direct competitor. Or, maybe that direct competitor has gone through a liquidity event, so you can go after that investor again to gauge interest. Aim for a 10-15% hit rate with those investors, as that type of “hit rate” is a world-class close rate for any salesperson.

To borrow from James’ philosophy, it’s not very useful to dive deep into each individual investor’s psychology about why they passed (or invested). Every massive business was built with hundreds of ”No’s”. Rather, it’s important to create a set of rules for different buckets of investors, and in turn develop a set of expectations about their investing style, check size, involvement level, and turnaround time. If founders can retain that high-level understanding across different inputs and build out a repeatable process, they’ll ultimately persevere into a successful fundraise.

“The results that matter are the results of a process. That is because the only results that matter in running a business are the results that you can recreate. I used to not truly understand or appreciate this, but if you focus on your specific business’ key inputs and key, replicable processes, day after day and month after month, the results genuinely take care of themselves. But more than that, the results are in your control.” 

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