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 dives into the following criteria: 
  1. Founding team
  2. Product experience
  3. Traction trend lines
  4. Entire brand

While people might be surprised to see product experience included in the list, James points out that game-changing products aren’t all that common, especially in an increasingly commoditized digital brand ecosystem.

While there’s definitely room to improve on a product—based on feedback—it's also important to evaluate the product experience upfront.

In addition to his criteria, James also looks at the brand universe and the size of the target market itself.

He adds that while some investors back small, fast-growing niches, he prefers to back companies that attack massive markets in new, innovative ways.

“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, he prioritized product over growth and revenue. 

While in stealth mode, his team continuously iterated on the product experience by testing out new formulations, especially on large groups of close friends who 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 that was ready for the public.

However, even after a full calendar year of sales and revenue growth, he is still constantly refining and improving the product. Magic Mind is currently on version 3.5—constantly iterating like a tech startup’s smartphone app.

As the business grew, data-driven metrics became an even more central part of everyday decisions.

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

There are a few similarities between launching a DTC brand and a consumer tech business, but most of it boils down to brand and community.

Every company—whether it's DTC or tech—should be building a “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 credit facilities or venture capital to fund  product inventory (especially if you're growing quickly and you need to order more 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 tech success, there are hundreds of successful, sustainable DTC or CPG companies.

It’s rare for a consumer tech business to hit its stride. Rarely are they the next Facebook, Instagram, or TikTok.

With a DTC brand, founders can start selling an MVP quickly with just a couple thousand dollars of capital. That can't happen in tech. On the software side, founders need expensive engineering resources to build something for one, two, or even three years before they even know whether they 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 believes 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 hardware products. But, venture 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 struggling to fundraise. They can talk to different credit shops and secure a credit line that can help accelerate their business without giving away unnecessary equity to partners.

“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 invest in tech-enabled companies that are the bridge between retail and ecommerce, or who represent 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, James recommends optimizing for the best process possible.

By optimizing for the process itself, specifically focusing on business metrics first (i.e. 3-6 straight months of +30% MoM growth) and then on repeatable inputs with long lists of potential partners, founders will find success.

Initially, it’s useful to go after around 30 investors who’ve invested in a similar space before but haven’t yet invested in a direct competitor. Or, maybe that direct competitor has gone through a recent liquidity event, so it's possible to reach out to their investors. James recommends aiming for a 10-15% hit rate with those investors.

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) in a brand.

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 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 only results that matter in running a business are the results that you can recreate. If you focus on your specific key inputs and replicable processes, day after day and month after month, the results will genuinely take care of themselves. More than that, the results are in your control." 

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