From Startup to $1 Billion Exit – How Dollar Shave Club Defied the Odds
David Pakman @ Venrock and Taylor McLemore @ techstars
Ascent Conference 2020
Taylor McLemore [00:00:05] Hello, everyone, my name is Taylor McLemore, I’m the managing director of the TechStars Workforce Development Accelerator, and I’m joined here today by David Pakman, a partner at Venrock. David has an extensive career in venture investing and also being a company builder and leader. Today, we’re going to talk about from startup to one billion exit, how Dollar Shave Club defied the odds. David, thanks for spending time today.
David Pakman [00:00:30] Thanks for being here with me to tell. It’s good to see you.
Taylor McLemore [00:00:33] Good to see you. Let’s start with the origin story. You know both. How did you first meet this team here about this company? And then how did that lead to you taking a role as an investor in the company?
David Pakman [00:00:44] I heard about shaping up the way everyone else did. I saw them blow up on social media the day that first video went live. And I have a proclivity towards certain categories of subscription services because I ran a few of them. You know, I was the CEO of eMusic, which is a subscription digital download music service, and I learned a bunch about what makes subscription services good and what makes them terrible. They can be either one, but the assumptions about our shape going in were really big market. But people tend to be brand loyal to their razor and the razor razor blade business model. Once you commit, you tend to stay with that format. So I reached out to Peter Pham and Mike Jones, who were the some of the seed investors at Science, and they introduced me to Michael. I flew out to L.A. right away and met him and spent time with the team. And the numbers were extraordinary. They were growing very quickly. But but the churn was extraordinarily low, which is what I was hoping to see. And that was what really got me excited.
Taylor McLemore [00:01:46] That’s great, and maybe share a little bit what was your first investment, and I know that you invested through the life cycle of the company, but maybe paying some of that picture and then we can jump back into the story of how you got to know this company so well.
David Pakman [00:01:58] Sure. Well, so I was been a bunch of time with the team in L.A. They were only about five or six people at this time. They had about seven thousand subscribers. The video kind of broke the Internet that day and they had a lot of inbound interest from customers. So the value proposition was demonstrated to be interesting. But they had six really big prominent pieces on the cap table who were in the seed room. So I was pretty confident there would be at least multiple term sheets going in for this round. So I moved very, very quickly, spent a lot of time with Michael, got to know the business, and we made a series, a investment offer, to my surprise and delight. Three of the six. These are big names that everyone knows. Three of the six who had invested in the seed round didn’t return Michael’s phone call, that he was raising a series, a round and three of them passed. This was a time when a lot of subscription services had had sort of launched and died sort of product in a box subscription service. I think some folks might have thrown the baby out with the bathwater. But I also don’t think a lot of people came to look at the numbers and see just how extraordinary the how low the churn rate was and how high the growth was. So we were the first series, a term sheet. I think you got a few others, but we were the first. And fortunately, Michael and I started a good relationship and he went with us. The company grew really quickly. We did, I think, six or seven million in revenue the first year and 20 million in the second year. And when we went to raise a Series B, we figured, gee, with growth like that, it’d be pretty easy to raise a series B, we didn’t get any term sheets for the series B? No, there was no one to lead the round. So we still believed even more than ever. And we led the Series B round as well. There were a bunch of other investors who came in there, but no one else was willing to lead. So we were able to buy more ownership.
Taylor McLemore [00:03:46] That’s great. Let’s go back to maybe some of those early days. You focus so much on team and your investments, what did you see in this team with Michael? Because to the point of the title of this discussion today, going up against the odds. What did you see in those early days from the team?
David Pakman [00:04:05] Well, I think first there were a couple. There were a couple non-intuitive observations that one could make of this company once you dug in, we have a thesis around consumer products investing and that’s that there needs to be some high differentiation on the product or at least some scarcity on the supply. If everyone can copy what you’re doing by shipping the same product you are, it’s just a brand marketing fight and you probably won’t win. And there are a lot of different consumer product categories where somebody invents a product, does really well, capture a lot of mindshare. But then 10 competitors come in and copy them and take some of the oxygen out of the market. The mattress space is one of those where Casper, you know, really invented the category, but their ability to grow got diluted as so many competitors arrived. What was unique about Raiser’s is there are only five razor manufacturers in the world and a huge amount of IP around that makes it very hard to enter the market. You can enter, but you’ll be in patent infringement wars for three or four years. So we had exclusive with one of the five and that made us feel comfortable around that. The team you had a native, incredible sort of born marketer and Michael Dubin, and he directed and starred and wrote and wrote the video and had an incredible sense of how to how to use humor to reach the target market, but also how to present a value play. I mean, this was an inexpensive, you know, seven dollars a month or even a dollar a month if you took the basic plan value proposition. But he didn’t say, hey, super cheap razors. He just made you feel smart about not paying 30 bucks for razors. Right. He made you feel smart about not putting more dollars and Roger Federer in his pocket. And so we loved his marketing sense, which was going to be a requirement to build a big company here. But most importantly, his ambition, he wanted to build a billion dollar or more company, and he did.
Taylor McLemore [00:05:58] Yeah, one of the things that really stands out is your clear respect and appreciation for the skills of this team. You invested across a lot of companies as you reflect broadly and with regards to just this company, how do you create that alignment, not just sort of economic alignment of, hey, if the company does well, I do well as an investor, but clearly just sort of alignment with the people and how they’re working and how you can contribute. What do you see that really brings that magic together in the individual world?
David Pakman [00:06:29] There were a couple of there are a couple of observations you could make about the team that I think is predictive of a good fit. One is they were consistently hitting or beating every number they put in front of us. Now, they weren’t sandbagging us like everything was pretty impressive, but they had a high consistency of doing what they said they were going to do, which is not just a respectful way to operate, but it shows that they had a real command of the business, that they were able to predict where it was going to go and then drive it that way, which told us that they really knew what they were doing. And that’s unusual in early stage teams. When I invested, as I think I said, they had like five or six people, but one of them was a CFO. Very unusual for a company that size to have an operations head. But this was going to be an operationally complex business, warehouses, supply chain, not just software. And so that, I think, gave us some confidence that they’re planning to build a high functioning operating business. The other thing you can’t import into a team is ambition. If the goal is not to build a multibillion dollar company, well, then you certainly won’t. Just because you want to doesn’t mean that you will. But you have to start with that ambition, that outsized ambition, that sort of willingness to bust through the walls when things don’t work out. And plenty of stuff went wrong. We had competitors enter the market and say bad things about us. We had lawsuits from Gillette, which we thought we would get, but we still got them. You know, it was high stakes. And you need a team that just sees the long term distance they want to run so that they can maneuver around the inevitable short term roadblocks that come up. And we definitely saw that in this team. So I think you combine those two things. We do what we say we’re going to do and we’re not going to anything stop us. And you feel really good about working with forming a partnership with a team like that.
Taylor McLemore [00:08:17] Yeah, I think that between the early video that broke the Internet and then the announcement of when the acquisition happened, it’s easy to fall in the trap of overnight success, which there are no overnight successes. Maybe take a little bit more in depth in how you as an investor really try to partner with that founding team and with Michael on some of those hard points, like what were some of those probably late night phone calls or, you know, really challenging decisions where you felt that you were doing your best work as an investor.
David Pakman [00:08:48] The first was just establishing a rapport close enough with Michael and the founding team that I could be their first call on the board if something wasn’t going right. And there are great investors in this company. I worked with some fantastic other because they might have been the first call also, but maybe we all formed a really tight relationship with Michael so that he was comfortable delivering bad news quickly to us and partnering with us to try to solve problems. There were a couple of big categories of problems. We had strategic questions about our supplier. This is a Korean company supplying us razors. Are we aligned? Is the agreement written in a way such that they are focused on meeting our deadlines and that we can be long term partners? We had a super high reliability challenge, right? If things didn’t work out with them, we could be dead in the water. So there were some high stakes poker with our supplier worked out fine. We knew we were going to be battling one of the most incredible consumer products companies of all time in Procter and Gamble and and Gillette. And so I think we had to partner sort of intellectually to plan out what’s likely to happen, what will their response is be. And we did we sort of war it out. What will they do? Turns out we were right. Actually, we did a pretty good job of predicting. We had a sense of like, what will they do and then what should they do? Like, if they really want to kill us, what should they do? And that was like if they do the things that we think they should do, we’re in real trouble. If they do the things that we think they’re going to do, we think we have a path to win here. And so I think that was fun, but that was part of the partnership trying to figure that piece out. And then finally, at the acquisition time, is it time to sell? Do we feel comfortable enough? And who is the right acquirer? You know, we knew there could be FTC review risks right on on market share challenges, which is what happened to our competitor. And so we felt actually there were limited M&A outcome possibilities here where that would not present a problem. And also with companies that would buy the team and the team would want to work for cultural fit. So fortunately, we got to the one that we picked that we wanted to acquire us is the one that did acquirers, that those are the major strategic on, of course, financing how to finance the company. And the scary moment, as I mentioned, was the series after that, the series C and D, there was a lot of interest.
Taylor McLemore [00:11:04] Well, let’s talk about the series C and D a little bit, because my understanding is that once you got to that point, there was so much momentum, more investor interest. And you know, Michael, as the CEO and founder, but also with counsel from you and others around the table, it’s not always about optimizing about just the highest price and that there were some strategic choices about who to have around the table. Can you share a little bit of that story?
David Pakman [00:11:30] Absolutely. The series was led by William Marshall at TCV, and he had direct experience with subscription services. They had invested in Netflix and they were investors in Spotify. Netflix really got our attention. It’s an incredible company led by an incredible team. And they were subscription service. But also they built a bunch of warehouses and distribution centers because they used to ship DVDs out. And we saw one of the main reasons Michael chose TCV was because of that expertize and we leaned on that heavily. We actually hired the woman who built Netflix distribution centers to come in and help us build ours. So like that was that was an awesome value add. And in the series D, Michael did not feel like he wanted to choose the highest price. He wanted to choose the right partner. He did have multiple offers and he actually chose, I believe it was Dragomir who priced the round, not the highest price because he really liked the partnership. He could have taken a higher price and wasn’t comfortable with the team that was bidding there. So he was focused on partnership and sort of chemistry and who was going to be sitting in the boardroom. And I think it’s an unusual a lot of founders say that they want to pick the right partner and they’re willing to take a lower price. Very few do. But Michael actually did.
Taylor McLemore [00:12:50] It’s great, let’s go back to that acquisition path and story, first of all, usually we only hear about the final one. There’s probably there was some interest from the beginning. How did you and Michael and the team think about sort of that right time? Because I’m sure it was that the final conversation wasn’t the first.
Man speaking on the background [00:13:10] Guys can hold on a second. Looks like we’re having some technical difficulties here.
Taylor McLemore [00:13:13] Sure.
David Pakman [00:13:13] sure.
Man speaking on the background [00:13:34] OK, and please continue.
Taylor McLemore [00:13:37] Picking back up, the question was, as we look at the exit that did occur, that definitely wasn’t the first time that an exit was considered. So talk us through that process as the company matured and you’re considering when is the right time and all. So you said that there were you know, the number of potential buyers were limited. How did you kind as as that board and partnering with the CEO think through? What are the strategic moves? What was the sequence? How did you position yourself? And especially because there was another competitor that was coming up quickly trying to compete with you all.
David Pakman [00:14:13] Well, these decisions are led by the founder, you know, the founder is the one who decides, founder and CEO decide, do I even want to engage with potential M&A interest? And if that’s happening early on or sort of midway through your your growth cycle, the investors around the table would probably scratch their heads a bit like I thought we were in this for a long time. And you’re spending a lot of time on M&A now because good things happen to good companies, companies that are exploding in growth in the way and as publicly as DSC was get interest and you have to stay focused and decide, do you even want to spend the time on that? So Michael was very clear. He didn’t want to spend any time on that as as it happened a couple of times in the way up. But he did say, look, I’m happy to have you in as an investor so we can get to know each other. But I’m not entertaining M&A conversations now. So in some of the early rounds, we let some strategics in for small investments just so Michael and the team could get to know them and try it out as someone we want to work with. So that was that was helpful. But I think, you know, we didn’t really have a substantive M&A conversation with anyone until it was the right party, the one that Michael was most interested in talking to and the right time where we wanted international distribution help. We wanted multichannel help, you know, getting into other selling channels. You know, the other point I’ll make is that companies are valuable beyond just their progress. Right. And they’ve existed at a time when Social was really taking off and and was an actual threat to traditional consumer packaged goods companies, because with the emergence of social media brands and their customers could speak directly, not through a retailer or distributor anymore. And that also means that customers can talk back to brands directly. And if you didn’t have some way to both speak directly to and maybe even sell directly to your customers, you were exposed. No, none of the traditional brands had that. Now they all do. Right now this is obvious, but it wasn’t at the time. And so DC was one of the few companies that was pioneering this and was sort of the shining example that all the brands would say, well, you got to you got to be able to go direct. You’ve got to be able to talk with your customers. And so there was a lot of interest generally, like we just learned what you’re doing. We want to learn more about it. And I think that was one of the advantages.
Taylor McLemore [00:16:45] And if I understand correctly, part of the calculus was also regulatory risk analysis, right, of the potential acquirers. Can you share a little bit? Because that’s something that most founders probably don’t spend a lot of time thinking of. But when you really go to build a truly large company, it’s a consideration.
David Pakman [00:17:03] Yeah. For instance, we didn’t think that that Gillette would come to try to buy us and they didn’t. But that would have been an example of an acquirer where there was FTC, you know, regulatory risk because of market share problems. We did think that, well, Qik would be an acquirer, a potential acquirer eventually. And we also thought that that would have regulatory challenges. And so that was not the one on our short list that we really wanted to make happen. And I think we were proven right because as they tried to buy our competitor, that deal never went through.
Taylor McLemore [00:17:38] Yeah, well, as we wrap up with our last few minutes here, it’d be interesting to take this experience. How has it informed you as an investor? What what did you learn from this journey with Dollar Shave Club that informs what you do going forward?
David Pakman [00:17:53] I’m really tripled down on this notion of supply side scarcity or high product differentiation, if it’s going to be really if it’s not really hard for others to duplicate what you did or to copy what you’ve done, we’re generally uninterested in that as a product category. So we’ve really taken that to heart. You know, the quality of the team early on is actually probably a predictor of the type of team that will be built on quality. People attract quality people. So you can make judgments about how great a team will be by how good they are in the beginning. And I think that was that’s been sort of drilled into our heads and the ambition piece, you know. Just it was super clear at the beginning that Michael wanted to succeed and was he was just not going to let things stand in his way and he was just very self-aware, like, look, a lot of people can sell razors on the Internet. Like, that’s not what we’re doing here. We’re doing something else. His ability to sort of see who they were, why they were strategic and where they wanted to go. We want to find that in all of our founders.
Taylor McLemore [00:18:57] That’s great. And as you kind of switch from that perspective of how it’s informing what you continue to do as an investor, speaking to the executives, the founders in the room, what what stands out to you? What is it that really sets apart the founders that can go to build the. Billion dollar business and, you know, beyond sort of intrinsic things, like what can people think about? What can they do to change their odds of success?
David Pakman [00:19:25] Well, first, just be honest. Like, do you really want to build a multibillion dollar company? Because if you don’t like, go don’t go meet with venture capitalists for financing. There are other sources of capital, but but that’s what VCs wants. So align yourself right with the source of capital that is proportionate to what you want to achieve. I don’t think you can fake ambition like if you don’t have it. It’s not what you’ve always wanted to do. It will be obvious. And but but that’s a it’s a requirement for most because, you know, being really resourceful, like showing how you were able to accomplish a lot on a little and and being able to demonstrate what type of talent you bring around you, whether they’re advisors or other investors. These are early signs about how hungry and likely to succeed you are. And finally, just your your. Your your passion for what you’re doing right, you have to you have to it has to be clear that this is something you love, not just something you’re trying to accomplish. And if if we see that early on and you’ve got a self-awareness about your strengths and weaknesses, we all have them. So you want to find other people around you that complement your own weaknesses. These are, I think, things that you could examine yourself and figure out if it’s you or not.
Taylor McLemore [00:20:41] Yeah. Final question for you. How do you identify ambition? You’ve talked about it multiple times. Is it is are there specific signals or patterns that you look for or is that just part of the pattern recognition that you’ve developed over time? Help us understand what you look for.
David Pakman [00:20:56] Well, first, I’ll say I really don’t know. Like we’re still trying to figure this out 11 years in and I still make bad investments, so I haven’t figured it out, but I’m trying to refine it. I think there are a lot of reasons for ambition, you know, but there are different signals to look for, like having a chip on your shoulder about something, I think that’s a positive, like having something to prove. I think that’s a positive. Why do you want to succeed? There are a bunch of reasons for that. But, you know, competitiveness, which could show itself in a bunch of different ways, I don’t mean to the point of self-destruction or destruction of others, but like just a real strong desire to win. And you can still be a super nice person about it. But every night when you go to sleep, you really try to win or not. I think there are different ways to get to know someone and assess them on a couple of these levels. I really don’t have like a checklist. You know, I think any of us, the more people you meet, the more better sense you can get of them.
Taylor McLemore [00:21:54] Of course, I’m definitely part of the art side versus the science of what we all do as investors. Well, David, any final thoughts for the audience today?
David Pakman [00:22:04] I’m just thankful that I’m here. It’s a weird time to do events, but I’m so glad that asset had us. And Taylor, thanks for being here and helping me do this.
Taylor McLemore [00:22:12] Yeah. So on behalf of David Pakman, partner at Venrock and myself, Taylor Macklemore, managing director of the TechStars Workforce Development Accelerator. Thank you to all of you that are out there listening. Hopefully some of this story inspires you, informs you and what you’re going on to do. And thank you to this and conference. We really appreciate the opportunity to share this conversation with you. Have a great day.
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