No. 7: Assembled Brands' hybrid funding model
Curated news, insights and stories about bootstrapped entrepreneurs building real businesses and the investors who want to finance them.
Good morning everyone,
As promised, today is about alternative venture funding models. If you like what you read, please share it with one person - only one person that you think could benefit from reading Mereo’s newsletter every week. Thanks! And now to our show…
Assembled Brands: funding emerging DTC brands
Assembled Brands, founded by Adam Pritzker (picture), is a holding company which provides equity investments as well as working capital to emerging consumer brands. It is different from a classic venture capital firm, as it does not operate out of a close-end fund, but provides equity financing out of its own balance sheet, and de facto acts more like a holding company. On the credit side, the firm provides working capital financing out of its $100m credit fund, which it raised from Oaktree Capital Management in October 2018.
Why now?
According to its founder Adam Pritzker, the investment thesis of Assembled brands is based on the fragmentation of retail (8:56):
What the re-platformisation of retail has disrupted is the traditional financing mechanism for brands and that’s the gap we are filling. It is an important point to hit on, even though it is a little technical: traditionally, a store would make a purchasing order, that brand would use the purchasing order as collateral for a factor or a bank, the brand would take the money from the factor or bank, they would go make their goods, they would sell them in the store, and rinse and repeat.
With marketplaces like Amazon, social platforms like Instagram, e-commerce platforms like Shopify, the buyer is now individual, not stores. And factors and banks don’t know how to underwrite in that scenario, but we do.
How does it work?
In order to be able to finance upcoming brands (with potentially limited financial information), Assembled Brands has created a proprietary assessment methodology called Assembled brands Capital Formula (ABC Formula), which uses data to understand the relationship between a brand and its customers. This methodology is leveraged by the company’s own underwriting technology (yeah it’s 2019) in order to move fast on working capital decisions.
Adam Pritzker at the 2018 WWD 20/20 Retail Forum ,PATRICK MACLEOD FOR WWD, Forbes.
An alternative model that seems to work for everyone
As the company’s technology gathers more and more data about brands, founders are able to leverage that proprietary data to derive intelligence and make better and faster decisions. Potentially, it could also help founders monitor competitors - in my view very useful in crowded markets like DTC mattresses or beauty products. In addition, an investment from Assembled Brands comes in with the “classic” venture investment perks: access to knowledge (marketing, supply chain, branding …) and a network of experts.
From an investor’s perspective, Assembled Brands’ data-driven business model and mix of equity/working capital financing is an interesting solution to generating top-quartile returns in a space (DTC) where the VC model does not always work (the always is because of Harry’s $1.37B exit). Their model allow to finance companies as their grow while owning a potentially significant portion of it. In the case of an exit, the working capital financing helped to keep dilution low for all shareholders, while being a profitable credit business in itself. This is a forward-looking statement as the company only closed its credit fund less than a year ago, but I can already see why it makes sense for the entrepreneurs, the holding company and its investors to be part of this alternative venture funding model.
In other news
Bootstrapped and profitable fintech Checkout raised $230m
Founded in 2012 in London, Checkout provides cross-border payment solution for digital commerce. From founder Guillaume Pousaz:
“We have been fortunate to have some of the world’s leading investors approach us for some time but our focus has remained on building the very best suite of products we can for our merchants on four continents. Having built a sustainable business, one hire at a time, it was crucial to find partners that share our vision of how enterprise businesses will consume financial services in the future.”
VC discovers bootstrapped companies are great
Matt Turck from FirstMark Capital recognises that bootstrapped entrepreneurs are a very special breed:
The odds of building a massive company are low enough for the lucky few that manage to raise tens (or hundreds) of millions of venture capital money but, now, doing it with no outside investment? That is a really hard way to do it.
But he also predicts that it will get harder to build large, industry-leading companies by only bootstrapping:
The pressure (or temptation) to raise venture capital early has probably increased over the last few years […]. As a result, my guess is that, in the current environment, less and less founders choose to bootstrap for extended periods of time when they have the opportunity to raise venture capital.
Accelerator for bootstrappers raised $3.4m
TinySeed, an accelerator that invests $120-160k in bootstrapped start-ups in exchange for equity, announced they raised $3.4m:
Because TinySeed is designed for bootstrappers, this [demo day] is not the end goal for its startups. Which gets to the heart of TinySeed’s unique model: focusing on growth through revenue rather than raising venture capital.
MailChimp will make $700m in 2019
Founded in 2001, the company never raised external financing. The growth is part of Mailchimp moving from email to full marketing platform:
Mailchimp, a bootstrapped startup out of Atlanta, Georgia, is known best as a popular tool for organisations to manage their customer-facing email activities — a profitable business that its CEO told TechCrunch has now grown to around 11 million active customers with a total audience of 4 billion (yes, 4 billion), and is on track for $700 million in revenue in 2019.
Thank you for reading. If you liked it, please share it with one person - yes, only one person that you think could benefit from reading Mereo’s newsletter every week.
See you next week,
Michel
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PS: this is not an investment advice. Before investing, do your own research.