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S2 E1: Elizabeth Edwards Founder & Managing Partner, H Venture Partners

Podcast Transcript

James Mackey  0:00  

Hello, and welcome to Scale by Design! Today we are joined by Elizabeth Edwards. Elizabeth, welcome to the show! How are you?


Elizabeth Edwards  0:07  

Great. Thanks for having me.


James Mackey  0:09  

Yeah, thank you for joining us today. Before we jump into the topics that we want to discuss, could you please share a little bit about your background with everybody?


Elizabeth Edwards  0:17  

Yes, sure. I am the Managing Partner and Founder of H Venture Partners which is a venture capital firm that backs early-stage science-based consumer brands. Generally, we are one of the first check-ins, if not the first check-in for companies that have some new active ingredient, new peptide for skincare or material science for consumer packaged goods, packaging solutions, and other science at the core of CPG. So I like to say that we invest at the intersection of biotech and consumer products.


James Mackey  0:58  

That's really cool. How long ago did you start H Venture Partners?


Elizabeth Edwards  1:05  

It was about 5 years ago, a little over 5 years ago that I founded the firm. And I've been a venture capital investor now for over 17 years with a couple of different firms before starting this one.


James Mackey  1:19  

Yeah, that's really cool. How did you initially get into venture capital?


Elizabeth Edwards  1:23  

I started young. I was a strategy consultant at Deloitte, working on front-end M&A strategy, mostly for Johnson & Johnson. As you're probably well aware, Johnson & Johnson has a pretty big biotech and healthcare part of the business and then also a CPG part of the business,  their consumer health division, I had to work in both divisions. 


It was very cool, I was working on medical devices and brands like Tylenol and really fell in love with venture capital from the perspective of a strategic acquirer. Actually being on the other side of the table, talking to entrepreneurs about their technology and how it worked, and how it might fit into the J&J portfolio.


James Mackey  2:15  

I love it, very cool. One thing that we discussed bringing up today on the show is going through unit economics as you're considering companies and as you're working with your portfolio companies. I actually want to hand it over to you, it sounds like this is a topic that's top of mind so maybe you could lead us here. Where do you want to start? Maybe we start high level on what outcomes you're trying to achieve? Most important ones and then we can dive into more tactics, what people can take away from the conversation, and how they can implement it.


Elizabeth Edwards  2:48  

Yeah, I think one of the hardest things for entrepreneurs in this environment where we're seeing an economic downturn and it's harder and harder to raise capital, efficiency becomes really, really important. It's really always important, but it becomes more of a focus for investors because they're really focused on that burn rate. How much companies are spending each month and so one of the things that I think founders need to really keep an eye on throughout the life of a company is those unit economics. 


A lot of times in startups, unfortunately, the SG&A, overhead is always going to be a little bit bigger than you would like because the top line is relatively small but growing. But where we as investors really need to focus initially is on those unit economics. So we're looking at what is your cost of goods sold. What is your gross margin, what's your contribution margin, and the delivered margin? 


Then how much does it cost to acquire a customer? And one of the things I have seen in recent years that has really, I would say squeezed CPG companies, in particular, is first an overspending on marketing. There's a great benchmark out there that VCs and founders love to point to your lifetime value of a customer, so your lifetime contribution margin for that customer over your customer acquisition costs or LTV to CAC ratio should be 3. I would argue it needs to be 7. The companies that I have seen that can really comfortably and profitably grow are usually north of 5 and in the best cases, 7 or above. 


And I think what it really forces entrepreneurs to do is to think creatively about the definition of a unit. We're always pushing our portfolio companies to think about how they're acquiring customers, are they acquiring customers one at a time? Are they acquiring them in groups of hundreds or thousands at a time? How can they really grow their brand through creative partnerships where they can acquire customers a lot more cheaply? The other thing that I think is just unfortunate, I would say a product of recent events, which is supply chain disruption caused by COVID over the last two years, which has really increased the cost of goods. 


So if you're making anything that is a tangible product whether it's oil prices, or shipping containers getting stacked up at ports, those things have a real impact on the cost of goods so that's negatively impacted margin for many companies. If you're a startup, you're already dealing with relatively low order quantities. You're not going to have that great scale of bigger, larger competitors and so it's really quite a bit of pressure on folks in the CPG world.


James Mackey  6:39  

Yeah, definitely. I want to just circle back to something you mentioned, talking about profitable growth. Is that something that you're truly focused on for the startups that you're investing in? And just to clarify - is it typically early-stage companies? 


Elizabeth Edwards  6:54  



James Mackey  6:55  

All right. So you're looking at early-stage, you're actually looking at companies to grow profitably at that point in time, or is that one of the requirements that you look for when you invest?


Elizabeth Edwards  7:04  

We look for unit economic profitability, you definitely don't want to be scaling a company that has negative margins. We need to see even if it's a novel technology, that maybe they're gonna have a negative margin on their first few orders, but very quickly that gross margin because of their order size scales. 


As a pre-revenue investor, now, I don't expect that companies are going to be profitable from day one. On a net income basis, what I'm looking for is really strong unit economics that is going to ultimately drive growth and hopefully get them to profitability probably sooner than most VCs would look to get to profitability.


James Mackey  8:00  

So how do you determine that when you're looking at unit economics at scale? At some point, they're gonna break to profitability, how quickly are you looking for them to break to profitability and what do you base that on? Is that based on a revenue milestone, or maybe a timeframe? What are the metrics you use to decide that and then how do you decide how quickly you need them to do that?


Elizabeth Edwards  8:28  

Yeah, I would say that in the best cases, companies that are able to turn profitable when they reach that 10 million in revenue mark, that's a great benchmark for CPG companies. I would also argue that there are companies that can reach profitability sooner than that, it really just depends on how much R&D expense is required. 


It depends on how profitable their dynamics are, the unit economics that I described previously, and just how lean they can be. But generally speaking, there's absolutely a pathway to get to profitability, and most CPG companies, by the time that you're 10 million in revenue, if not beforehand.


James Mackey  9:36  

Right and I think I liked the conversation around unit economics, whether it's a VC-backed company or even a bootstrapped organization, maybe a services firm similar to my own. I think it's pretty much the most important thing because otherwise, you could potentially even have a profitable company at an earlier stage. Then as you scale add additional overhead and become unprofitable. I think a lot of people are confused about what scale actually is. 


A lot of the times I think the emphasis on scale is how much money you've raised or how many people you've hired like - Okay, we've scaled from 100 to 200 people, and it's actually - No, you've just doubled your overhead. So what is the actual scale that you're achieving? Then that's really what's getting into unit economics to determine if this is truly a scalable business and at what point are you going to be able to make that turn. I'm sure you've seen that too, right? People talking about scale like - Hey, we just raised X amount of money, or we just hired 500 engineers.


Elizabeth Edwards  10:38  

Yeah, I know, I hate it when people talk about - Oh, we grew 200%. And yeah, there are no numbers behind it. To your point, if it took you an incremental 20 million of capital raised to get to an incremental 10 million of top-line growth, that's not good. Unless you are investing in a lot of R&D, or you are a biotech company, you're going through clinical trials. But for the companies that are focused on where they are commercially ready, or very soon to be commercially ready, so less than a year to get to some market, it should not be the case that they're raising 20 million to get to 10 million in revenue.


James Mackey  11:38  

Okay. Got it, that's very interesting. I think one thing with the unit economics too, just getting down to customer acquisition cost, and getting into more specific marketing strategies, how much of your time is diving into go-to-market when you're evaluating companies? I'm also really interested in the concept of having platform services from VCs in terms of recruiting talent, solutions, support, and go-to-market product development roadmap, how much are you helping? 


Two questions - How much are you evaluating when you're looking at an investment? And then are you also providing that strategic support? What's your kind of philosophy on providing support and evaluating go-to-market?


Elizabeth Edwards  12:27  

Yeah, it's a really big area of focus for us. We spend a lot of time with our companies across the board. Go-to-market is key because your go-to-market strategy is going to drive most of the spending. So what investments you're making, what risks you're taking, and who you're hiring? From our standpoint, companies really need holistic help and so our model is that all of our investors with only a couple exceptions being big institutional investors, all of our investors are experts in the space that we invest in. 


They are retired executives of consumer companies, who have 30 years of experience in the supply chain, R&D, or IP strategy, retail strategies, part of that go-to-market strategy, and retail, direct-to-consumer, etc. We really surround those companies with a lot of resources, people that they can call on and get their help looking at a pitch deck for a Target or a Walmart, or even getting an introduction to any of the above and thinking through which retailers even to approach first and then second, and then third, and how that retail strategy rolls out over the years. We really do need all of the above. 


I would say IP strategy is pretty darn important, supply chain strategy is pretty darn important. Especially in this environment and so we do our best to help for me, I'm spending time before we make an investment even with the same group, evaluating all of those aspects. So that same group of experts really helps our investment team and the due diligence of companies that are high interest, high potential for investment.


James Mackey  14:50  

Got it. When you're looking at that I'm just curious how far along do you expect the founders to be in terms of their go-to-market strategy. For instance, if they just have a really fantastic product but maybe they don't know a whole lot about go-to-market? Are you willing to say - Okay, we're gonna help you make the heavy lift here? 


Or is there a certain level of competency that you expect them to have in terms of maybe you're looking for second-time entrepreneurs, or you're looking for somebody that had some type of business experience and potentially even some touching go-to-market things maybe not directly done but at least being involved. Do you look for that prior experience? How do you determine how much of a lift your team is willing to do for a company?


Elizabeth Edwards  15:34  

Yeah. You know, we're not in the business of running companies for our CEOs, right? We do like to see companies that have a well-thought-out go-to-market strategy but are open to collaboration too because if you start with something good, we can probably help you make it great. That's more of the approach. It really ranges because we'll invest in companies that have 0 revenue and will invest in companies that have 10 million or more in revenue and that's a pretty broad landscape of companies. And over that time, they will have tried and proven different things. 


However, I think at the pre-revenue level or looking for more experience, we have to have a reason to believe that this team is able to execute a plan. So at the pre-revenue level, we want to see great technology, a great plan, and some experience there to back it up, as companies prove more of their strategy. I would say that need to see the bonafide and the CV burn off a bit because if you've been really capital efficient, grown your company to 10 million in revenue and you're profitable, and you've got a really great plan, you've got a really great history of execution. Well, it's less important that you have 10 years of experience because you've already proven yourselves, in many ways.


James Mackey  15:52  

It makes it a little bit easier because they've already defined repeatable success, right? 


Elizabeth Edwards  17:28  



James Mackey  17:29  

Yeah, very cool. One of the things I wanted to talk about, I think we've probably got about 15 minutes left recording, but I wanted to talk to you a little bit about what we're seeing right now with the downturn. Yeah, seeing a bit of a stir in the market. It seems like we're in that part of the cycle. Companies are making different moves companies have to make to survive. Focusing more on profitability, sustainability, and ensuring customers aren't churning, doing everything we can to sustain. What are you seeing right now and what advice are you giving to your portfolio?


Elizabeth Edwards  18:06  

What I'm seeing right this moment, here, as we sit on November 22, it's a really tough market for early-stage companies that are burning cash. I would say it's actually a really tough market for companies of any stage that are burning cash. Because as we saw, and we knew that this was coming, a business cycle is usually plus or minus 10 years and we're kind of overdue. We've printed a lot of cash to kind of stave off this particular recession. 


I remember very well in 2008, being a venture capital investor and having five portfolio companies that were brand new portfolios that we were just starting to build out. And three of them immediately went out of business because they were seed-stage companies. And they didn't have very stable cap tables, they had angel investors and us. We were the only fund in those three particular companies. That really puts a lot of stress on the existing investor base to bridge through tough times. 


I tell entrepreneurs, in good times when you're raising capital for the first time or just as a general rule of thumb, you'd love to see at least 3 deep pockets in the deal and keep doing that over and over with each new round. If you've got a cap table that's too concentrated, so you have one set of deep pockets to go to in tough times, some big VC fund that's most of the invested capital in the company. If you have a rough patch, or if a rough patch, like a downturn or 2020 goes down and that hits, you don't want to have one investor to go to help you bridge through that time. Because if they say No, the answer is you're out of business. 


We'd much rather have 3 or 6 or 9 key investors to say - Hey, we want to do a small bridge round just to get through this, your piece of that is small, can you support the company now? So this is a tough time, when we see the capital markets move from a growth orientation to a profitability orientation, as strongly as they did in January of 22, and continued to do and we saw massive layoffs started hitting and April and May of 22, it really points to the need to respond to the market, which means - you got to take the deal. 


I like to say you have to be present to win, if your company is out of business, you won't be around next year or the year after, when things are marketed better and you can raise fresh capital at much better terms, and maybe re-up that employee option pool and start to re-earn some of the equity that may be lost and use crashing down rounds. And by the way, it's all relative. These crushing down rounds are a result of a totally irrational market over the last 18 months, if not more, where so much capital was going out the door at crazy high valuations. 


If you look at the charts of venture capital funding, you got to take the end of 2020 through the beginning of 2022 out of it, because 2021 and early 2002 were bonkers. Those valuations didn't make any sense. And so while you might feel like - Oh, my God I had a valuation of 40 million yesterday and now they're telling me 10? Well, the answer was probably 20. Things go up, they come down. If you don't have cash, you're out of business, take the cash, whatever terms, you can work it out later.You might not win the battle, but you'll win the war. So you have to be flexible.


James Mackey  23:01  

Well, yeah. That actually makes a good point because it's like if you feel - Okay, this is down-rounded, I'm not getting a good valuation, it's like - Well, maybe to some extent, it does even out because you got to insane valuation six months ago? 


Elizabeth Edwards  23:13  

Yes, absolutely.


James Mackey  23:15  

What are your thoughts on this? I've talked with a couple of different people in the VC community, one individual actually came on the show. What he hadn't mentioned is he advises companies that are raising venture capital. And that's really his business model, he helps negotiate terms and these types of things. What he was saying is that he would advise people against sometimes taking a maximum valuation last year, because he said potentially it's not setting you up for success. And you're more likely to hit a down round. 


There might be some clauses in you know, the agreement or fundraising agreement when a down round is raised, there might be certain terms that are obviously much more favorable towards the VC than the founders. What are your thoughts on that? Do you see that too last year, do you think some founders would have been better off, as opposed to raising as much money as they could at the highest valuation maybe raising less money at a more reasonable valuation? Would you say that would have been better?


Elizabeth Edwards  24:14  

Yeah, I mean look, if somebody is willing to pay an insane amount of money for your company, it's really hard not to take it. And it's really hard not to take all that cash, but to your friend's point, if you know that the valuation is bonkers, then you really do need to look at the anti-dilution provisions and that term sheet which will tell you if there's a down round, are we going to share the pain amongst the investors and entrepreneurs or is it mostly the entrepreneurs that are going to bear that that pain?  


For the longest time in general it was a broad-based weighted average, everybody kind of felt the same pain. The other thing that I would say though, I think the bigger danger, even than the dilution aspect is if you raise a huge round at a bonkers valuation, then take all that cash and throw it into a dumpster and set it on fire, that is the worst outcome. If you raise a huge round of bonkers valuation, then you're very careful about how you spend that capital. 


And when the market shifts towards profitability, you pivot and say - you know what, we are going to grow, but every few quarters we're going to go profitable, because we're gonna prove it to ourselves that we can. We're not just going to burn all of this cash and pursue a growth-at-all-costs strategy, because we have the cash in the bank. Because when the market shifts now that you're out of cash, investors are gonna look at - what did you do with the 10 million that you raised last time? Oh, you set it on fire? Okay, well, that's influencing the terms and how I feel about putting capital at risk because that was a risk-return calculation that we're doing on our part,


James Mackey  26:41  

Honestly, for me, my company is currently around 30 employees. That's always been the hardest part. When you enter this kind of down market environment where cash is not as easily accessible, how do you find the balancing act between maintaining an aggressive posture and conserving cash? This year this has been the biggest challenge for me as the CEO. I hope I've done all right. I mean, we've been able to correct course and become profitable again. It's just been very difficult. I think it's because to some extent you want to keep investing and go to market and do your revenue strategy. 


Then again there also comes a point where you ask yourself how much do you try to go against the current. It's very easy to spend cash irresponsibly and as you said, burn cash. Particularly if you're in an environment where you want to raise again, then it's when you're looking at CAC, and these types of things what can you show? And you're totally screwing your metrics. So at some point, it's how much do you want to fight against the current. 


I'm curious, I don't even know if you have anything to add to that. But again, that's probably one of the hardest things that I'm dealing with this year, trying to strike the right balance between being with aggressive focus on revenue, focus on go-to-market, and then also saying - Okay, we need to tighten our belt, lower expenses and preserve our runway in cash and try to maintain profitability to ride this thing out. So that we are in a decent enough cash position for one of the market rebound hits that we can then deploy capital at that point in time to actually take advantage of the growth in the market. So that's hard, that's the hardest thing.


Elizabeth Edwards  28:31  

If what you're saying is, it is hard as a leader to completely change the paradigm. People, your employees, your investors, everybody signed up for a growth story during a growth-focused market. But now, we're in a profitability-minded market. And can you the leader, change your mindset and reset expectations and say - look, the market is doing this, and we need to respond? And it's literally like trying to argue with gravity. 


The interest rate is what it is, you're not going to be able to go into a bank right now and say, I know that the Fed just raised interest rates and other three quarters 7% but man, just give me the money at the old rate anyway. That's not a thing. So for the growth-minded CEO, I think one of the things that you can measure and then use as a guide to help you figure out how much to lean into any growth because what I would say is there sort of a profitable state stasis is your baseline, which will stay the same size in terms of revenue. We said we're not growing, and we're profitable, and we're in this state of homeostasis. If we want to start thinking about growth, let's think about unit economics, and also, let's think about the payback period. 


Because a lot of people have, I'll give you a great example of this, if we're talking to consumer products, the max lifetime value of a tampon brand is generally $5,000, right? Like women will spend about $5,000, in their lifetime on menstrual products of some type. It's gonna be something south of that, the lifetime value is gonna be something south of that. But that is over a lifetime. So, if you're thinking about that customer and how long she's going to be a customer, she's going to be the customer for decades, and probably the payback period on that marketing spend is gonna be long, it's a long time to earn that back, versus a Peloton bike profitable on first purchase. I mean, I don't know where they are today but back in 2014-2017 easily profitable and the first purchase, and you've got this really nice subscription thereafter, but the payback period matters. 


Because if the payback period is not within the timeframe that you will see the market shift back to growth, let's say it's gonna take a minimum of a year, maybe even two or three years to get back to growth. Keep that payback period short, keep it within a six-month window, then okay, I am spending some money on growth but I know it's gonna pay back very quickly and it's worth it. And if that's not the case with the business model, or with this particular campaign and business activity, don't do it.


James Mackey  32:31  

Yeah, the other thing that we're doing is we are doing less experimentation on different ways to acquire customers. So when cash was flowing a little bit more easily, we were testing a lot. We were saying - Okay, we have these channels that are working, let's do some different things here. Let's attempt these other channels. And now we're really honing in on - Okay, what channels are producing the best outcomes, both in terms of revenue and payback period? These types of things. And for us it's relationships. It's investing in podcasts that bring awareness. 


We produce a couple of those, my content on LinkedIn, relationships, going to CEO dinners, and VC events, these types of things and just building awareness and brand are ultimately what is driving the most business referrals. I meet somebody at an event, a CEO event, and his or her buddy is hiring. And it's like - Oh, you should talk to James. As a services business for my specific company that's what drives most of the revenue. So we basically cut the budget on everything else and just started focusing on the core strategy, which is very cost-efficient, but the downside to our strategy is that it's heavily reliant on me. 

When we get into a better market condition we really need to build out more of a holistic revenue strategy that's not so heavily relying on myself. The point being is that getting to what we know works, right, and then just cutting everything else and not focusing on experimentation go-to-market right now.


Elizabeth Edwards  34:22  

Or running much smaller experiments. As you run more and more experiments, you see really the range. It used to be if you were doing a TV buy, that was a pretty big minimum investment. Then these days with streaming, actually TV advertising a little bit, a little bit more approachable. Obviously, I'm talking about CPG brands for services, it's completely different, right? 


In good times, upwards of 30% of a marketing budget will be reserved for experimentation. The earlier a company is and the less they've figured out, the more experiments you want to run and really figure that out. And as you identify those, those activities that are getting you at least a 3, now 5, a 7x LTV to CAC or greater, then you focus on those and you cut everything else that's less profitable or longer payback.


James Mackey  35:37  

So you're looking at LTV to CAC, and then also payback and you're trying to essentially balance this out because you might have some things where the LTV to CAC is better, or the payback period is maybe not as ideal given the fact that you're trying to mean profitability or sustainability in the short term, right?


Elizabeth Edwards  35:53  

Yeah. Think of an equation where maybe you have an offering where it's $10 a month, and people stay on it for a long time. But if it costs you $200 to acquire that customer, that's even before you think about - what's my margin on that $10 a month? Yeah, maybe you want to rethink that, versus something that's a $200 acquisition cost and you're getting $1,000 of revenue.


James Mackey  36:33  

For sure. Well, this has been incredibly insightful. We're coming up on time here. I wanted to ask you real quick if people want to follow you online, they want to engage with you and your company, what's the best way to do so? 


Elizabeth Edwards  36:47  

Yes, check out our website. It's and I write for Forbes. We post a lot of the content from Forbes on our blog on our website. And yeah, you can check out all of our investment criteria, reach out, contact me on Contact our team via our website, or you can find me on LinkedIn.


James Mackey  37:13  

Elizabeth, thank you for joining me today. And for everybody else tuning in - Thanks for joining us and we will see you next time!

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