Lara Schmoisman  00:05

This is coffee number five. I’m your host Lara Schmoisman. It’s all about you and I want you to succeed. Download today, my exclusive Insiders Guide to generate in business relationships that last and turns into sales. Hi, everyone. Welcome back to coffee number five. I’m so excited to be here today with you and also have a special guest at the end of the day for you guys. It’s all everyone who has a brand a business is all about return of investment, and is all about making money to make our brand profitable. profitable. Mike, that’s my English at some times you get tricky. And but today, I’m by Richard Kestenbaum. I hope that I said it right. The best part. Terrific. Okay. Hi, welcome. Rich. And thank you so much. You are one of the founding partners of triangle. Capital. Yeah, capital on so you work with money. And you work with a lot of beauty industry brands, and you work with other brands as well. Other Other kinds of brands, right?

Richard Kestenbaum  01:18

Yes, what we do is mergers, acquisitions and capital raising for beauty. But really in consumer we work. We work across all consumer businesses, and we are focused on consumer.

Lara Schmoisman  01:34

Okay, so let’s let’s, I have no idea about anything of this. But so let’s start from the beginning. So basically, you’ll find money for other people. How does it work? Well,

Richard Kestenbaum  01:47

we are not principles, which is to say we’re not investors, we don’t have a fund. We are agents, people hire us to do transactions, and they pay us fees. We are investment bankers. The firm was started by myself and my partner, he and I both came out of major firms on Wall Street, he from Kidder Peabody and me from Drexel Burnham, where we were both partners, and we bring that expertise to firms at a size and stage that typically don’t have access to it. And we’re really proud of the track record, we have getting very high values for our clients. So not sure where to begin. There’s a lot to say about fundraising and liquidity, and love to be helpful. Tell me what you do. Yeah.

Lara Schmoisman  02:37

Fundraising, I like that the word a sign getting the funds the funds. Yeah. So for example, because I talk to a lot of smaller companies and they say, I’m ready to fundraise I, I want to put words, I want to get money, I want to grow my company, when is the right time for a company to start getting funding? Okay?

Richard Kestenbaum  03:06

The beauty business is unique, because the margins are typically very high. In a world where direct to consumer has become important, marketing has become an important cost. So, if you, if you have high margins, and you don’t have a high marketing cost, then you may be able to fundraise or you may be able to fund your business without having to raise outside capital. That’s an ideal circumstance. Because why give up equity, you know, the the whole purpose, the whole financial purpose of starting your own company is to build your own wealth and the more equity that you can retain, the more wealth you can keep for yourself and the more control but not everybody and and what’s interesting about the beauty business is it doesn’t need that much working capital. Working capital is capital you use in the business for things like inventory and to finance receivables when people owe you money. And the beauty business doesn’t need that much working capital because the margins are so high. So you know, if you have a gross margin of 85%, which is not strange in the beauty business, then only about 1/6 of your revenue is needed to purchase new inventory. So often companies in the beauty business don’t need to raise outside capital. So the simple and I don’t mean to be a smart aleck answer to give a smart aleck answer but the time to raise capital for for growth or to build your business is when you have to in the market we are in right now.

Lara Schmoisman  04:49

I just want to say something from the marketing side. A you do need to do marketing, because it’s so competitive.

Richard Kestenbaum  04:57

Yes. It’s a noisy The world. And there’s a lot of competition that if you have a way to get meaningful wholesale sales, then you don’t have to spend a lot of time on marketing. But if that’s not your if you don’t have that ability, or it’s not your strategy, then you’re absolutely right. You have to do marketing, you have to raise capital, how does a startup a company that has no revenue or very little revenue? raise capital? Well, you know, what is it that investors are investing in when they invest in a startup, you have a concept. And we all know that most new businesses fail. So an entrepreneur is somebody who or founder is somebody who says, I know most businesses fail, but I think I have something special and unique, that will make it succeed. And that, and, and believe me, I understand that state of mind, because I’m a founder, my partner, and I founded this business. And we know what that’s like. You know, in order to, in order to do that, you have to have a certain stage state of mind. And what investors are investing in is not your business, they are investing in you. And the people who are going to invest in you before the business itself is proven out are the people who’ve done their due diligence, so to speak, which are the people who know you, and those are going to be the people in your contact list. And if you’re a person who is young, perhaps, and you grew up without a contact list of wealthy people, wealthy enough people, then the odds are that your contact list has a contact list that all of your contacts, no PII that that among your contact, there are people who know people who have money, and can refer and can refer you to them, and introduce you. Because they’ll do that saying, Look, I’ve done my due adult due diligence on this founder, I know them, and I think they’re a good opportunity, I think you should meet them. And that’s how you raise money, because you’re not raising money based on the business, you may raising money based on yourself. Once the business has revenue, and has developed and has a track record, then you can talk about, then you can expect people to invest based on what the business will do. But until then, it’s about the founder and the team.

Lara Schmoisman  07:26

So it because I see and I mean, I’ve been in a lot of beauty, industry events, and and there are meetups and I see a lot of new founders trying to peep talk to people like you thinking that they wouldn’t get money, or you can help them. So let’s make it clear, it really is not very realistic to think that they can start a company or coming with an idea and get funding.

Richard Kestenbaum  07:57

Well, institutional funding is very unlikely. And someone like ourselves will take that on. Because we know that the most likely candidates are not institutions, their personal contacts of the founder. And so we’re not going to add a lot of value to that. And the transactions are often too small for us to work on. And as a rule, we don’t work on any transactions that are under $10 million, and most of them are or the vast majority of them are above $25 million. So you know, that’s not really startup universe. Nope. Not at all. Right. So So that’s not the universe of things we’ll work in, and you won’t really find investment bankers. I can’t think of any I don’t know any who will get hired by a startup to help them raise capital. It’s just not a good business, because you can’t succeed often enough to make it a good business. So that’s

Lara Schmoisman  09:01

also what the risk is too high.

Richard Kestenbaum  09:05

The risk is to the risk of failing was too high. Yeah.

Lara Schmoisman  09:07

Yeah, absolutely. So let’s say that the company is being in business one on show years. Because I want this is what I see in that many companies. They don’t have a plan like you were talking before. I say, Well, if you go to retailers, are you maybe you don’t need the marketing, but retailers many times they’re not going to pick them up if they don’t see that the brand is doing their own job doing marketing and brand awareness. So it’s what comes first the chicken or the egg. So I always believed that a small brand, just try everything at the beginning. Go to the DTC and try to work on retailers and see what stakes

Richard Kestenbaum  09:50

Yeah, so let’s talk about that. If your marketing depends on Facebook and Instagram and other paid media, that’s probably going to be too expensive to be an enduring strategy that brings you to meaningful profitability. Marketing is really a cost of the product in the world we’re in today. And, and in order because in order to get your customer to be exposed to your product, they you have to reach them. And how do you do that in a world where the brand is trying to give to each consumer directly. So what we found is that the companies that are successful, have a unique communication strategy. And that strategy allows them to avoid having to buy essentially every consumer and every order on Facebook or Instagram or Google’s paid Google search or other media. Without a unique communication strategy. It’s very hard for a product to get viewed by a consumer and for business to get built in a profitable and meaningful and substantial way.

Lara Schmoisman  11:09

Any going deeper in what the communication strategy means to you?

Richard Kestenbaum  11:14

Well, what I said is unique communication strategy, right. And, and what that means is you can copy someone else’s, I love

Lara Schmoisman  11:23

that you’re saying that is that I what I felt absolutely each one of my clients.

Richard Kestenbaum  11:29

So Well, I agree the your communication strategy needs to be unique. Otherwise, you’re caught up in too much noise in the world. And then you have to pay to reach to to be seen or heard. Outside all of the activity that happens in marketing today.

Lara Schmoisman  11:49

What’s an A successful, unique communication strategy that you have said?

Richard Kestenbaum  11:55

Well, let’s see, we’ve sold. So the company called pulp riot, which is hair color for the professional market to L’Oreal, okay, and they started, the founders had a sell on and they created a better product. And they had interesting social media. And they had their own following about the hair business on social media. And they use that following to reach beauty professionals, who were then not having the product marketed to them, but were pulling the product, they were asking for the product. And that drove the business. And I believe that the biggest part of the value that L’Oreal perceived in the business was, in fact, their social media strategy. Because they were able to execute it without spending a lot of money, because they were able to generate followers that wasn’t about paid advertising. And that’s extremely valuable. So I’m saying before that one of the cost of goods is your ability to reach your consumer in the in the way the world works today? Well, when you can reduce that cost of goods by having a low marketing cost, you make a lot of money. And your company’s very valuable when you have a great product, but you have to pay full freight, to reach consumers and tell them about it and educate them about your product and your brand. That’s very expensive. And it’s hard to make a lot of money. Because think about it, if the gross margin in retail, in beauty is 85%, but it costs you 40% or 50, or 60%, which we’ve also seen, then the cost of what you’re doing is really the marketing and not so much the product. And if you can cut that marketing cost, it makes a huge difference in the economics of your business. So if you’re seeing

Lara Schmoisman  14:10

this, this is something I’ve seen a lot all the time, new brands trying to be everywhere. And that’s where a lot of marketing and money and effort goes instead of trying to create that efficient communication. I only know not only thing that needs to be unique, but also need to be efficient.

Richard Kestenbaum  14:30

Yes, startups have to have a strategy for communication, because the strategy for product is not sufficient without a strategy for communication. And one of the things we’ve seen with a lot of if we’re talking about direct to consumer products, is that when you dig deeply into their customer data for those businesses that are able to get traction, what you find is that They have a very narrow demographic of superfans. And that narrow, if you market to only that narrow demographic, it’s much less expensive than marketing to a broader audience and much more effective because they’re the demographic that is more likely to buy your product.

Lara Schmoisman  15:26

Absolutely. And lately there is this belief that a lot of people fit. It’s like a popularity contest. And I’m not into that. I don’t care even about how many followers you have. I care about what conversions you have.

Richard Kestenbaum  15:39

Yeah, it’s about the money. Exactly. It’s again, where we didn’t talk about this. I loved the name of your podcast and all your references to coffee, because you and I are having coffee together.

Lara Schmoisman  15:50

Absolutely. And that’s how we met having coffee too. Yes, I love coffee. And it’s about also I love fashion and beauty. And Chanel, number five is to classic. So why not to go for plastic? Anyway, so let’s get to talking about money. Because I’m fascinated by this. Because I, I always think from the marketing, I’m very respectful of my clients money. And I always tried to spend it very wisely. And I don’t think that there is a lot of return of investment and very high expenses that I see companies doing, like trying to work with all the influencers and try to get an I don’t see a lot of return of investment in immediately. It may be you can, if you’re wise and you choose the right person to be the face of your company. That’s okay. But I see a lot of bias into working with influencers. That isn’t a good word for brand awareness, which is great, but it’s not going to give you that immediate return of investment.

Richard Kestenbaum  17:00

Yes, but that’s right. You can’t be everything to everybody, you have to pick your spot.

Lara Schmoisman  17:08

Absolutely. So Rachel, thank you so much for being here. And coffee, number five. And just one more question and that tip that you can give, if you wouldn’t give a tip to someone who started about their money and their company, how to use it wisely. What would you say?

Richard Kestenbaum  17:33

I would say your I’d kind of come back to what I was saying before, which is, I think in some ways, accounting does us a disservice by saying that cost of goods is only about the actual physical product itself. Because Cost of Goods also includes what it costs you to reach your consumer. And not enough companies focus on that. I’ll say one more say, I ran a panel recently with venture investors. And I asked them, What do you think, is the biggest weakness in the decks you see from startups that are looking for funding? And almost all of them said, they don’t explain what the business is clearly enough, at the front of the deck. And I was shocked by that answer. Because of course, you know, saying what business you’re in is the most basic thing. And to not do that. It’s just you can’t get past that. And I think it happens, because when you’re involved in a business, you’re so enmeshed in it, you make certain assumptions about what other people know and understand. And sometimes you assume too much. I think there’s also a temptation to create slides on a deck that have one word or three words. But sometimes it just requires a clear explanation. So I would say, for companies that are seeking to raise money, inevitably you’re going to use a deck to do it. And make sure that you’re explaining what the business is. And what makes it unique. Right at the front of the deck.

Lara Schmoisman  19:24

Yeah, how you’re different. Yeah, because this is a crowded who all done very competitive. And you’re different and what you do. Yeah, exactly. And yeah, I, I will pass on a lot of things if you don’t see it, like, and you can be dismissed just because oh, I don’t really understand what it is. Right. Well, Rachel, thank you so much for having coffee with me.

Richard Kestenbaum  19:49

Thank you so much. And thanks for the coffee. And so

Lara Schmoisman  19:52

you guys, thank you so much for having coffee with me too. And I’ll see you next week by phone everything you need. At Large boys man.com Or in the Episode Notes right below don’t forget to subscribe we’re so good to have you here today see you next time catch you on the flip side Ciao ciao