Brian Sugar is one of the most insightful thinkers and investors in consumer. His essays are cogent, well written and often contain surprising new ways to think about a topic. I recommend subscribing to his newsletter AirSugar.
A funny side note. I sold him the domain for his corporate entity about 20 years ago. So I have been following what he and the team have been doing ever since. I met him only once. At a previous company, I pitched Sugar Cap. They didn’t invest. But I got to know his partners, Krista Moatz in particular, and have always appreciated her feedback, insights and help. I think that’s the sign of a great firm - you like the people and want to build a relationship even when they don’t invest.
Brian’s essay “Taste is the Alpha” really struck me. I woke up early this morning thinking about. If you are interested in consumer brands you should read it for yourself. But here’s why I couldn’t stop thinking about it.
He hooked me when he banged away on spreadsheets and financial analysis at the very beginning. ‘Hey wait! I love spreadsheets, models and financial analysis.’ My defenses were up. But Brian makes the point that in looking at early stage companies, some will put unwarranted faith in their financial projections and market size analyses. That’s absolutely true. In a recent post I talk about how models lie. Internally we put too much faith into models. And Brian is making the point that external observers of companies i.e. investors, make that mistake. Point taken.
Brian’s main point is that predicting which brands and products will resonate in the market is not something that can be done with analysis. It can only be done with experience. That experience takes years of cultural observation which creates a deep sense of how the culture and market is moving which leads to an intuitive understanding of how a new product will intersect with the changing culture.
Truly special and remarkable brands have founders with this talent.
But in reading it for a third time, I realized why I kept turning it over in my mind. Brian gives the example of Michael Preysman and his new hydration brand Magna. I spoke with Michael a few years ago about Everlane and I was pitching him on financial analysis and data analytics combined. He was already years ahead of what we offered him. I was struck with the amount of people he had working on these problems, the insights they were uncovering and the speed of decisions Michael could make as a result. Most importantly, it was clear that all this effort and speed of execution was focused entirely on generating more cash.
Taste isn’t enough. You have to turn taste into cash.
And this is where so many founders can learn from Michael. It’s not enough to be prescient about how your products will intersect where culture is going. You have to ensure that intersection generates cash (and wealth for you). The VC’s are not an ATM to enable your indulgences in new product development. They want you to convert their money into massive returns. And if you don’t take venture, your time is finite. You have to make sure what you are doing will maximize your chances of generating wealth.
You end up seeing four outcomes.
- The prescient founder catches lightning in a bottle. The intersection is so big and powerful that simply nothing they do screws it up. In spite of their financial mismanagement, massively bloated OpEx, unbudgeted marketing and terrible decisions, money pours in and so do the big exits.
- The prescient founder nails the intersection, but does manage to screw it up with terrible financial decisions. They end up as the ‘oh yeah, remember those guys?’ stories. And are often followed by more disciplined founders who take their great idea and then execute the hell out of it.
- The prescient founder nails the intersection, but lacks the cash to make the most of it. The clarity of uniqueness is lost in an avalanche of competitors’ ads.
- The prescient founder nails the intersection, but the market turns out to be not big enough to create a massive success. How these founders react next makes all the difference.
- Many ignore reality and are unwilling to adapt. They are like gamblers at the blackjack table turning their stacks into debt as they seek the feeling of the big win again. Finances are ignored, cash is frittered away, years slip by all to end in a BK or ‘acquisition’ in name only.
- The smartest realize they have something pretty good. With smart financial discipline, they extract cash from their intersection and build wealth through distributions or an exit.
Taste is not enough. Unless your plan is to be Founder Type 1 - the lucky financial fuck up who still manages to get rich - maximize your gift of taste with a financial discipline that turns that taste into cash.
Links
Brian Sugar Taste is the Alpha
Brian Sugar AirSugar | Brian Sugar | Substack
I help founders generate wealth through better finances. If you want to make rapid improvements in your company, let’s talk.