New Economic Realities   //   February 2, 2023

XRC Labs partner Diana Melencio on investing during an economic downturn

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XRC Labs is looking for the next consumer brand winner.

The organization is both a venture capital fund and accelerator that has been around since 2015. Its portfolio companies include Outlines, Caraa and Billie. Partner Diana Melencio is constantly trying to figure out what’s next — and what market is under-tapped.

On the Modern Retail Podcast this week, Melencio spoke about her investing process and the areas she’s most excited about for the year to come. For example, she sees men’s skincare having a moment soon. She also sees older generations as a demographic that remains overlooked by many startups.

“Women over 40, women over 50,” Melencio said. “They’re a demographic that has some of the highest purchasing power in the world in the country. They’re at a stage in their career where they have a lot of disposable income, and there are very few brands that try to directly speak with them.”

One of XRC’s main theses is that digital is the way of the future for consumer-facing brands. And even though foot traffic is coming back to some stores, there is still too much under-utilized retail space. If you go to a mall in suburban New Jersey or Connecticut on a weekday, she said, “there are not a lot of people shopping there.” As such, she’s looking for ways that companies can rethink the spaces they once relied on.

But perhaps most top of mind for her — and most entrepreneurs — is how to stay afloat given the current economic uncertainty. It’s true that it’s tough to raise money as a startup right now, said Melencio. But now is when brands can prove they have longstanding business models that can outlast downturn.

“The first thing is that you should be profitable on your first sale,” said Melencio.

Why physical retail remains a huge problem
All you have to do is go to your neighborhood Mall. If you’re in you’re in New York City, go to New Jersey, go to Connecticut and you will see that if you go on regular business hours during a weekday, there are not a lot of people shopping there. On weekends, you might see a little bit of a pick-me-up. But one of the ways in which I think retailers and mall owners are thinking through that problem — because it continues to be one — is by creating experiences and services in-store, and then different ways that they could use the back of the store. So that’s everything from in-store pickup to rentals and rental pickups.

Why men’s skincare is the next big category
Another area that I’m really bullish on is men’s. Men’s haircare has largely been addressed but men’s skincare is an emerging category that I’m really bullish on. We’ve invested in a company called Stryx — they do really well. They do more functional cosmetics; so they have a concealer pen where if you have a pimple the day of your wedding, you can [use it] and you won’t feel weird about asking your sister or your future wife… [I’m also bullish on] VMS, which is an acronym for vitamins, minerals and supplements. We now know that vitamins are great for you, but a lot of people don’t like to consume a pill. So I’ve been really interested in — and have been digging in for the past year on — new forms of VMS. Whether that’s a Listerine strip that gives you vitamins or gives you caffeine to perk you up, or it’s a mint, it’s a gum or it’s chocolate. Or maybe it’s a patch. So different forms of VMS have seen low double-digit growth, which is very high.

What Melencio looks for in brands
The first thing is that you should be profitable on your first sale. Not a lot of people are — well, a lot of people are, but I’m still seeing some companies’ decks that show: ‘no, it costs us this much to acquire the customer but we’re not profitable until we make the second sale.’ [That] is interesting because a good repeat purchase metric is over 30%. Let’s give you the benefit of the doubt, [let’s say] 50% of your customers are buying your product again. Then that means you’re only profitable with 50% of your sales.