DTC Briefing: How VC Brian Sugar invests in the ‘picks and shovels’ of commerce

After starting a company called Neptune that sold dial-up ISPs to college students in the nascent days of the internet, Sugar got a call from J.Crew in 1996 asking for his help in putting the company’s apparel catalog online. After serving as the apparel company’s vp of e-commerce for rouhgly three years, Sugar has held a variety of roles in e-commerce and media, most recently as the co-founder of PopSugar, which was acquired by Group Nine in 2019.

Since then, Sugar has launched a venture capital firm called Sugar Capital, where he focuses on what he calls the “picks and shovels” of e-commerce. Sugar Capital has three other partners general partners — Sugar’s wife Lisa, as well as Will Hawthorne and Krista Moatz — and wants to “write $1 to $2 million checks for double-digit ownership,” according to Brian Sugar. 

Since launching in 2020, Sugar Capital has made 48 investments across 33 companies. Sugar Capital investments include cookware company Caraway and CBD brand House of Wise, as well as in business-to-business companies like analytics platform Tydo and Novel, a low-code platform for NFT commerce.

Through its inaugural fund, roughly one-third of Sugar Capital’s investments went to consumer startups, while two-thirds went to B-to-B companies. Through its second fund, Sugar Capital expects to direct even more of its money into software companies, as much as 85%.

“What we’ve learned is, consumer companies take a long time to get off the tarmac,” Sugar said. “To stick the landing and become a $25 million, $50 million, $100 million revenue company, it takes a much longer time.” At the same time, he said that “there are so many problems that the consumer companies have, that technology can help solve.” 

Still, Sugar Capital is interested in investing in some consumer companies, in order to get a “first-row view of all the problems that brands are having.”

“We use that [information] when meeting with software companies to be like, ‘wow,’ this is a real problem that needs to be solved. This is a great software solution.”

I spoke with Sugar about what types of consumer companies Sugar Capital is still interested in investing in,  and what the biggest problems are that DTC startups are facing right now from his perspective. This interview has been edited for clarity and length.

What aspects of commerce would you say Sugar Capital is interested in investing in?
We kind of look at the lifecycle of customers in the commerce world. We have a bunch of investments [dealing with] efficient customer acquisition. With everything that happened around [the death of third-party] cookies, and iOS14… no longer can you build a brand solely on spending money on social media marketing. There’s a lot of companies that we’ve invested in that help companies have a more efficient customer acquisition.

Then, as you move down the funnel, to the [brand’s website], we invest in a lot of companies around raising conversion rate or increasing average order value… to all things retention. 

And then during Covid — but even still today — there’s been a lot of merchandising and supply chain issues that a lot of brands have gone through. So there’s a lot of investments we do there. 

Then, there’s forward-looking stuff, like Web3, which we have the investment in Novel.

So we’re trying to make pretty much every KPI of a consumer brand better by investing in software companies that provide the picks and shovels to these consumer brands.

What are your thoughts on the biggest issues that consumer brands are struggling with right now as it relates to trying to improve some of these key metrics like customer acquisition costs and average order value?
I would say, prior to May of this year, the majority of problem-solving for brands was [around] ‘how do I more efficiently acquire new customers?’ And that was like, ‘what do I do on TikTok, and how do I deal with Instagram Reels, and is Snapchat a real place for us to acquire new customers?’

But then in May, with everything happening around the macro-economy, brands had to tighten their belts on spending, and wanted to spend less on customer acquisition. And they were all sitting around saying, ‘hey, 97% of the people that come to our site don’t buy. If we can increase that by around 1 or 2%, wow that would be pretty dramatic.’ 

So over the summer, [the focus] really switched to more retention and conversion marketing once they’re on the site. 

It changes, but now in the fall what we are seeing is still a lot of activity on TikTok.

We have this company called Bounty that just raised their seed financing, which has created a really interesting loyalty program based on customers posting videos of them using the product on TikTok. 

Generally, what do you look for when evaluating deals? Is there anything in particular that’s a sticking point or a selling point for you?
For us it definitely starts with the founders and relevant experience. 

They are not just goal-seeking and being like ‘oh this category hasn’t been millennialized, so we’re going to create a new brand with a cool Serif font, and a new palette of colors — and they are ultimately just a marketing company for products that have existed before. 

We love investing in co-founders. When there’s two people running the business, and one is the sales-marketing-brand person, the right brain of the operation. And then we’re looking for a finance-technical operations person to have that left brain, right brain partnership. 

What consumer companies do you think are still successfully able to break through the noise?
I think you’ve got to start at the unit economics of a business, which is having a very high margin business. — You need to, from day one, have an omnichannel strategy that you’re going to execute as you get bigger. 

I still think we’re going to see a plethora of beauty brands get started just because the margin on beauty is just extremely high. I think we’re going to see less alcohol companies start because it’s really hard to get a distribution moat just because of the way the laws work with selling alcohol.

I think crafting an omnichannel strategy is even harder today because the Targets and Walmarts only have so much shelf space. You have got to be thinking about ‘what are the new categories that they’re gonna want to get into?’

One of our portfolio companies that is a great example of this is a company called Cake. Cake is a sexual wellness brand. And, you know, if you took a walk through Walmart’s aisle where they sell these products, it’s not fun, kind of icky. And Cake has really changed the landscape of that category. And they have a fantastic strategy with their retail rollout. And that’s going to be a great moat for Cake as they think about distribution. 

What I’m reading

• Peloton unveiled a flurry of new distribution deals last week, announcing deals to put its exercise bikes in every Hilton-owned hotel in the U.S., as well as to sell its equipment and accessories at Dick’s Sporting Goods. 
• Liquid Death says it’s on pace to do $130 million in revenue this year, up from $45 million in 2021, as it announces a fresh $70 million in financing. 
• In an apparent about-face, Retail Dive reported that Stitch Fix is once again making its flexible shopping service, Freestyle, available only to customers of its styling service. 

What we’ve covered

• Subscriber Exclusive: From JuneShine to Swoon, why more beverage brands are getting rid of their direct-to-consumer delivery programs entirely. 
• Amazon aggregator SellerX is facing a breach of contract lawsuit from the former owner of one of the brands it acquired, pointing to potential turbulence within the aggregator industry. 
• Kosher food company Manischewitz joins the parade of legacy CPG brands launching their own line of merchandise to appeal to younger customers.