Eric Malka - Co-Founder & CEO Strategic Brand Investments

Welcome to another VC Wisdom pod. We have Eric Maka with us today. Eric is a previous co-founder and CEO at The Art of Shaving, uh, still co-founder and CEO at Ingredients, and also a company called Strategic Brand Investments. We're gonna talk about PE, D2C, Eric's background. Eric was on the pod about 2 years ago, so eager to see what's been up in his life since ChatGPT-4. So Eric, welcome to the pod for round 2. Tell us a bit more about yourself.

Hey, thanks a lot. Glad to be here. Um, yeah, I've pivoted for the last 2 years, really investing and supporting young founders, um, developing, um, consumer-branded product companies in my industries, which is beauty, men's grooming, and the wellness. So that's what I've been up to in the last 2 years. I also wrote a book called On the Razor's Edge: The Story of the Art of Shaving, where I really lay out a lot of the principles and lessons I've learned over my entire career, going from really rags to riches, startup to exit in 12 years. That's what I've been up to.

Tell me, some investments you've pulled in the last 2 years we've spoken, some of your flagship port co-companies that have grown to great success since you invested in them?

Well, I think we're involved with, uh, I think 6 companies, um, plus 2 that we've already exited, uh, a while back. And one of our main portfolio companies is called Barbarinos. It's an Italian men's grooming brand, very similar to The Art of Shaving, except much more updated to today's consumer. We've helped them cross the pond from their Italian market to the US market, and they're scaling extremely rapidly at this point, opening flagship stores, entering luxury retail, and soon to launch their D2C campaigns in 2027.

I love that. And yeah, why is it similar to, uh, The Art of Shaving, uh, and what you've built? Well, what do you see in them?

Well, the similarity is in the offering, um, luxury barber, uh, services accompanied by a full range of men's grooming products. Um, and what I really liked about it is that they've built a truly luxury brand Um, and the founders are very capable individuals that can execute a strategy at a high level, which is what I'm looking for.

Interesting. Uh, how do you grow such a company nowadays? Uh, what do you invest in? Of course there's a product, the experience, but how do you get customers to reach your door?

So we've taken a different, uh, route than a lot of brands out there. We started with our brick and mortar. We operate 17 locations in Italy, and we decided to enter the U.S. market by operating our own freestanding stores. We currently have 2 in New York City doing really well on Madison Avenue and Rockefeller Center, and we are building 2 more, one in Grand Central and one in Columbus Circle in New York. Um, we have a run rate of about $5 million targeted for the end of this year, so it's not bad after 2 years in the marketplace. We're also entering Bloomingdale's, Nordstrom's, Dillard's, and specialty men's clothiers, and we're gearing up to launch our direct-to-consumer. We basically flipped the script. Instead of starting with the digital presence and then moving into wholesale, we decided to go with our most profitable, high return on investment strategy, which is our retail stores.

And what's the top of funnel for that channel? Is it ads, Meta ads, Facebook ads?

It's like, you know, it's high traffic. Really, it's been high traffic. You know, we're paying high rent. You know, our rents range $30,000 a month, and we have thousands and thousands of men coming through our— in front of our stores. So we're doing it the old-fashioned way. Even though we're on social media, really our cost of acquisition is, is a positive because our stores are very profitable based on being in key retail districts.

Got it. And is that your most successful investment nowadays? How do you segment your time between the investment and the investment play and Ingredients, which is obviously still active?

Yeah. I'm not spending any time on ingredients. My heart is really focused on supporting founders and investing in early-stage companies. Another company we invested in is called Jack Henry. It's really a fast-growing company, mostly digital. They're doing a bang-up job online and Their, their claim to fame is hair care, but they also do skincare and body care, and they really use clean ingredients and are going after a hipper, more affluent consumer, more gender-neutral but focused on men's.

Interesting. Um, who do you raise from nowadays? Uh, if you're active on that level, who are your LPs?

So it depends the stage of the company. We raised $1.2 million for, uh, Barbarinos this year, earlier this year, and that was really done through, uh, private placements, high net worth individuals, family offices, uh, people from the industry that have exited like me. But we're gearing up to raise another $5 million for Barbarino in January, and that's going to be more institutional. VCs that invest in the space when the brand has already passed the $5 million thresholds and has a growth trajectory.

Okay, so you raise per client, you're not like a fund as per se. Um, no, how does that work?

Uh, we're really doing it on a, on a case-by-case basis. We feel that at this stage that's really how we want to, um, to approach supporting our founders with raising capital. And the reason for that is because each of our brand portfolios are at different stages, and we don't want to be under pressure to take money when it's not allocated yet. We want to be very thoughtful about who we invest behind.

And how do your clients find you ultimately? Is it like existing connections? Like, how do they hear of you, and what's your beachhead? Is it to raise capital for them, or is it to participate in advisory and growth? Like, what's your— Yeah, Wedge.

So it's through our network. We have deep roots in our industry, and we're becoming known for helping entrepreneurs that are at early stage, meaning usually a million or less in revenue, and we prefer to start with advisory, because a lot of these smaller brands need to be restructured before they're ready to take capital, you know.

Yeah, so okay, advisory first. They know you, uh, advisory— is it like, I don't know, pay us $5,000, $10,000 a month and, uh, we'll, uh, tune in on every single of your decisions? What's a specific— yeah, contract for that?

So Again, it's a case by case, but it starts with advisory fees so that it's a very, very non-committal relationship on both sides that can be stopped at any moment. And then I need to know that they're the right partners for us to get behind. They need to know that we can really add value. The second level is to really get advisory shares, so we get equities for helping them advise and operate the business. And then the third level is we help them raise money and we participate in those rounds, and that can go to the next fourth level, which is for us to sponsor a Series A SPV type relationship, right?

And for fundraising, do you get extra payments for that? How does that work? Like to not fall under broker-dealer rights and all that?

No, no. The funding, when it's a— so the funding rights, either we sponsor the round and we have a carry and a sponsor commission on it. But primarily what we're looking for is to bring strategic investors into the business to help it scale.

Okay, interesting. Since we last spoke, I think you launched your book as well, right? Um, what's in that book like, and why did you decide to write it?

Um, I finally got inspired to write the book. I, I didn't want to just tell my story. A lot of people asked me to tell my story, you know, 17-year-old arriving at Port Authority in New York City in 1985 and selling the company to Procter Gamble 24 years later made for a good story, but I wanted to really make it a business book that entrepreneurs can use to learn, you know, lessons of going from idea to exit. And I really wrote it to help entrepreneurs understand, you know, what it took for me to go from that idea to that strategic acquisition in 12 years and, um, everything that went along with that journey before, during, and after, actually.

Yeah, it's crazy story, right? Especially like after 9/11, right? Like, what was the feeling, uh, the economic feeling back then on the streets, right? Uh, I think you were— were you open like right, right after the events? Uh, Yeah, we were underground, right?

Yeah, we were, we were right in the middle of it. We had all our business in Manhattan at that point, and we were very scared for many reasons, but financially we were concerned. But 9/11 was a very small bleep financially for the economy. It rebounded very fast. I think we only lost about a month in business, and, and then we were back to, back to the to the regular sales that we were used to. It really— the big— the biggest impact I had was the financial crisis while I was trying to sell my business in the middle of that turmoil. That was really stressful.

Yeah. How did you survive that?

Grit, man. Grit. Just fighting, fighting another day. You know, if you survive long enough, maybe you're going to make it. And that's what happened. Just never giving up. And really, it was the fight of my life. And I almost lost the business.

Yeah, most of the Wall Street guys were actually sitting on your chairs, right? So you were— you would speak to these guys pretty much on a daily basis.

Yeah, that was our audience. We were really tied to the markets in many ways as a luxury consumer goods for affluent male consumers. A lot of our customers were professionals and stockbrokers and people invested in the markets for sure. But our acquirer went from a $58 price per share to $28 overnight. So everything was really chaotic.

Yeah, it sucks. Um, per sitting, how much would a Wall Street dude spend on, uh, haircut, care, and all of that? Like, for us, it was like $200 out of him.

Yeah, I mean, our average was $100 because, you know, we sold $18 products, but we had an average of $100. We really measured our success by the sales per square foot of our stores. Today at Barberino's, we average about $150 per customer. So yeah, it's a premium offering.

So you had products, but you also had chairs, right? Like you had—

Yes.

So you could even get your product like directly in store, like almost immediately. Absolutely.

And today the script has flipped, you know, services was about 20% of our business back then, and today the services are about 60% of the business. It's really what drives traffic.

Are you still in New York?

No, I live in Miami. I—

okay, okay. Yeah, it was like, why not go back to Europe or something? I guess your heart is in the US, right?

No, I spend a lot of time in Europe. A lot of time in Europe.

Yeah. How's Miami? What— and how's the scene there? Like, there's all these tech and startup and crypto bros?

Like, uh, uh, yeah, it's pretty out of control. I mean, um, you know, my neighbor's the, uh, co-founder of Google. He lives across the street, you know.

Jeff Bezos.

No, the other guy. Oh, so, yeah, um, so, you know, they're all moving in. Zuckerberg, you know, Bezos. I think Elon Musk is looking for space about a quarter mile from here. Uh, it's pretty crazy in Miami these days.

Yeah, yeah. Uh, do you see— are you like deploying capital in Miami? Are you economically active there, or—

yeah, for sure. We love to support local brands. We have, uh, one of our brands is called Miami Beach Bomb. It's an outdoor On The Go brand selling clean reef-friendly products for women, you know, sunblock and other products for the beach and to be on the go. We're helping entrepreneurs everywhere, but we love to help the founders that are in our backyard the most.

And is SBI! scalable, or are you running it more as a lifestyle business?

It's definitely scalable and there's a lot of opportunities. I tend to look at it as a lifestyle business right now, but it is scaling. It is scaling.

Right. Yeah, I'm just thinking of a system to get you more clients, right? Other than your network, obviously network is always great because it's high close rate, low sales cycle, right? But yeah, system to get more people your way because you have so many, so much experience, right, in your space. Um, not everyone has done what you've done, and yeah, the grit aspect is quite important in that niche. But, um, what's the plan for SBI this year? Where do you want to take it?

Uh, we've made two new investments this year, and next year we're looking to really bring more LPs into the brands in our portfolio. So we're doubling down on brands that are really showing traction. Um, And we, we're talking to brands all the time. It's just that, uh, we have to be really picky. This barrier to entry is very low and failure rate is very high, so we have to pick the right horses. We're a high-touch shop, you know. We don't want to be a mass— we're not going to go working with 50 brands. We want to work with 1 or 2 more brands a year, uh, and build a very strong portfolio over time.

So there's never been a worse time than to launch a D2C business than right now, you're saying?

Why?

Well, I mean, it's a tough market. You just said it's very hard, uh, and I believe there's so many brands nowadays. So is there, is there still an opportunity? I'm saying that because my first business 15 years ago was a nootropic and It was so hard to deal with consumers. Nowadays I deal with CEOs, founders, investors, people I understand because I am that myself, right? So I'm targeting myself ultimately.

Absolutely. I think the D2C economics have changed over the last 5 years and, you know, young entrepreneurs are still on that mindset that you have to go digital first. And that's not always the right the right call. I mean, it's very expensive to acquire customers online today. So it's always been difficult to be successful. I mean, I think, what is it, 90% of startups will fail. That's the statistics over the last 70 years, whether you're in the AI era or pre-internet, the statistics are the same. So, you know, what I focus on is how do you avoid failure more than how do you achieve success because All the entrepreneurs I meet, most of them are hardworking, they have good ideas, and they've gotten off the ground, but somewhere along the line their businesses break down, and that's because they make too many mistakes. So that's really what we're trying to do is to help guide them to avoid some of those pitfalls so that they can, you know, survive long enough to find the success lane that they're seeking.

And why would you advise physical also? Because physical lacks scale, but, uh, it gives you massive, uh, data on your clients, right? Like, you're, you're with them, you, you're physically with them, so you understand stuff that an entrepreneur doing purely online wouldn't understand. Is that the thesis?

Not really. I think for me the thesis is where do you find traction early on that is not, you know, burning too much cash, right? So in some cases, online is the right strategy. Other cases, going to third-party wholesale retailers is the way to go. And for a few brands, having their own freestanding store, which is expensive to build, but they can be very profitable and really create a lot of brand awareness. So at the end of the day, you want to have an omnichannel. You want to be on Amazon, on Shopify, in mass retail distribution, and maybe even having your own freestanding stores.

Yeah, I can see a couple more reasons for this. It's like burn all boats, right? You just invest massively and then you're there, and then you just have to sink or swim, and that's where the miracle sometimes happens, right? And then you can create physical content, right, with your product. You can even do some events at your place, right? And people are sort of looking for that on the back of COVID right? So I could see why this would work. But yeah, if you started the podcasting, $30K a month rent, I think you'll scare a bunch of people off.

Well, you know, it's about percentage of rent to your revenue. That's what I tell people. A lot of people that competed with me as a retailer were looking for low rent, and with low rent came very low traffic density. Oh yeah, and with low traffic density came very low sales.

Brand, right? Like the, the, the foot, uh, the place where you are is your brand. So if you have like a top place, well, people look at you and you can raise your prices.

So yeah, I mean, we're paying $30,000 a month, but we're producing $150,000 a month at the same time, you're talking about 20% ratio rent to revenue. I have no problem with that. I'll pay $50,000 if I can do $200,000.

Yeah, dude, I love it. Where can people find out more about you, Eric?

Um, strategicbrandinvestments.com, or just Google me, Eric Malka, and you should be able to find me pretty easily.