Brentwood Associates’ Jay Sung is always on the hunt for the next great investment opportunity. Today, his attention is on companies with built-in communities, or what he calls “grassroots stickiness,” as well as those in the health and wellness space. Sung thinks consumers are less interested in buying new things and more focused on boosting their well-being.
“[Consumers] ….are pretty high up there in terms of, ‘I have a whole closet full of clothes. I’ve got three cars. What else do I need?’” he says. “It’s health, it’s wellness, it’s actualization.”
Hear more from this lively conversation with Signal360’s Stan Joosten in the video below, or read the lightly-edited transcript.
Welcome to this month’s Signal Conversation. Today I have as my guest, Jay Sung, who is operating partner and CMO at Brentwood Associates, which is a private equity firm. Jay has substantive expertise in marketing, is an excellent person to ask about the future of marketing, and what he is seeing with all the technical and business landscape developments that we’re seeing around. Jay, you’re very welcome here. I wanted to ask you as a first question, can you tell us a little bit more about Brentwood Associates, and also what private equity is because not too many people might actually know what that does?
Brentwood is a Los Angeles-based private equity firm. To your point, it’s what they call a mid-market private equity firm. We focus on companies that are between $50 and $200 million in revenue.What a private equity fund does basically is it gets investment investors, large pension funds is one of the larger sources of investors for private equity funds. We take the funds and put them to work by essentially buying companies. We have about 25 investment professionals at our firm, who are steeped in knowledge on all kinds of different aspects of business analysis. We go and buy companies, and on average we hold companies for 567 years, and then we go and hopefully grow them during that period of time, and sell them either to a larger private equity firm or in many cases to a larger firm like a P&G.
You’re a good person to ask what’s ahead. What trends or signposts are you seeing that might give us a glimpse of what the future of commerce would look like?
It’s tricky, Stan. We’re still trying to digest what’s happened over the last five years. What happened obviously during COVID was a huge push into digital, into e-commerce. A little bit of a sugar high, two steps forward and one step back. But the other bigger kind of trend over the last five years is trying to absorb this explosion or detonation of direct to consumer brands. What the heck happened? There is sort of a fizzy mix. Facebook was coming into its own, consumers are starting to shop through their mobile phone enabled through VC funding, low interest rates, and then the Shopify phenomenon. You smoosh all that together with Facebook, creating the really the greatest marketing machine of all time, because it pretty much sold out everyone’s privacy. What a great invention that is for marketing, kind of terrible from a consumer privacy standpoint. But what a great invention for marketing, like it could do no wrong. Facebook could profitably acquire a customer, no matter what, you could swing a dead cat, and you have a free customer, right?
This ecosystem spawned these gazillions of brands. What that’s given is now being taken away. Interest rates are up. I don’t think there’s too many smart VCs that are that are funding exclusively direct-to-consumer businesses anymore, because it’s not just about shoving dollars in the Facebook machine and driving the top line, and then going and exiting to somebody else. There are plenty of folks that were able to make it through that window. But that whole thing is starting to contract. So the future, it’s a little bit hazy as to what’s going to happen to all those different companies. But what what’s very clear is that what was there before it, some of these things are enduring. So omni channel retail for a long time that was saying, “Guys stop focusing on DTC.” The answer is retail, and it’s a hybrid of retail and DTC. It’s not one or the other. DTC allows you to get closer to customers and retail helps you leverage or amortize your brand investment so that you’re getting some more margin without having to pay quote, unquote, Facebook tax on every customer that comes through the door. It’s a hybrid of those two things.
In the grand scheme of things, a lot of the earlier brands that I see very early on in their game plan said, “We’ve got to get into retail, ASAP. Because otherwise, in a post iOS world, we cannot afford to just keep shoving money into the Facebook machine.” So that’s in the grand scheme of things as far as from a technology standpoint. One of my favorite expressions that always comes up is, “You know QVC-ification. You know of the web, right? When can we get into live selling? When can we have a more interactive commerce experience?” If you think about our websites, they haven’t really changed very much. Go over last 10 years, websites are still a category. There’s a navigation and there’s a cart. The only thing that’s really gotten a little better is is the checkout experience, because Shopify has made that kind of frictionless.
Barbara Kahn from Wharton, she’s a kind of a thought leader. She had a cool thing I read years ago, which I think still applies today. Like the four quadrants of e-commerce growth, she said, brand, value, experience, and frictionless. I like that framework. You pick something like Adidas for brand. The reason people buy Adidas is the brand. They don’t buy it, necessarily, because the product is fantastic. They don’t buy it because it’s cheap. They buy it because of the brand ethos. You think about frictionless, that box is for Amazon. I want to buy something in one click, Amazon fits into that box. On the value side, someone like T.J. Maxx can kind of generally do no wrong, because if it’s cheap enough, they’ll do it. Then last, but not least, is experience. So it’s the experience side that has been really sorely lacking on the web. You think about how the commerce experience, generally it isn’t fun at all. But recently, one of our brands that we exited last year, Saxx Underwear, launched a web experience, that’s all a little bit like a metaverse kind of experience. You don’t need goggles or any crazy thing. But it’s a three-dimensional shopping experience, like a little shopping mall. You can look at products and rotate them in three dimension. It’s a step in the right direction. You come to an apparel website, it’s pants, pants, pants, not very interesting.
The other thing that I think we’re going to see much more of is social commerce, which means different things to all kinds of different people. But if you think about it over here, we have all this cool stuff going on with TikTok and influencers and people glued to their phone on social media feeds all day long. They do that, and then maybe they click, or they search later and they go over the wall. It’s like in those old movies, everything was color, and then it goes into black and white. It’s just a very static web shopping experience. There’s a lot of friction because payment tools are not in there. It’s a different experience entirely. It’s not very fun. So I think TikTok is leading the way on creating shopping experience where they’re going to put that whole shopping experience into TikTok. Facebook’s tried it before. But I think Gen Z and Gen Alpha, like the TikTok-centricity of what they’re up to, and are really going to drive that experience part forward. I think the other vectors are pretty pretty well covered, but at the experience side it has really been sorely lacking.
That’s very interesting perspective that you just provided, Jay. I assume that you also reflect that in how you look at potential investments that are currently possible in the market. I know that the current interest rate conditions might not necessarily make it easy to put money on the table for new emerging companies. But where are you looking at in investing today? To put your money with an eye towards the future of commerce?
Great question. I always have to put a little disclaimer up here that I’m not speaking on the behalf of Brentwood at all. But I’ll tell you very broadly, when we think about what’s out there, we’ve never really liked companies that are purely direct to consumer. Because it’s always about when is the meat? When does the media spend stop scaling? It’s a data point that no amount of modeling can actually tell you. And we hold companies for 5, 6, 7 years. So there might be really impressive growth over the last two years driven by customer acquisition and that kind of thing. But we’re much more interested in the core fundamentals, which is around product market fit, around the power of the brand, looking for evidence that there’s kind of a community or some some sort of grassroots stickiness, if you will, that will allow it to power through whatever six or seven years. You have to get through a couple cycles of things. It means two or three years from now, who knows, like TikTok may not be here anymore. We don’t even know. We have to be able to push through those cycles. What’s fundamental is really the brand aspect.
As far as what we like, say very broadly there’s a reorienting of values out there from 20 years ago, from buying stuff, to buying experiences and making yourself better, self improvement. That’s a very broad theme. But if you look at Brentwood 10 years ago, we were acquiring a lot of apparel companies. Apparel companies are about going out and making an impression on people and collecting and buying things. I think that consumers, in the 2020s, if you will, are much more focused. They’ve climbed their hierarchy of needs, and they’re pretty high up there in terms of, “I have a whole closet full of clothes. I’ve got three cars. What else do I need?” It’s health, its wellness, its actualization. We own part of a company called HIMS, a publicly-traded telemedicine platform. All of the trends that happened during COVID, around transformation, and zooming our way through here, how can you apply technology to older technology to older consumer problems? The cherry on top is obviously this transformation around what’s most important to people in their heart of how they’re going to go spend their money, wellness and being able to be proactive on their health aided by technology. That’s that’s the kind of investment we couldn’t resist.
Do you have any other illustrations in your portfolio that you see a signposts of where the future’s headed?
I’m into health because you can see it. If you zoom all the way out and look at the consumer health vertical, whether that includes vitamins, minerals, and supplements, or it includes health and wellness and all the shakeups going on in the medical field around how you concierge medicine, it’s just a humongous growing field. We have an investment in a company called L-Nutra, which is a longevity platform. It was developed out of USC and its flagship project is called Proton. It’s a five-day kit and it uses the science of fasting to carefully coordinate your calories and your macronutrients over a five-day period to kind of choreograph your body into a very specific state of what they call cellular autophagy, which is a bio-mechanism. They’re just starting to really understand it as far as being good for longevity and for against chronic illness. So that’s a fascinating company. It violates one of our rules, which is not to invest in single product companies. But what we liked about it was its potential to expand beyond a product into a brand and then into a platform where it can be more than just a single product. You can be a lot of different things to a lot of different people in trying to maximize what they call their health span. We think the longevity market, it’s weird, because it’s not exactly a market. But it’s an evolving category, that we’re really very bullish about.
Jay, to wrap this up, one question to you, if you were 25 today, and you were stepping into the world of marketing and commerce, what advice would you give yourself? What one or two pieces of good parental advice would you give to your younger self?
I was always kind of a nerd. I’m a very curious person. I’ve accumulated a lot of information up in my head. But there’s nothing like learning, learning by doing. Increasingly, I’ve been really reflecting on this. In this day and age, it has never been easier to actually launch things. So I would probably tell my earlier self, “Hey, whatever your day job is, managing people strategically and doing all these different things, get your hands on a keyboard, and set up a Shopify site and upload some images yourself and run some Facebook campaigns, and use that sort of side hustle.” An overused term. The purpose of a side hustle is not exactly to go make a million dollars on this side. A side hustle is an important part of an educational strategy to really learning, but learning by doing. I think that’s what I would tell my 25 year old self.
Well, I’m glad that Signal360 is your side hustle today. I learned a lot. Thank you very much for your time. I look forward to talking again in the near future.
Terrific. Thanks very much.