The Next, Episode #32
Wellness as entertainment, zoochosis, and a failed rollup experiment
Hi there, and welcome to The Next - my take on health, wellness, and brand building.
In the last 4 years I’ve founded 3 health brands (Kettle & Fire, Perfect Keto, Surely), which each do tens of millions in revenue. I’ve raised ~$20mm to build Kettle & Fire, gotten into 10k+ retail stores, bootstrapped Perfect Keto, launched 80+ SKUs… and have a small portfolio of Shopify apps I run on the side. Previously, I worked in tech and had no experience in CPG, DTC, or any other 3-letter industries.
If you missed past episodes, I’d recommend checking out Episode 26 on my annual goals, or Episode 31 on a new theory of disease). Otherwise, let’s dive in!
🆕 What’s new
Something I think about a lot is “why now?”. Why is chronic disease exploding today vs 50 years ago? Why are mental health issues orders of magnitude bigger now, today, than just 40 years ago?
So many of the issues we have today are a result of our poor environment. From a health perspective, we’ve had 50 years of crop subsidies creating artificially cheap corn, soy, and wheat. Because corn/soy/wheat is so cheap, the trifecta worms their way into everything: corn syrup replaces sugar, soybean oil replaces tallow + olive oils, and wheat is in literally everything.
Subsidizing these crops has meant that economics have ensured these artificially cheap inputs make their way into nearly every corner of the western food system. As a result, we have the fattest, sickest population the country has ever seen, with the lowest life expectancy to boot. All because we exist in a food environment that’s not the one humans were meant to exist in.
It’s this lens that drew me to the ancestral health way of thinking. Why are humans today fat and sick? Well, for the same reason animals in the zoo tend to gain weight: they’re not fed a species-appropriate diet.. When humans don’t eat an ancestrally appropriate diet (too many sugars, processed foods, vegetable oils, sugars/carbs), humans get sick.
I suspect that this ancestral health idea applies well beyond physical health. Just like an ancestrally inappropriate food environment leads to physical illness, I suspect that our ancestrally inappropriate social environment similarly contributes to terrible mental health. Getting 20% of our calories from vegetable oil is definitely not natural - but is it any less natural than going on 100 dates with strangers each year? Or getting pinged 500 times per day by friends, family, and strangers on our phones?
Just like our food environment is driving poor health outcomes, I suspect our social environment contributes to poor societal mental health. Relative to our tribal ancestral environment of 50,000+ years ago, humans today are FAR more plugged in, know far more people, and deal with levels of social complexity our ancestors couldn’t have dreamed of. Yes, it leads to some beautiful, amazing outcomes: but I can’t help but wonder if it also comes with a tax that we too often pay without realizing.
Rates of anxiety, depression, and other mental health issues have skyrocketed in recent decades. How much of this might be due to our unnatural environments?
When animals in captivity exhibit coping behaviors or freak out, we call it zoochosis (yes, there’s literally a name for it). When humans exhibit similar behaviors we’re told to meditate, shrug it off, take an SSRI, or go to therapy. Almost nobody says: hey silly human, why don’t you consider changing your environment, touching grass, and getting back to your ancestral roots?!
As usual, I don’t have any brilliant advice here: I am, after all, but a humble broth merchant. But I do strongly believe that recognizing your ancestral health roots can do more than just improve your waistline (and energy, and libido, and metabolism, and longevity)... it can also improve your experience spinning around this beautiful little planet.
💪 Health stuff
Being healthy is boring. From a food standpoint, liver and lettuce are far less compelling than Doritos and Dominos.
This boredom often doesn’t stop at the palate. For many, being into health and wellness can make your life more, well, boring. Whether that’s giving up drinking because there are no good non-alcoholic wine options (except one 😬), staying in because you don’t want to f*ck your sleep, or saying no to delicious fried meals out, for far too many people there’s a real tradeoff between health and having fun. It’s annoying.
A trend I’m very excited about is one I’m calling wellness as entertainment: a category of activites that are both good for your health and fun. More and more I’m seeing friends choose to do things like evening breathwork, sound baths, sauna sessions, an evening swim rather than drink and hit the bars.
It just makes sense. After all, the formula for going out hasn’t really changed much in the last few decades: pack a bar full of people, blast music at them, and provide as much alcohol as they’ll purchase. For years I’ve felt like going out is something a lot of people do, but not many enjoy. Instead, it’s felt a lot to me like an experience that most people do because, well, there’s not much else to do late on a weekend night. So why not?
Beyond just a wellness focus, I suspect there’s a LOT you could do to improve the going out experience. Not only has the formula not changed for decades, but the interests of the customers (maximize fun!) are misaligned with the interests of the bars (maximize alcohol sales!). When you have two groups’ incentives this misaligned, it’s no wonder the outcome doesn’t satisfy everyone.
I suspect there’s a LOT of pent-up demand for wellness/entertainment experiences. There’s a whole set of wellness-focused experiences (late-night breathwork, group sauna) that I’m certain would do a better job of giving people a new experience, creating connection, and providing a sense of social fulfillment than today’s bar scene (like Othership does in Toronto).
It’s early, but watch this space. There’s going to be a lot happening here over the coming decade as more people turn towards a socializing culture that promotes connection, fulfillment, and better Oura ring scores, and turn away from drinking culture and the day after pounding headache.
If you’ve seen anything in this nascent “wellness entertainment” space, or have cool ideas for things that should exist here, hit me up! It’s something I’ve been thinking about, and am planning to test out some events along these lines in the fall/winter this year.
🤑 Biz stuff
Note - this post was co-written by myself and Will Holtz to share our thesis on 2021’s hottest startup trend: raising billions (yes, literally) in funding to roll up Amazon businesses and operate them under one roof, a la Thras, Perch, and others. We looked into applying a similar model to DTC-native Shopify brands, rolling them up and building a DTC-native holding company. After looking at more than 1600 DTC brands, we decided to scrap the whole thing. Here’s why.
In early 2021, we noticed the rise of FBA aggregators (Thrasio, Perch, Heyday, etc) that raised billions to buy small brands selling products on Amazon. These early movers saw three things that made this an attractive opportunity:
The ability to use cheap debt capital (thanks to low interest rates) to…
Acquire often under-optimized, high-margin FBA businesses…
at cash flow multiples ranging from 2-4x.
For many early operators, they were able to use debt at 12-16% interest to buy an asset at 3x EBITDA (ie an implied 33% annual return), improve the asset a bit, and build strong operating cashflows. The early model seemed promising, and eventually culminated in Thrasio becoming the fastest US startup to reach unicorn status.
Yet while the FBA frenzy was well underway, we thought we saw a gap: every aggregator was focused on buying up Amazon brands, but not one was focused on DTC. Thus, we thought there was an opportunity: DTC brands have 1-1 relationships with their customers, real brands and real expansion opportunities. Why not acquire several DTC brands and try to roll them up, and create the Thrasio of DTC?
After sourcing and acquiring our first DTC business, we were feeling pretty good. The market felt untapped, lenders and operators we talked tol suspected there was a big opportunity here, and our first asset was performing well.
As we looked at more and more DTC businesses as the months went on, we began to notice that the businesses open to selling were not necessarily high quality, which made them hard to underwrite from a debt perspective. For the businesses that were compelling, we saw many business owners over-extrapolate the acceleration of COVID-related ecommerce demand and be unwilling to sell.
After looking deeply into this strategy, thinking deeply about the rollup space, and talking with almost 1600 DTC brands, we came to a few conclusions:
Shopify and Amazon marketplaces are structurally different - what (maybe) works on Amazon just doesn’t translate as well to Shopify brands, as Shopify is much more operationally complex (as you have to manage operations, marketing, and customer support) relative to FBA. This requires a lot more staffing and operational work that Amazon abstracts away for you, which can make brand integration more challenging. It also means higher operational costs, which is why most sub-$5M Shopify brands are lower margin and only marginally profitable (if at all), which makes debt-financed acquisitions challenging.
Additionally, running a large Amazon business is just about as easy as running a small one. As a brand scales on Amazon, Amazon itself takes on many of the challenges of customer acquisition, customer service, logistics, and marketing. This is definitively not true of scaling a DTC/Shopify asset.Demand generation is key, and harder on Shopify - Amazon has its downsides, but one of the benefits is they bring customers to you. If you have a decent product and decent reviews, Amazon will send customers your way practically for free. The opposite is true on Shopify, as brands have to invest heavily in customer acquisition, influencer marketing, and the like to acquire customers and hope to reach any sort of scale.
Seller expectations are different on Shopify, driving adverse selection - Because it’s more challenging to build and scale a Shopify brand, founders are less willing to exit for Amazon rollup multiples (ie 2-4x EBITDA). This leads to an adverse selection issue: the founders that have good assets don’t want to sell, and the founders who want to sell often don’t have great assets.
The Shopify ecosystem is much thinner than Amazon - reading public filings, there are orders of magnitude fewer Shopify sellers doing $5M+ in annual revenue than there are on Amazon. This means you have a much smaller pond to fish in as far as acquiring multiple brands, which makes a scalable rollup strategy focused on Shopify much harder.
Macro headwinds are heavily impacting unit economics and growth - between iOS 14 making targeted advertising more challenging, shipping costs going through the roof, competitive pressure from Amazon, marketing costs across all channels going up more than 100% in the last 12 months, ecommerce is structurally very challenging right now. This is less specific to a rollup play, but man - things are not exactly easy in ecom land right now.
Last fall, after looking at so many DTC assets, we decided to turn down investors that had committed to backing us to pursue this idea, and walk away from the strategy altogether.
This wasn’t easy. When a space is as hot as the FBA rollup space is/was, it’s hard to get the conviction that you’re right and the market is wrong. When a space is raising billions in just a few short months, it’s hard to draw the conclusion that the strategy is unlikely to generate the type of huge outcome we were looking for.
We do however think that there are opportunities to build a portfolio of high-quality ecommerce assets (a la Elements Brands, Aestuary) that looks more like a very attractive holding company.
OpenStore is also interesting, and may have the right approach: raise a huge chunk of equity to make acquisitions, use conservative debt leverage, and do a lot of the hard work of integrating these long-tail ecommerce assets.
The team at OpenStore is world-class, and much (much) smarter than me, so take this with a grain of salt. But even though they’ve raised a bundle of money to pursue the strategy, I’m skeptical that owning hundreds of long-tail ecommerce assets is all that valuable, unless they can leverage their brand portfolio to create a Amazon-like shopping destination where they sell their brands (and eventually others) through one storefront. In effect, they could be using capital abundance to bootstrap an Amazon competitor, which definitely is interesting.
Either way, it was an interesting experience and space to dig into, with lots of learnings across the board. Hopefully, this was an interesting peek into how we thought about the aggregator space, and where we think it’s headed.
😌 Dope stuff on the internet
Some of my favorite things since the last newsletter (note: I don’t get paid to recommend anything here):
📰 Article - This was the wildest read I came across this month. In the article, the author makes a (rather compelling) case for a way to make a 100+ year impact on the world if you’re a person with resources. They suggest resurrecting the patronage networks of historic Italy, and building a modern-day house a la the Medicis or other dynastic families. Though not a plan I’m going to execute today, it certainly got me thinking along lines I hadn’t previously considered. If anyone wants to chat about building moral patronage networks, hit me up I guess?
David Perell’s review of Austin is also well worth the read if you’re interested in what it’s like to live in the Texas capital (where I live).
📚 Book rec - If you’re interested in creating deeper social connections and building community, one of the best ways to do so is to throw small parties. My friend Nick Gray outlines how you can do that in his new book, the 2-Hour Cocktail Party. Having been to several of Nick’s harmonica-loving parties, I can confirm that Nick is both (1) out there and (2) his structure works quite well. I’d highly recommend picking it up for a very tactical and helpful read.
⌚ Cool product - This month, I have an extremely dangerous product recommendation. I think I have found a way to (nearly) completely prevent hangovers.
Though you all pay literally nothing for this newsletter, I’m willing to put my body on the line for science. And at a recent wedding in Mexico, I did just that for you, dear readers, by drinking 16 alcohols in a single night.
The shocking part? Zero - literally zero - hangover the next day. I’ve since had a few friends try the anti-hangover stack: take a shot of Z biotics and a glutathione supplement and feel pretty much fine the next day. Though drinking is definitely not good for you, when I do indulge these days I’m planning to use Z biotics and call it a day.🎵 Music - This mix from Anjunadeep was fire. I’m also a bit bummed that only now did I find out that Anjuna does their own music festival (Explorations) - alas, I’ll check it out next year.
🏀 Random - Something I’ve been exploring lately is starting more companies with people. If you’re a mid-career professional who wants to start (or buy) a company, let me know - I’d love to chat about starting something with you.
If that resonates, fill out this form and I’ll be in touch!
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That’s all I got this month, squad! Thanks for reading, and I’ll see you shortly, at the year’s halfway point 👋
Justin