David Pakman, partner in Venrock’s New York City office, joined the MOI Global community at the Latticework 2017 summit, held at the Yale Club of New York City in September. David, an early investor in “challenger brand” Dollar Shave Club, presented Venrock’s investment thesis on the changing landscape in consumer products.

David has been a partner at Venrock since 2008 and focuses on early-stage consumer and enterprise internet companies. Before Venrock, he spent twelve years as an internet entrepreneur. David was the CEO of eMusic, the world’s leading digital retailer of independent music, second only to iTunes in number of downloads sold. Prior to joining eMusic, David co-founded Myplay in 1999 in Redwood City, CA, which introduced the “digital music locker” and pioneered the locker category. In 2001, Myplay was sold to Bertelsmann’s ecommerce Group. Before Myplay, he was Vice President at N2K Entertainment, which created the first digital music download service. He also was the co-creator of Apple’s Music Group and worked at Apple for five years.

We are pleased to share a transcript of the session.

The following transcript has been edited for space and clarity.

Shai Dardashti: At Latticework 2017, we are exploring intelligent investing in a changing world. We’ve heard a wide spectrum of perspectives. One meaningful change in the world is the role of challenger brands. It’s never been “cheaper, faster, easier” to build a startup – given Amazon Web services, given Facebook and social media.

David specifically identified Dollar Shave Club quite early. He was very much involved in Dollar Shave Club’s trajectory. What happened with Dollar Shave Club is the end of the beginning and not the beginning of the end. It’s a “Crossing the Rubicon”, which creates opportunities or brings threats, depending on where you’re sitting. David is going to share insights into challenger brands. Venrock has a remarkable history, and we are much honored that David has chosen to be here with us.

David Pakman: It’s a great honor to be here.

I am a partner at Venrock, an early-stage tech and healthcare venture fund. I invest in tech companies. About five or six years ago, with the mainstreaming of social media, I put together a consumer products investment thesis, which led to a number of investments that have been very successful for us. I will talk to you about some of our consumer products thesis.

If you look around at most of the dominant consumer products brands, they came to life during a very different era, an era where these companies were remarkably good at two main things that seem much less relevant today. This was an era where TV dominated our attention. We had few choices about where to spend our free time, and there were few channels on those TVs. It was relatively easy to reach consumers if you could afford to advertise on television.

This thing happened, called “the internet”, and social media. It splintered attention across millions of different sources of information. Now, there are very few dominant brands that control our attention. You can point to Google and Facebook as digital versions of “platforms” where we spend a lot of time.

It is possible to reach consumers every way now. But, one way that is a sure way not to be able to reach consumers is television. Particularly younger consumers — they don’t watch television at all. They watch on-demand video, and they certainly don’t see television commercials. Commercials are not a part of Netflix. If you watch TV on a DVR, you fast-forward through them. The idea that you are going to launch a brand in 2017 or 2018 and be dependent on TV – unless you are trying to reach the senior demographic – is unlikely to be successful. The decline of multichannel video cable networks and subscribers continues. The rise of Netflix, iTunes, and YouTube offers different ways to see video. Being great at TV advertising is not an advantage anymore.

The second way most of the legacy consumer brands have remained dominant is they were great at shelf space. They had a massive distribution advantage into retail. They didn’t sell directly to their consumers, they sold to their customers. [The latter] were retailers, and the retailers formed relationships with end users. As many of the legacy consumer products brands became multi-brand giants, with scores of different products, they were able to command a significant amount of shelf space and keep challenger brands off those shelves.

But, we know a thing or two about what’s happening to retail. Foot traffic to retail over the last five or six years [has declined], while the last two years have [recorded] an even more dramatic falloff. We see the failing of Macy’s and Target, and Walmart’s traffic continues to decline.

If the method you use to reach and protect your brands is largely through dominance of the physical retail channel — this is not the most effective go-forward “power alley” for brands. The percentage of people who shopped at a Target outlet over the previous four weeks [has declined steadily over the past several years], and we know why this is happening — because of Amazon, which now has ~45% market share of all e-commerce and is getting more than 50% share of every incremental dollar spent online.

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