24hrs Inside $70M Venture Capital Fund Backing Consumer Startups

0:00 Being able to sit down with founders and really understand what they're going through is incredibly important and I think it's a meaningful part of why we've been successful. Being able to maintain that, staying approachable, keeping those levels of empathy, I think it's important when it comes to winning deals. >> Right now, most of the money in venture capital is being poured into AI with giant generalist funds writing huge checks into the same handful of companies. But venture runs on a power law and some of the best returns come from specialist funds going deep into a single category that everyone else overlooks. And on this trip, I met one of them. That's kind of the ethos of our fund. We want to position ourselves as very founder friendly cuz sometimes VC can have a bad name of being predatory. And so that's kind of the brand that we want to build is we want the founders to bring their problems to us and help us solve them rather than keep the problems away.

0:51 The only thing that matters is magnitude of correctness. When you have great results as a venture fund, it's because you have one or two brands in each fund. They're just absolute breakout winners. >> Today, I'm going behind the scenes with the team at Midnight Venture Partners, an Austinbased fund that only backs consumer brands, the kind of products you actually pick up off a grocery shelf. They've raised a $23 million fund one and deployed capital in some big names like Lollipop, Recess, and Magic Mind.

1:21 >> The tangibility of what we do in terms of be able to walk to a grocery store and be like, "Hey, I own a piece of that business." I think it's super fun for that person SAS product or something else that they might not use all the time. >> One or two breakout companies usually drives the returns for an entire fund. So, the real question I want to understand is how a specialist firm decides which founders are worth betting on and what they see that everyone else misses.

1:49 All right, good morning. We are outside of a place called The Collective in Austin, Texas. And you may be wondering why the hell are we at a really cool looking gym in Austin? And that's because today we're going to hang out with the Midnight Venture Partners team. Alex is waiting for me inside. We thought we'd actually catch a workout. And you know, I haven't worked out in a little while cuz I've been filming. So, really want to actually just like do something for once.

2:17 >> Did you get a gas today? Find out. >> How we feeling? >> Great. Getting good, man. Good. This is a warm up. these boys are smoking. No better way to start the week. Hell yeah. Always got to get in here on a Monday morning. So Ryan and I met in college and Ryan actually met Chris in college as well. He and Ryan were kind of talking how they could work together and they had talked about starting a venture fund and then I kind of fell into the mix and we just kind of went in 2021 and we all kind of looked at each other and we're just like we're either going to do it or we're not. Everybody quit their jobs and we went for it.

3:09 >> Was there a bit of struggle street at some points like you know raising fund you quit your job by then? Like >> yeah we went a long time without paying ourselves $1. Yeah, it was stressful and you start to see that checking account just get smaller and smaller and smaller every month. And but I tell people all the time too, like we raised $23 million bucks. If you'd have given us $23 million just out of the gate and handed it to us, we wouldn't have been as good as stewards of capital. We wouldn't have made the same investment decisions. And from a timing perspective, you talked about 2021. If you'd have given us all that money up front in 2021, we'd have probably deployed more capital into a frothier environment at way higher valuations and our portfolio wouldn't look as good as it looks today. So, everything happens for a reason and we we had to grind, but it made us appreciate it more and I'm happy that we did it.

4:03 >> I love that, man. And it's funny. It's like the thing I'm noticing, you know, traveling around talking to VCs as well as founders is good VCs are a lot like founders and that it's it's, you know, they're entrepreneurs and you go through just as much struggle at times as founders do when they're raising capital for theirs, right, in the early stage especially. I I think that was part of our secret sauce in the beginning and something that we talk about the importance of being able to maintain is the empathy that we're able to have with founders because of going through those the the difficulties in fundraising. And Midnight, yes, it's a venture fund, but it's Ryan, Chris, and I's entrepreneurial journey. No different than anybody else's. It just happens to be a venture fund, not an operating business.

4:52 >> >> Now, a lot of us don't understand how these venture capital funds actually work, how they make money, what sort of checks they're writing, and what sort of startups they're actually looking at backing. And Midnight's super interesting because they're not a generalist fund. They're specialists in consumer. So, we're going to take a pen to paper and map out higher level how this thing actually works.

5:25 So, Midnight raised a $23 million fund. One, first thing, a fund isn't forever. It runs for around 10 years. The first few years, they're writing checks into new brands. Then, they're doubling down on their winners and waiting for exits. And the whole time, their investors, the LPs, have their money completely locked up. Now, unlike some funds, Midnight is a specialist fund. And here's what makes it interesting. Most generalist funds commit to a stage. Seed funds spread out smaller seed checks and growth funds do big growth checks. Whereas Midnight commits to a thesis instead, backing consumer brands full stop. They invest anywhere from seed to series B, writing checks from 500,000 to 4 million USD, which usually buys them around 2 to 4% equity in any given startup. It's also important to flag that every now and then when they want a bigger position in a single brand, they'll run what we call special purpose vehicles or SPVS.

6:16 These are side vehicles that are raised for one specific investment and for them can range anywhere from 2 to 20 million USD. So how does a fund actually make its money beyond the 2% management fee? It does so in three ways. One, a brand in their portfolio goes public. Two, a portfolio brand gets acquired, usually by a bigger company. Or three, the fund sells its shares early, usually to bigger funds or credible investors who want a slice of the pie. That's called secondaries. And like the team said themselves, this whole thing runs on a power law. One or two breakout investments will carry the entire fund.

6:49 Take Ollipop, one of their brands. A few years ago, it was valued at around $200 million. Today, it's valued at $1.85 billion. So, even a small slice of a winner like that can be worth a serious chunk of a $23 million fund on its own. But here's the math their LPs actually care about. To call this a strong fund, investors want roughly three times their money back over this 10-year lifespan. That's roughly 70 million USD output for an initial 23 million USD input.

7:19 And the GPS of Midnight don't get there by being right often. They get there by being right once or twice enormously. That's the bet a specialist fund like Midnight is actually making. Now, everything you just watched me map out on camera was the simple version. I'd had time to think and really plan this all out, but most of the time I don't get that luxury. I'm on calls with founders every single day trying to understand their startups and how I can best help. And if you take meetings for a living like me, this is where our episode partner Granola comes in. It's an AI notepad that sits in the background of my calls, transcribing and turning everything into clean and structured notes. Now, for me personally, I'm always trying to improve the quality of conversations that I'm having. So after every recorded meeting, I use a recipe in granola called look again. It actually goes back through my whole meeting transcript and gives me the questions that I should have asked but didn't and a reason why. This has been an absolute gamecher for having more insightful conversations with both founders and VCs. I've included a link in the description for your first month free. Thank you so much to the legends at Granola for making this video possible. All right. So, I talked to this morning and he wants to run traps in terms of his position at and making sure that there's not like legal conflict or anything. Even if that conflict does exist, he's more than happy to, you know, be helpful. He just doesn't want to be the face of a fundra if that makes sense. Like, we're not coming up empty. So then my biggest concern is honestly the next financing, not this one.

8:55 >> Give us a bit of context. What's going on? >> Yeah. So we have a a portfolio company that's kind of involved in a tricky situation. They have trying to negotiate a term sheet and unhappy with what it looks like and trying to get a competitive term sheet put together that that is a little more company and founder and executive team friendly. So trying to work through all that and maintain relationships and it's like this whole situation has just become a crazy spiderweb of this person knows that person knows that person knows this person who's upset with that and it's it's kind of gotten a little bit weird from that standpoint. I was joking with somebody like I probably legitimately spent 20 to 25 hours on the phone about this topic last Monday to Friday and we were kind of talking through like what does your week look like? Sure. Is this what a Monday could look like? Yeah. But does every Monday look like that? No.

9:49 Other than going to the gym at 7:00 in the morning, that's the one consistent part of my life. Everything else is just up in the air. >> >> What do you think is your biggest challenge right now? >> We see plenty of deals. It's always ranking opportunities against each other. So, we're blessed with a bunch of really good deals. You're really trying to get to this team and then in venture financially from a return standpoint, we talk about a lot. The only thing that matters is magnitude of correctness, not frequency of correctness. So the when you have great results as a venture fund, it's because you have one or two brands in each fund that are just absolute breakout winners. And if you do that, you can afford to make some early stage mistakes, which are going to.

10:51 You're just going to make bets that don't turn out the way you hoped. Doesn't mean the team did anything wrong. It's just the nature of the beast. But if you have a few in each fund that turn out to be breakout winners, you're you've delivered great results for your LPs. For us, this has been a six-year journey of looking at PET, trying to figure out where the opportunity in PET was, and really finding something that I think pushed the category forward. I think it took us a long time to get to pouches and really find out how to do it and get a product to market.

11:34 >> Why are you guys raising? >> Where's the money going to what's the use of funds? >> Yeah, use of funds obviously take advantage of this new scaling opportunity with this manufacturer. get these two new sectors segments on the market. customer acquisition. I think we've proved that the funnel works. We can acquire customers that come back and we compound get on with that more aggressively. What specifically in the GTOC metrics have you seen that gives you the confidence to raise and that this is scalable?

12:00 >> If we just look at what we've acquired and how quickly our velocities are increasing aside from ads, I think it just tells us that the customer likes the product. It's resonating. There's product market fit. We're understanding how people are using it. I think the use cases are consumable on a dayto-day, monthto-month, you know, 3 month, six month basis and just leaning into that. Yeah. I don't remember the last time you guys were in here. What? Two, three months ago. So, >> yeah.

12:27 >> Have we seen steady growth? Has there been a huge inflection? Are we down? Like what's kind of happened in in those 90 days? >> I think last year at this time, our e-commerce, and I'll just say that cuz I just looked at it right before I came in. Last year at this time, we closed about 600 and this year we'll close at about a million. >> So, that's just March alone. >> This is a silly question, man. It matters to me. Do you see yourselves more as it vegan cheese company or dairyfree cheese company?

12:52 >> Oh, I got this one. >> Dairyfree. So 74% of our customers are not vegan for a number of reasons. One, you know, we're artisal. We're not trying to compete with the slices frozen shreds. Even with this new line of mozzarella is going to be a high-end, you know, mozzarella initially. The majority of our customers, they see that. They know that. That's why most of them aren't vegan. They're avoiding dairy. They can't eat dairy. you know, it's due to health, you know, planet, animal welfare, all of those reasons.

13:23 >> All right, stepped outside for a bit to kind of debrief on what I'm seeing here. They're in backto-back meetings right now. It is just so fascinating how they engage in conversation with potential investments. It's like a big deal for founders to come in and I'm not like sure, look, seasoned founders like the guys in there raising their series A, they've kind of been through this before. Those guys in particular actually featured on Shark Tank a couple of years ago. You know, if you're a food brand pitching to a CPG venture capital firm, you're going to get some questions thrown at you that are very in the weeds, very in the detail, and you need to know what you're talking about. The Midnight VP team do a really good job of making the founder feel equal in the conversation. It allows them to ask all the due diligence questions really effectively, but also make the founder feel comfortable to answer honestly.

14:12 They're not feeling that really intense pressure. It's just super cool. >> Fill us in. How was it? What are you seeing? And where's your head at? >> So, like the first company that we looked at, it was really interesting product as far as like being category defining. That's typically where we like to invest if a product is going to define a category cuz that's usually what's most interesting from an acquisition, M&A play for strategic acquires, things like that. Conversely, the second opportunity, product market fit has already been proven. We've known the founders for like four years now.

14:43 They've continued to just execute, increase revenue. You know, they're on around a $25 million revenue run rate, growing quickly. >> Where are we going? What are we doing? >> We're going to HB, best grocery store in Texas. >> We're going to see the result of the help of midline partners, basically, right? Totally. I love it. >> >> So, we should have Ollipops in here for sure. Leisure Hydration just got in last week, so they should have some good product display. Recess.

15:24 >> Recess has a ton of SKUs in here. One of our snack brands, FitJoy. Fairly well represented here. so yeah, we should be able to see some Midnight Porcos in the wild. >> Wicked. In the biggest groceryer in all of Texas. >> That's right. >> Hell yeah. >> Hell yeah. So, I'll be doing my grocery shop and then I'm going to catch >> number one. >> Here we go. >> Here we go. >> Lollipop recess. Let's go, man. There's sighting number one.

15:47 >> I love how they know where to go. >> They've done this before. >> Sighting number two. Look at that total display. Trip gets a corner. >> Damn. >> What's the other one? >> Leisure. You really go above and beyond for your portfolio companies. >> Yeah. Now, if you're a real OG, you find a competitor and just kind of up their shell and you turn around. Sounds really dumb in the street. >> But they don't do that, of course, because they play fair, you know.

16:19 >> No, no, we wouldn't. >> Of course. >> I I didn't spend my whole 20s doing that. >> So, when when they s when you're like going for capital calls, you'll be like, "Let's go up some drinks as well." >> Yes. Yeah. Right. >> >> anything you want to say to the younger founders out there early stage in the CPG space any wisdom >> there's no rules there's no reason that you can't create whatever you think is worthwhile if you believe in it go do it >> for sure you can make it happen little steps over time like us we talk about all the time you know you look up one day and you'll be shocked at how far you've come so just start taking those little steps now Make sure you're personally financially prepared to get paid $0 for at least 2 years.

17:08 >> I love it. It's like it went from really like philosoph like motivational and then it went super practical like hectic. We talked about it this morning like we did this midnight. Yes, it's a venture fund but it is our entrepreneurial journey and we didn't quite make it 2 years without getting paid but we came damn close. >> We got paid we paid ourselves 35k a year or something. >> We were balling. >> Yeah. You know, ball.

17:32 >> Yeah. >> Legendary. Thank you guys. >> Thank you. >> That was awesome, man. Awesome, man. Appreciate it. Thanks, man.