Kevin O’Leary, star of the hit show “Shark Tank,” is better known for vetting startups than providing advertising advice. However, with a portfolio of more than 50 privately-owned companies — increasingly going direct-to-consumer since the pandemic began — O’Leary has unique insight into how the DTC landscape is evolving beyond the easy fundraising.
Part of that, of course, is how they advertise on various platforms while navigating an uncertain economic climate, ongoing logistical issues, an evolving data-driven marketing ecosystem, and an evolving retail market. evolution.
During Ad Week in New York, the famed investor spoke with Digiday about some of the trends he’s seeing. He said the economic uncertainty over the growth of existing businesses has led to a “very disconcerting situation”. Meanwhile, he said, entrepreneurs who don’t understand advertising “will go broke.”
This conversation has been edited for brevity and clarity.
How is the current economic climate changing the way you think about advertising? Ad agencies had rosy forecasts, but it looks like brands are considering pulling out.
Here’s the dilemma: We look at revenue and free cash flow every seven days, on Tuesdays. We try to assess inventory expenses. That’s it for a small business, how much capital is tied up in inventory. We try to predict preferences, style, size, flavor – whatever you’re selling. We expected to see a slowdown with this impending recession. We don’t have a slowdown. We have a very dynamic consumption. Our dilemma is that we are going on vacation. We have to make decisions every day now. Are we building 7% more than last year? Because that’s what it looks like we’re getting right now. That’s a lot of money. It’s hundreds of millions of dollars? Or do we have to pull our horns because we think we’re hitting a recession? And we see no evidence of it.
It’s one thing for the stock market to forecast 18 months ahead. It’s different for small businesses to make economic decisions about investments every day. So it’s a very strange recession. Full employment, no one can hire, consumers are on fire. We spend as we have always done in digital advertising, while waiting for Godot. It’s a tough decision. We make these decisions every day. Did we buy more inventory? Because if we don’t have inventory during the holidays and people order it directly from us, we don’t ship it to them. It’s really bad.
I’ve heard that it’s getting too expensive for some DTC brands to advertise on Facebook and other platforms, especially those with lower margins. Do you see that too?
Yields are down because of what Apple has done on privacy. Everyone knows this story. Geo-locked advertising on Facebook, or Meta, is still very valuable. But the way to increase returns is to increase them with ancillary data. So that’s what we’re doing. Now we use agencies like C Squared Social — I must disclose that I’m a stockholder and paid spokesperson — but that’s because we use it in conjunction with Facebook to boost our returns. So if we have a 28% drop in yield, we can recover 15% of that by combining it. Let’s say I want to sell franchises in Miami and I need people with $500,000 of cash available to invest in the franchise. It’s a real case. So we can use Facebook in conjunction with bank databases that we rent, so that we can overwrite that data together. So we pay more to mine the data, but we recoup the returns. Let’s say they were 100% four years ago, now we’re back to 85%.
What about beyond Meta, like TikTok or other platforms that have attracted many DTC marketers?
We use all platforms. And here’s what we had to do. And this has happened in the last 18 months. The content team that makes content for Instagram or Facebook is no longer the same team that makes it for TikTok. These algorithmic changes that are happening so quickly now require specialized teams. So if we’re going to shoot something, we shoot it for five platforms. LinkedIn is different from Facebook. It’s different from Instagram. It’s different from TikTok. It’s different from Twitter. So these teams are now an additional cost, but the returns are much higher. And we measure it every day. I mean, it’s the number one expense.
I’ll tell you what I’ve learned over the past 14 years. At least 75% of my feedback comes from women-led businesses, and so I think what’s happening in digital spend is that women are better storytellers – they’re better at dialing the TikTok of 59 seconds or this Insta – it doesn’t matter that’s what they do. Because if you look at women-led businesses that are consumer goods and services, they do better on digital spend. So they focus more. And because everyone’s passed 50% of direct-to-consumer sales, there’s no choice but to spend. What are you going to do? If not, how are you going to acquire customers? So yes, everyone is pissed, yields are down and expenses are up, but we’ve already recouped half of the losses. It took 18 months to do it, but we’re back.
When you think about storytelling and advertising, how does that change how startups present you or how you decide what to invest in?
It changed the way I invest. And that’s a very intuitive question, if you come to me for a million dollars [Series A] round, and you tell me you don’t know your customer acquisition cost, I can’t invest. ‘Cause the reason I’m giving you $1 million is because you understood the CAC. You show me CAC is profitable, you know your lifetime value, you know CAC, you know your churn rate if it’s a subscription service. If you have this model nailed and I can test it. And I know I put a million dollars pouring gasoline on the fire, I’m gonna do it because I can get a really good return in 18 months on that million dollars if I know I can build the base of users. Businesses that haven’t figured this out yet can’t invest, and you’ve seen it. They do not encourage anyone to invest in them. Because if all I’m gonna do is burn my money while you try to find your CAC, I have no interest.
Are startups better informed to navigate digital advertising?
If you don’t understand this, you will go bankrupt. The Darwinian nature of today’s world will only take that entrepreneur and they won’t be in business. You must know that. Five or six years ago, the average distribution pie looked like this: it was 50% through retail, 40% through Amazon – which does its own marketing and you don’t get the name of it – and 10 % through a website. It’s completely reversed. Most companies now invest 65% directly with consumers on their own platforms. So they must have this thing nailed down. They are very successful businesses because their margins are very high. And the return on cash invested is good. So that’s a change in the last couple of years.
Beyond social, what about the retail media landscape?
We are much more concerned about the amount of inventory we are holding up in retail, as we are not paid for 90 days. So at the end of the day, we much prefer to sell this product. We support brands. We no longer deploy to 2,000 stores. We want to be careful in terms of the amount of inventory, and I think the retailers themselves want us to be aware of that. They want to prove that the sale is there. So we do a lot of testing with 200 or 300 or 400 stores, that sort of thing, getting an idea with the sale is changing the mix and the selection and then committing the capital.
I’m sure it varies by geography and product, but how do you decide which stores to test in?
We test in New York, Florida, Texas, California. We do a lot of testing. We don’t deploy anything without testing first. It’s all about capital. This is how much capital you are tying up. Inventory is a killer for small businesses, so we care a lot about understanding it and reducing our risk. We also get color, style, and flavor preferences and all of that information from testing. But most of those things we do now are direct-to-consumer testing. Even a retail test doesn’t give you as much data as a direct-to-consumer test. You don’t get the data because no retailer says, “Oh yeah, take my customer user base and do what you want with it.” I prefer to exploit the data directly to the consumer.