McKesson Ventures is the strategic venture arm of healthcare company McKesson CorporationRead more...
Envoy Ventures is the investment arm of consulting firm Envoy Group
Venture capital used to be a cottage industry, with very few investing in tomorrow's products and services. Oh, how times have changed!
While there are more startups than ever, there's also more money chasing them. In this series, we look at the new (or relatively new) VCs in the early stages: seed and Series A.
But just who are these funds and venture capitalists that run them? What kinds of investments do they like making, and how do they see themselves in the VC landscape?
Kevin Bauer, is managing partner at Envoy Ventures.
Bauer is the President & CEO of Envoy and also leads Envoy Ventures--which combines Envoy Group capabilities with direct equity investment to help entrepreneurs and business leaders accelerate and launch digitally-driven business models.
He has a diverse background spanning over 25 years as an executive, entrepreneur, investor and investment banker in various growth industries. He has particularly deep experience in the environmental sustainability industry as the former CEO of American Solar Direct, a Co-Founder and Partner at Global H2O Investments, and the CFO of Archimedes Technology Group, an energy technology company that was acquired by General Atomics.
VatorNews: What is your investment philosophy or methodology?
Kevin Bauer: Envoy Ventures is the investment and operational arm of Envoy Group, so maybe it makes sense to pause for a second and talk a little bit about Envoy Group on the consulting side because then that link becomes really, really evident.
On the consulting side, Envoy has a 10 year history and a heritage of digital experience consultancy. We have 125 employees that are positioned from Chicago to Irvine to San Diego, and about 85% of our customer base is within the C-suite or the board or closely held investor groups of companies. Our upfront discussions revolve around brand, brand strategy, digital business model strategy. I always jokingly say, ‘Launching a brand today means a whole heck of a lot more than just a logo and a color wheel,’ and increasingly we're thinking brand and then digital economy and then digital environment. So, we're working with C-suites and investor groups, trying to get that business model, that brand strategy and that customer experience right in the 2020s.
Once we work on that strategy with our partners, and feel like there's alignment on where we need to go, then we move over into different activation phases. So, our first core area would be around digital activation, and that would be traditional websites, commerce platforms, mobile apps, as well as a big trend in the industry that we see right now which is immersive digital experiences in physical spaces. And so, again, we go from strategists to engineers and developers and creatives to put all that to action in our digital phase. And then we do amplification or acceleration, and what I mean by that is once you get strategy right, once you're putting those digital platforms out, how do we always think about connecting with our customers in the right way, with the right content, with the right digital marketing campaigns? We’re always trying to measure if we're getting the customer experience right. Are we targeting the right customers? What are we learning from it? And then iterating and learning from that experience in the market. Is it working or is it not? Then we circle back around to work with our core strategists up front again. “Hey, did we get strategy right? Did we get that business model strategy right?” That's Envoy consultancy. We view that as a digital experience consultancy against Fortune 500 companies, Fortune 10 companies, all the way down to well funded startups.
What we've seen since I've been at the company now for three years is that we have an inherent pipeline of unique opportunities that are coming through the consulting side of our business, whether those are well funded startups, or whether those are earlier, incubated ideas. Over the last few years we've also seen multi-billion dollar companies trying to take a new shot and a new idea, a new concept, and wanting to structure it as a standalone entity, a standalone startup concept, and so they're looking at partners to help them and hold their hand through that process. So, we launched Envoy Ventures because we felt that with the insight that we gain every day being in the trenches with our clients, and the market opportunities we're seeing for really unique ideas, as well as management teams coming through the consulting side of our organization, why not pause the right way? Whether that's two times a year or four times a year, when we feel like there’s that idea, or we feel like we can help accelerate it, where we feel like there's a good fit with those management teams, why not be more than just a service partner? Why don't we think about writing a check to help accelerate and amplify that idea at early stages of companies?
VN: What verticals do you like to invest in?
KB: I'll go from broad to narrow for you here. So, a very key, connected theme for us is the strong belief that we have in the growing importance of understanding brands in a digital economy, and how that can really be a differentiator and accelerant for business models in an era where barriers of entry have never been lower for bringing an idea to market. But, as you're thinking about the idea and plan development, just what does the brand mean? What do the customer experiences mean around that brand? And how do you go to market and defend it in the right way? So, we're always looking for opportunities with like-minded entrepreneurs, C-suites, investor groups that also feel that, in this digital economy, that there's a growing importance around getting brand and customer experience right.
If I go down from that level, most of our track record over the last decade has been in a digitally native, direct-to-consumer business model strategy where we can really leverage our 125 team members over at Envoy to think about all aspects of executing on that business model the right way when it comes down to digital expansion. We absolutely work with clients that are omnichannel, and that are selling products and services not just in a digital format, but we definitely do feel our background and competency really leans or biases to the digital side, so we want to feel like we can help amplify people's business models in that way.
Then we think about a couple of key verticals: consumer packaged goods, as well as consumer electronic products or devices, have been practice areas for us over the last decade where we spent a lot of time. And within those, where we are spending an increasing amount of time is thinking about health and wellness the right way and increasing trends around it. So, how do we think about sustainability in different ways as we're bringing those products or services to market? And do they fit with where we feel like there's not just trends but also key values which are important to us as an organization? We are trying to find unique ways to sponsor and support new approaches to health and wellness and sustainability.
VN: It would be great to have you actually drill down into what's happening in health and wellness right now and what you see in that space. What is the opportunity and why is that why a space you're really interested in at the moment?
KB: For us, in the health and wellness space, we have more visibility into the consumer packaged goods vertical than anything. Our only outside investor in Envoy, the consulting entity, is also really our sole LP, a capital backer in Envoy Ventures, and that's an investment group based out of Orange County called Innovate Partners. So, while Envoy’s focus on the health and wellness has been a bit more on the consumer packaged goods side, Bob Allison and Innovate Partners has definitely looked at health and wellness more from the consumer oriented side with electronics or this next class of SaaS platforms, which allow for training or easier dissemination of health and wellness records and things like that. So, Innovate has a little bit more of a software technology bent and consumer electronics bent versus us on the Envoy side where it's CPG oriented.
There are two different things that we've been looking at, and that maybe parallels a little bit with some of the work that we've done in the space, and even some of the portfolio companies within Innovative Partners. One interesting theme that's been following now for three years, probably on going on five years, has been the entire segment that’s been brought to attention by Peloton, and other large platforms like that. That's the completely remote training and program development where you obviously don't need to be in the four walls of a gym but you can do it from the benefit of your home. There's an investment within the Innovate portfolio called Pear Sports, which Envoy has actually been helping launch their business model in different ways over the last five years. That is a platform behind other larger platforms, so it's the core technology that makes sure that coaching platforms have the ability to connect with the teaching population. Across that experience, we've looked at other variations on that theme for investment opportunities, as well as partnering, but we generally take Innovate’s lead because they're spending a lot of time in that space.
On the CPG side, we've principally focused in two core areas, which has been health and nutrition, so food products supplements, as well as the beauty care space. With supplements that could be protein-based powders, collagen-based powders, meal supplements. How do you get ingredients more simply defined and as raw and unprocessed as you can get, and deliver the most impact for the end customer? We saw a similar trendline or throughline in the beauty care sector, which ultimately led us to one of our first investments in Kopari Beauty, which is an all natural, coconut-based product line that started with lip balm and moved to deodorant and beyond. It has a really interesting successful model and a founding team that I got to know pretty well. That’s now an L Catterton and Unilever backed investment, which just happened a little over a year ago.
What's also been interesting to us is, as we've focused on some of the healthy nutrition trends for people consumption, we woke up probably three years ago and realized that almost at any given time we were working on one to two different generally new-to-market brands or ideas in the CPG space for pet food, either core pet food or pet snacks, and it's been really interesting for us to watch. They might be delayed a year, or a couple years, behind human consumption but it's just been a fantastic turn of events that we see within the pet sector, where people treat their pets like an extended member of the family. If you're thinking about health nutrition for your pet, it's not too dissimilar to how you're thinking about health and nutrition for your kids. So, we're excited about those trends and the experience we have in that space and actually we're incubating one idea in the pet health nutrition sector right now with a long term partner of ours that has fantastic manufacturing expertise in that area.
VN: What is the size of your current fund and how many investments do you typically make in a year?
KB: The size of the fund for our launch is $10 million. A lot of that is driven by our close partnership with Innovative Partners here in Orange County.
As we look at 2021 moving into 2022, on the low end we’ll probably do three to four investments and, on the high end, probably not more than six; we're not trying to exhaust all our capital, we're not trying to show speed of discharge and early ROI. The uniqueness with our venture model and how closely tied it is with the great stuff we're doing over on the consulting side.
VN: What stage/series do you invest in and how much is that in dollar amount for you?
KB: The average range of those investments to date has been, on the low end, $200,000 to $250,000. On the high end it's as high as $400,000. That's exactly where our sweet spot will be with this fund.
Our view is we're early stage, so we will incubate ideas with the right partner, or the right management team, where we know that we can be additive in the early stage of those ideas. We will partner for the traditional seed rounds, where teams are coming to us after they’ve spent that year or more really framing the idea and now it's time to start putting the business model wrapping around it, so we will write a check for those companies. Probably less so, but from time to time if we really liked the idea and the team and we still feel like we could be a catalyst, we'll invest up to that Series A or Series B round, but that's not as much as our model as going earlier, where we feel like we're in the trenches with the teams and trying to make a difference.
What we're looking closely at, and we already have one that we can point to for 2021, is this concept of these corporate co-venture opportunities, where we have $100 million, $1 billion revenue type companies coming to us. They're thinking about a new idea that, for whatever reason, within their corporate structure, they think it may make sense to be launching it in a different type of holding entity, and so they ask us to come in to be that partner with them to launch and to really learn from that entrepreneurial experience. So, we've launched one of those in 2021. Those are a lot different, as you can imagine, than your more traditional entrepreneurial driven incubated or seed type company. But we do see it as a trend, especially following the pandemic, where corporations are thinking about speed to market and they are trying to understand what it means to be direct-to-consumers and digitally native. With that, they realize that their corporate structure or culture, that entrepreneurial environment, potentially needs to be augmented in different ways to really give that new idea or concept a shot. So, we're taking a hard look at that. I think those are harder to execute on but we're curious if we see that trend continuing here over the next couple of years.
VN: What traction does a startup need for you to invest? Do you have any specific numbers?
KB: For three of our four investments, they really didn't have a business model, but we had a sense of the model, where it would be executing moving forward, and an expectation of the importance of those first couple of years of launch. With my background, the background of the other Envoy founders, plus Bob Allison’s background, we're pretty pragmatic on what it takes to successfully launch an idea, and we're not looking at models five years out. For those ideas that are earlier in stage, we're looking at the concept of where we think overall market opportunity is. We're looking at a competitive dynamic within industry and a perspective of where differentiation for a new approach, new service offerings, new product offerings, what type of penetration could be achieved and defended or sustained in a go-to-market strategy. That's true business model development and strategy and trying to develop where you think value can be over X number of years.
For the later seed rounds, I would say we switch a little bit. We know that our checks aren’t going to be leading those rounds. Generally what we do is we think about a partner ecosystem which is early in development but this is where we really leverage the benefit and reach of Innovative Partners, especially all through the California and Southern California market. If I looked at Kopari, for instance, yes, we knew the executive team, but we also had connections, principally with L Catterton. Looking at the structure of that round, how they were valuing it, how they were looking at other deals in the health and beauty care sector, with a pretty strong bent to health and wellness, those conversations were invaluable to us as we are working with other lead investors. So, when we are looking at those kinds of mid-to-later stage seed rounds, those As and B, for us there's a little bit of a bifurcation: we are still laser focused on market opportunity, that focus on brand and customer experience, that management team, but we begin to pivot to realize, “Okay, our $200,000 to $400,000 check is really going to be largely amplified by a lead investor that's writing a $1 dollar plus check.” We end up having a relationship there, understanding their due diligence, understanding and seeing the scope of other deals that they're looking at within the industry.
VN: What do you look for when it comes to the team?
KB: At the end of the day, the people make all the difference. The business model and market opportunity are going to change and evolve. It's all the ups and downs of the rollercoaster ride of a startup that you can't navigate the right way, or think about how to pivot and adjust the right way, without the right team in place. The older you get, the more you think about the importance of really developing meaningful relationships, and putting the right meaningful work around them. We know that it's about more than a person having an idea; maybe it’s what we see day in and day out on the consulting side of our business model, but we want people that have, not just that idea, but the purpose driven approach that shows the idea and what the brand is going to represent and, ultimately, how it's going to change a customer’s behavior, a habit, an experience. How it's going to drive a different emotional connection to a product or a service offering. That purpose driven belief that they can make that impact within that given sector of the industry, that's what we're looking for. That's just our fundamental belief.
We've got this great democratization of access to business models, access to launch, launching business models faster because of our digital economy. We could even argue that access to capital has never been easier. So, for us, it's just a fundamental belief in going beyond just have a good idea; it's what you're really going to commit to and personify with the vision behind the brand and the experiences that you're going to try to bring to market through it. And that's what we're really looking for in that person or that team.
VN: What do you think about valuations these days, especially give what’s happened with COVID over the last year?
KB: The entire market took off in Q2 to early Q3 of last year, just trying to see where things were settling. Once that passed, and there was a sense of people could come out of their foxholes, I say all the time that on the other side of disruption comes the unique opportunity for creativity and value creation. We see that all the time in our business and we feel it increasingly on new ideas coming to market. There's not a shortage or a scarcity of capital. There was pause for people trying to think about whether there are lessons learned through the pandemic and if there are there other sectors that are accelerating faster than others. Where do I need to be spending my attention? But we are in this great era right now where ideas can come to market fast; it might not be necessarily new inventions, but there's innovation happening in so many different areas and access to capital is as alive today as I've ever seen it.
When you're going earlier on stage, it's less about a valuation number or the figure you're putting in those early incubation and early seed rounds. Total aggregate investment might just be half a million dollars coming into a given company and, in that case, what you're just solving for is what's the right level of dilution where I can make sure that, at the end of the day, we've got a founding team and a structure that's going to survive taking this idea forward? When you're working with ideas or founding teams, you have to be mindful of what's realistic and market based dilution is for a founding team. For Envoy Ventures, where do we want to see minimum ownership levels? I would say that we've been fortunate enough in these early structures where we haven't seen ourselves falling below 20% to 30% on the low end of ownership. Sometimes, if we're writing bigger checks, we’re even able to grab more of that initial ownership structure, or percentage.
VN: There are many venture funds out there today, how did you differentiate yourself to your limited partner, Innovate Capital?
KB: It was an easy one for us: Innovate has been along for most of the history of Envoy, our digital consulting entity, over the last 10 years. They're the largest minority shareholder in the company. I've been with the company for three years, spending an increasing amount of time with the managing partner over at Innovate, Bob Allison, and we were talking about the automatic deal flow and uniqueness of the potential ideas that were coming to us on the consulting side and how to formalize that the best way. That was a conversation that germinated over a couple of years and then Bob and I finally said, “Let's formalize this. Let's not be the best known secret south of LA. Let’s start getting the perspective out there for what we're trying to do.” Bob has been in the early stage venture game for, gosh, a couple of decades now; he’s been in the private equity and venture space for beyond that. My background is I started in technology investment banking in the Bay Area during the go-go days of the internet, and then I did a little bit of private equity as well, but have now been operating companies for 15 years. My view is that if you are really focused on backing business models which are digitally driven, where a core part of the business model, or maybe all of it, is being driven by digitally-minded decisions, the lenses that you need to have on that thought process to take that idea from that idea to take it to the market are a lot different than just having a venture group have an in-house CMO who has had some success taking a like-minded brand to market. It's different from a venture group saying, “Hey, we can put you in touch with a handful of different digital agencies that will give you advice.” Our view is about flipping it completely on the end. The access to capital is not the differentiating aspect; the differentiating aspect is how do you select your surgeon when you're getting an important heart surgery? You want the person that's in the OR as much as possible. If you're going to work with an idea and transform that idea to take it to market, you want to work with a group of individuals that are living in the market every day, taking new ideas and new brands and bringing them alive into the digital economy. So, our view is, let’s attach the capital to a 125 person group, which is growing every year, both organically and through acquisition, with what we're seeing in the market for what it takes to be successful. And, with that lens, take the right investments every year and help them grow by writing a check as well.
Say you're launching a flip-flop company and you want to talk to another venture capital group that also launched, you're not having the right conversation. We're trying to talk differently about brand experiences, business model experiences and how to bring them alive in a digital economy.
VN: What are some of the investments you’ve made that you're super excited about? Why did you want to invest in those companies?
KB: With Kopari Beauty, we've known the founders, specifically the CEO, for quite some time. We liked what we saw from brand and some of the practices that were they were doing around digital only. We were excited when they were, with that success, being given permission, about a year to two years ago now, to move from direct-to-consumer only to omnichannel, meaning they were starting to be able to take that brand to retail, to the Sephoras and Ulta Beautys of the world, etc. So, that was just a unique opportunity for us to back a multiple time, successful entrepreneur that spent a career in health beauty, where we felt guidance and support for what we were doing in the space could be additive along the way.
It was unique in that it is our only later stage investment to date. We've learned a lot from just watching bigger firms like L Catterton and Unilever and their approach to investing. Also, it represents why we like to go earlier and really feel like we're driving or impacting value, which maybe feels a little bit more tangible.
There are two really good examples of that just in this past year. Violux was born out of the pandemic; it is the whole emerging space of UVC lighting, and how to apply that the right way for disinfection. We had a previous existing relationship with one of the co-founders of the idea; we're actually still working with that person as a core client within Envoy. Confidentially, we're not not entitled to say who that is, because he's also holding a position within a publicly traded company, but we've had a relationship with him for, gosh, five to 10 years. He co-founded the idea, wrapped the management team around it, and we jumped at the opportunity to work with them. That was from naming ideation, initial industrial product design concepts, to launching every aspect of their digital model. It’s just been fun watching it take off.
Then Kapsul, which was at the very beginning of 2021, maybe the end of 2020. It was fundamental for us on what needs to be done better from the point of view of sustainability and energy conscious saving individuals in the distributed AC market. So, in-wall, in-window AC units in urban environments. How do you create a Dyson equivalent for connected ACs where you may have multi-room environments in apartment buildings, condos, townhouses, where you don't have the benefit of central centralized air? It’s very, very early in development. It’s smart technology, again, a Dyson-like brand positioning for a next generation approach to that segment, which has had very little innovation, or just innovation around the edges from the LGs of the world. How do we improve more than just that user experience? If you do smart controls the right way, you can improve energy efficiency during the day for home users, which we jumped at. They're only sold direct-to-consumer still, and we're working with them through all of their supply chain logistics issues during the COVID year from Asia, getting products back to the US market. For that product, we did all the app design and user interface for smart control for the AC units. So, that's been another exciting one for us, where we think it fits within our theme and we feel like we've had a big seat at the table for helping launch that business model over the last year.
VN: What are some lessons you learned?
KB: We’re just for 30 days into from our formal launch, but we've been learning for the last year. I'd say that really our formal launch represents what we've learned, which is to do it right, you do have to have truly a standalone model on the venture side. It's got to be separated, kind of like a church and state. So many times in our industry we’ve seen consulting or agencies think about doing this, and it quickly becomes in-kind investments, trading services for equity or maybe X amount is pro bono to lock up a larger type of engagement with the client. Our lessons learned over the last year were there's a lot of twists and turns and pauses around what's working and not working as you're launching early stage models. The services side of the business just needs to know, “Hey, this is what I need to do, this is where I need to be running,” and execute on that and have those separate relationships and partnerships and experiences and contracts in place to do that.
Why we formalized this is to really wave our hands in the marketplace and say, “Look, we're treating this really formally. You're going to have the undivided attention of myself and my partner, Bob Allison. When we write that check, we know that there's all these learnings and all those risks that go along with that, but we're going to be your partner through this process.” We made the decision to be separate and distinct, and to understand the risk profile of it, and to make sure that we really balance the positivity and how we're impacting and what's happening on our service side of the business model. Where I think our industry has maybe struggled at times in the past is there's too many conflicts of interests across the way. And so, our view is we eliminate those; we make sure that there's no confusion with the groups that we're working with.
VN: What excites you the most about your position as VC?
KB: We're so excited about seeing the breadth and diversity of ideas. I was your Silicon Valley banker and investor for close to 10 years of my life, but the breadth and the depth and the richness of the types of ideas and the equality of management teams that are alive and well in Southern California, and some of the stuff that we're seeing from out of state, that's what's exciting. A lot of that has been driven by our own inbound at Envoy on the consulting side, as well as leveraging Innovate Partners’ channels of opportunity.
For us, there's a little bit of pause and excitement; once we formally launch we're really going to have to put some structure up around how we're evaluating and putting processes in place. Our sense is there's just a lot of great ideas, there's great management teams, but how will we know that we're doing the right two to four, or four to six, investments a year? It's just nervous excitement as well as dialing in the review process and diligence. We're not venture first, if that makes sense; we’re joining the capabilities of the two groups and how to balance those demands.
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