If you should be among the lucky circle of entrepreneurs who cough up the right product or service at the right time, it may seem like the hard part is over. A flood of customers think your unique product offering is exactly what they need, and are willing to pay you for it. This is called proof of concept. So much the better if the social media fairy godmother sprinkles your company’s reels and marketing posts with viral pixie dust. Overnight, you may find that your brand name is suddenly top of mind for hundreds of thousands of followers.
This happy set of circumstances once befell Nina Ellaine Dizon, founder and CEO of F-beauty cosmetic brand Colourette. In 2022, orders came in thick and fast for her cosmetics line specially designed for Filipinas. There was only one problem with this wave of success.
“Our warehouses were empty! We had no capacity to invest in inventory,” she shares. “When stores place an order, they pay [only the] downpayment. Our revolving cash fund was simply not enough to increase production.”
Nina Ellaine Dizon proudly “bootstrapped” her business for seven years, meaning she grew the business using only her own resources and had no external help. But it came to a point that the necessary expansion required a big step up in funds.
The absence of funds constrained every part of her fledgling business. Expanding the product line with new variants was difficult as minimum order quantities (MOQs) from suppliers were steep. Marketing efforts were also held back as bigger campaigns entailed more team members, while managing the entire process required higher caliber team members than she could afford. All of these required funds that Dizon simply didn’t have access to.
“I wasn’t born with a silver spoon in my mouth. My mother was an OFW and I had to stop school many times when I was growing up,” recalls the college dropout from Pampanga.
Getting affordably-priced loans from banks was not easy as they required a track record and collateral, which Dizon, as a start-up founder, did not have. She proudly “bootstrapped” her business for seven years, meaning she grew the business using only her own resources and had no external help. But it came to a point that the necessary expansion required a big step up in funds.
Word came from a fellow founder that a company had noticed Colourette, and was interested in meeting her, and perhaps providing the funding that she so sorely needed. It was a venture capital (VC) firm called Foxmont Capital Partners.
Foxmont was set up in 2018 precisely to invest in Filipino-founded technology startups. For one of their first investments, what made them decide to look past the app makers and coders and invest in a direct-to-consumer (D2C) cosmetics company? “Aside from the great products of Colourette, the cult-following of the brand stood out to us the most,” says Catrina Magsadia, investments associate at Foxmont. “We believed that the brand had great growth potential given its strong sense of community built on genuine brand trust and love.”
Foxmont has not disclosed how much they invested in Niv Della, the parent company of Colourette, and the skincare line Fresh Formula, both started by Dizon. Likewise, both investor and investee have declined to reveal how much sales and profits have grown following the first seed round of funding.
Venture capitalists (VC) would naturally want to ensure that the entrepreneur is open to the recommendations made by the VC’s management team, whose expertise typically spans several industries in different stages of the expansion cycle.
To be sure, securing a VC fund’s green light for an investment is already a huge achievement in itself. It is not uncommon for a venture capital fund’s analysts and partners to closely scrutinize 100 potential companies before actually choosing to invest in about 10 of those. Industry statistics show that the great majority of start-ups do not pan out as expected. Only one of those chosen 10 are expected to generate handsome returns in a 10-year window.
The payout for the VC fund (and for the original founder) could come in many forms: dividends from earnings, an initial public offering of shares in the company in the stock market, or sometimes, a bid for the entire company or a majority block from a larger player at a hefty premium.
Uber success stories of these buyouts are plentiful, most notable are Shisheido’s purchase of Drunk Elephant back in 2019, and Blackstone’s investment in Supergoop! in 2021.
What are the drawbacks for founders and entrepreneurs in sharing ownership of their start-ups with VC funds? People who have birthed their businesses and nursed them from infancy through small hiccups and giant nightmares would naturally be reluctant to cede any form of control to a venture capitalist partner. Entrepreneurs are used to calling all the shots. When one agrees to sell even a minority stake to a new party, the original owners are literally giving away seats at the table during board meetings where all the major decisions are made, such as deciding whether to pursue new products and which markets to prioritize.
Usually, the division of domains is discussed before the VC seed funding is even signed. The VC would naturally want to ensure that the entrepreneur is open to the recommendations made by the VC’s management team, whose expertise typically spans several industries in different stages of the expansion cycle.
“Given that we are early-stage investors, we have realistic expectations of the company and management at the time of our investment. We value transparency throughout the entire process from initial meetings, and due diligence to portfolio management if we end up investing. Without transparency, it is difficult to build a healthy investor-investee relationship,” Foxmont’s Magsadia says.
Dizon also echoes the same sentiment. She recommends that founders who are considering the entry of new VCs should value the ease of the relationship above all.
Without a VC entering her business, Dizon believes Colourette may still have progressed to current levels, but it would have taken her longer and she would have made many more mistakes if she did not have an expert sounding board.
She rates the insighftul feedback and helpful recommendations she gets from Foxmont executives (called community teams) as the most important contribution they have brought to her company, even more than the funding and the access to a wider network of suppliers and contacts, which were the initial draws in the first place.
After so many years of flying solo, Dizon was careful to check whether she was on the same page with the Foxmont team. She did a “vibe check” with the partners to ensure the vision and identity she saw for her brand were aligned with those of the VC. She also consulted the founders of other companies in the Foxmont portfolio to see if any squabbles resulted from the buy-in.
Without Foxmont entering her business, Dizon believes Colourette may still have progressed to current levels, but it would have taken her longer and she would have made many more mistakes if she did not have an expert sounding board. Proof that this particular relationship has been satisfying on both ends is that they are talking about another round of seed funding.
Entrepreneurs who are intrigued by all that VCs bring to a startup would do well to consciously make themselves attractive targets. While robust sales growth and market penetration are obviously sought-after attributes, VCs note that they are in search of companies that have a clear vision and mission of where they want to be in five years, a unique and scalable product that serves a growing market, and management that is open to guidance.
The 411 on Valuable Ventures
Foxmont Capital’s investments associate Catrina Magsadia answers our key questions on how VCs think and what goes on top of their priority list when it comes to investing–and investing in beauty.
When you do valuations of an enterprise, what are the major assets and financial ratios that you value the most?
Each startup is different and so the nature of the business will determine the way we value a business. Our main internal valuation method for companies in Foxmont is building a comp set (or a comparable company analysis) that includes public and private companies and different valuation ratios, most commonly price to sales and price to EBITDA (earnings before interest, taxes, depreciation, and amortization). We also look at other relevant multiples depending on the specific industry.
At Foxmont, we highly prioritize rational entry valuations when investing in a company as this is an important factor that impacts the exit potential of the company in terms of returns not just for us as investors but also for the other shareholders including the founders.
For a beauty product like cosmetics or skin care products, how do you differentiate between a run-of-the-mill product and one that has the potential to become a global product?
Makeup is arguably a commoditized product already. The greatest value of a brand like Colourette is that it is not trying to be like other makeup companies. Colourette’s DNA is to create products for Filipinas and Filipinos. When a brand has its own unique story to tell and sticks to its brand purpose and values, it is not just reflected in branding and marketing but also in the product development process which births high-quality products that resonate well with the consumers.
What are the red flags in possible target companies that deter VCs from investing?
[Other than the above mentioned], we are active investors and therefore want founders who are open to having a partner on their side to get feedback from, discuss strategy with, and generally go through the highs and lows of entrepreneurship with.
What kind of business decisions do you expect to participate in once you are a minority shareholder?
As investors who are minority stakeholders in our portfolio companies, our role in the company is usually to advise unless we hold a board seat giving us the right to make decisions at the board level for certain matters.
Building good rapport with our portfolio companies is important to us as it allows us to have a trust-based relationship with our founders. When you have this foundation with your portfolio companies, it results in a partnership dynamic where both the investor and company are open and more willing to listen to each other.
What functions do you generally think are better off left to the entrepreneur to handle?
When we invest in companies, it is because we believe in the vision of the founders for the company. Many big decisions across all functions are made throughout the lifetime of the company, and sometimes even pivots are considered and discussed both by investors and the management. Many of the founders in our portfolio are first-time founders so they also appreciate having a sounding board in us as their investors.
What are the top three benefits to the entrepreneur that signing up with a VC brings?
Fundraising from venture capital firms is not the only route to grow a company. But if this is the route a founder wants to take, the top three benefits would definitely be: first, the capital from the initial and even follow-on investments; second, the network that the firm can lend to its portfolio companies which could help with business development among others; and last but not least, [it’s having a] sounding board and extended support outside of their own hired team members. At Foxmont, we have dedicated portfolio and community teams to help our investees across different areas such as hiring.
