Imaginary Ventures is a commerce-focused VC fund with $1.5B AUM. They’ve invested early in brands like Skims, Everlane, and Glossier.
We sat down with Logan Langberg, a Partner at Imaginary, to tap into his domain expertise and dive deep into what brands can expect from the turbulent market times ahead. We cover:
- Why high-growth merchants are focused on marketing profitability
- The key metrics that VC funds are prioritizing in new investments
- How brands are using machine learning to drive paid spend ROI
“Having your foundations in place from day one puts less pressure on always marketing or testing new products. It creates a more viable, long-term business.”
Why Investors Are Optimizing for DTC Marketing Profitability
From an investor's perspective, the appetite for CPG brands has morphed over the past decade.
Today, there is a bifurcation of demand towards CPG’s; either investors are picking brands super early at the pre-seed or Seed or trending later towards middle market private equity, and this has created a gap for that middle layer in the cycle - one which we are still filling. Meanwhile, those still investing are looking for brands with solid unit economics and profitability instead of growth potential.
Imaginary has long focused on CPG businesses that aren't wholly reliant on paid acquisition, but rather demonstrate growth capacity due to factors like their product's repeatability potential, organic growth, and gross margins.
This trend is even more extreme now, with the market shifting toward profit over growth.
The reality is that this market has created a “want it all” attitude among product investors who still look for growth, yet focus on growth that leads to real contribution margin.
Refreshed Diligence Criteria: Prioritized & Deprioritized Metrics
The Imaginary team has always prioritized gross margins in potential investments, and now the market at large seems to act similarly. For instance:
- Brands looking for investors should strive to have products with a 50–60%+ gross margin that can withstand market changes and remain lean by having levers they can pull to extend cash runway if needed. If you can navigate through the next few years strategically and reduce burn, then you are going to come out stronger with an undeniable foundation.
- At the same time, current priorities in the broader VC space include repeat rates, retention, and OpEx priorities to run a lean business.
In contrast, deprioritized metrics for investors include growth across the board and fictitious growth, which is growing due to VC dollars.
It's hard to have a solid foundation without healthy contribution margins or profit, so VCs are looking for solid unit economics in this challenging market that’ll outlast competitors..
However, none of these metrics are absolute. Brands still need to understand:
- Their categories and category competition, since it critically drives up CACs
- Which levers will mature their brand to the point of functioning independently
“Today, the new normal is VC interest in brands hinting toward profitability. Frankly, this should’ve always been the norm for CPGs.”
Imaginary’s Playbook: How Brands Can Weather the Recession
For companies currently in the process of raising funds, Logan recommends the following:
- Runway — Give the brand the runway to survive an 18-24-month recession (which he believes we’re heading toward), so it emerges more robust on the other side.
- Housekeeping — Ensure your brand’s G&A makes sense, cut meaningless costs without emotion
- Fundraising — Be realistic with your valuations and take more cash where you can
- Simply - Focus is everything, don’t overcomplicate the business - drive your core product / strategy
- Test - test other marketing channels, Tik Tok and influencer especially, even in small increments with small dollars
Despite the short-term circumstances, navigating the down market can actually be a phenomenal and formative experience for entrepreneurs.
Brands that weather the recession will emerge especially stronger for it.
1. Be Realistic About Your Valuation
The price of capital has, quite simply, risen drastically.
Seven months ago, software saw 50X multiples while CPG saw 5-10X. Compare that to five years prior, when those 10X CPG multiples were 2X to 3X.
As such, if a brand needs capital, it should focus on business longevity rather than making the shortsighted choice of an extra 3–5% dilution.
In addition, interest rates continue to inflate the market, but alternative financing options are still available. Brands should try to be creative about unique finance lines while running lean.
2. Boost Effectiveness of Paid Spend
More and more teams are pulling back blind spending. Just because, for instance, Facebook receives 95% of your marketing budget, it doesn't mean all of that is productive spending.
It’s critical that brands ensure that their marketing spend is effective in driving new and repeat customers to drive revenue. If paid marketing budgets aren’t being spent wisely, teams should reassess their efforts as it relates to top-of-funnel performance and conversion metrics on-site.
From Imaginary’s perspective, brand owners and performance marketing teams not only need to ensure ad budget effectiveness, but also must continue to build out their organic channel mix. Paid is always going to be an essential part of online CPG companies, but now is the time to truly understand your strategy, diversification, and daily CAC evolution.
How the DTC Performance Marketing Engine Has Evolved
With the state of the market, brands have to start returning to questions of unit economics:
- How do I build the company’s foundation before anything else?
- Do I have the proper supply chain and gross margins?
- Have I found the right customers who’ll repeat often?
Diversification of marketing through unique channels like Tiktok, offline ads, print, and TV are returning because brands can no longer afford to focus solely on building around Facebook. However, you should not and cannot totally dismiss Facebook spend either, it is still a powerful and essential part of acquisition.
From now on, brands should lay a foundation first, followed by top-of-funnel efforts. For instance, Sundays, a pet food brand and Imaginary investment, has executed this well.
- Order of ops — They spent 1.5 years perfecting their product, then 1.5 years building up supply since they knew it’d be more expensive to obtain meat in the coming years.
- Understand the numbers — They also invested a large amount of time to build their operating model and achievable unit economics, understanding necessary retention metrics and target gross margins.
With this base in place, they expanded from a single-digit gross margin to 50% in one year.
Some companies are seeing their CACs increase by 30–40% month after month, while their payback is drawn out from 3 to 15 months. There's no point to this trajectory.
It’s what Logan calls the “growth for growth's sake” model.
If a brand sees this trend, it’s a sign that their dollar is worth more elsewhere: in retail, in new marketing channels, or perhaps on a new head of retention to build up repeatability and loyalty.
Relying on blind spend without understanding where it is going doesn’t work.
Brands are responding by diversifying, such as by adding data science teams instead of huge marketing teams and focusing on newer channels like Tiktok early on.
The State of DTC Acquisitions: Building with an Exit in Mind
There are two typical (but varied) approaches to launching a DTC brand:
- Create a new category — Be a pioneer in a category that doesn’t exist or is still forming. For example, the cannabis beverage market didn't yet exist when Cann launched.
- Reinvigorate a sleepy category — Innovate where others won’t. Magic Spoon shook up the cereal industry, where dozens of legacy and leading brands lacked innovation to evolve.
Exit Forecasts for High-Growth Brands
At the other end of the journey, there are three common exit routes for CPG brands:
- IPO — Simply very hard to do right now; requires a years-long journey with solid unit economics, growth, and a base for future development that public investors believe in
- Private equity — Forces brands to build profitability early on since exit multiples are based more on EBTIDA of gross profit
- Strategic acquisitions — Difficult but very possible today; requires white space that conglomerates need to fill, either category, consumer, or innovation
Last year, many DTC darlings IPO’d in a wave. They went on to do poorly in the public markets due to challenges around cash burn and gross margins.
Since then, IPOs have downsized (or perhaps right-sized, depending on your POV).
As brands attempt to strategize around the uncertainty of the next five years, this trend signals the need to build out possible exit strategies.
Strategic Incubation Trumps Hopeful Acquisitions
Strategics want accretive acquisitions. In that sense, they’re not restricted to solely purchasing profitable businesses, despite VCs’ recent emphasis on independent profitability.
When a legacy consumer business buys a company, they can usually make a 10–12% margin increase overnight by smartly fitting the acquisition into their manufacturing and distribution.
At the same time, some of the modern-day acquisition landscape has morphed into incubation.
For instance, while Pepsi could have easily acquired a sparkling water brand, they chose to produce Bubly instead and generated over $100 million in revenue in its first year.
Similarly, Heineken opted to begin selling an original non-alcoholic version of their product and quickly made similar margins.
Both brands illustrate that acquirers have realized just how much they can create by incubating to generate cash, rather than just relying on hopeful acquisitions.
The Next 12 Months: Driving ROI and Leveraging AI
For brands more severely affected by the iOS updates, the number-one priority for the next year is building your new marketing channels correctly. Logan advises the following tactics:
- TikTok — Spend 50% or more of your bandwidth on TikTok. That doesn’t necessarily mean 50% of your budget, but rather educating yourself on what TikTok can do for you.
- Diversify your channel mix — The most accessible way brands can reinforce isn’t decreasing general spend, but decreasing single channel reliance. Diversification is key.
- Consider influencers — The macro thesis on the future of influencer marketing looks promising, so begin educating yourself on that sphere and how to participate.
- Always be testing — Brands should continuously test marketing on, again, diversified channel mixes, such as TikTok, offline ads, Youtube, and SEO.
Within Imaginary’s portfolio, the entrepreneurs who’ve doubled down on technical tooling and efficiency to improve service (on both the back end and user end) have exceeded expectations.
Black Crow has been one of these tools, as a number of Imaginary investments have seen 30–50% growth in ROI on retargeting across the board — not just on Facebook, but on display, pinterest, and SEO..
Logan especially looks forward to Black Crow’s upcoming rollouts for email and SMS targeting.
He explains that these areas move the needle by allowing brands to grow without the added strain of customer acquisitions or breaking down unit economics.
Holistically understanding customer data means getting a handle on the true demographics, repeat rates, and predictive LTVs of your brand’s consumer base.
Without these insights, you’re likely just spending blindly. Customer transparency is crucial — and tough to achieve without Black Crow in the post-iOS era of eCommerce.
“Black Crow not only efficiently lowers CACs, but they also get you back to the point of genuine transparency with customers.”