Canned Water: LA Venture Firm's Biggest Exit?

Science Inc., the Los Angeles-based incubator and venture firm celebrating its tenth year, launched a special purpose acquisition company (SPAC) onto the Nasdaq earlier this week, successfully securing $310.5 million. Founders Peter Pham and Mike Jones state these funds will be allocated to facilitate the public listing of a company operating within the mobile, entertainment, or direct-to-consumer sectors.

During a recent discussion, they refrained from identifying any specific portfolio companies currently under consideration for this process. However, Science possesses a number of promising candidates. The firm was instrumental in the early development of PlayVS, an amateur esports platform, following an introduction between Pham and founder Delane Parnell at a South by Southwest event. Additionally, Science holds an investment in Bird, the micro-mobility provider which is reportedly pursuing a merger with a blank-check company through Credit Suisse. Furthermore, the firm played a key role in the creation and expansion of Liquid Death, a brand distinguished by its unconventional marketing approach and the sale of mountain water in aluminum cans – a strategy Pham describes as highly effective.

This approach is demonstrably successful, as water remains the leading packaged beverage in the United States, maintaining that position since 2016.

The conversation largely centered on the strategies for establishing a robust consumer brand in the current market, regardless of the product category. A recording of the complete discussion, along with selected excerpts, is available, with minor edits for conciseness and clarity.

TC: With the launch of your new blank-check company and the commencement of discussions with potential acquisition targets, will you consider companies that Science has previously incubated or funded?

MJ: No, the SPAC operates as a completely independent entity. We believe there are over 100 companies that align with our criteria. While we may have existing investment interests in some of these companies, the evaluation process will remain separate from the Science portfolio.

TC: So, you are not excluding the possibility?

MJ: Our independent directors will oversee a distinct process should we evaluate a company within our portfolio. Currently, our focus is on identifying a strong pool of potential targets and then proceeding through a formal evaluation.

TC: What key performance indicators (KPIs) are you prioritizing? Given your expertise, particularly in direct-to-consumer businesses, is profitability a requirement for target companies?

MJ: We don’t necessarily require potential companies to meet specific profitability or revenue thresholds. We maintain a focus on the fundamental metrics and revenue drivers that contribute to successful businesses within their respective industries. Our team is highly analytical and at the forefront of marketing strategies geared towards Gen Z and millennial consumers. We identify specific characteristics that we believe are indicative of future breakout brands.

TC: Considering your extensive knowledge of social media, what are your thoughts on emerging platforms like Clubhouse? How is Science approaching potential investments in this space?

PP: Over the past decade, YouTube evolved into a marketing platform, followed by Instagram six or seven years ago. Subsequently, Snapchat emerged, then Instagram Stories, TikTok, and now Clubhouse. New platforms consistently appear.

While it’s crucial to monitor Facebook, Instagram, and Snapchat, Clubhouse presents a genuine opportunity. It resembles a participatory radio format. Attending events like South by Southwest feels akin to attending panels continuously. The unique dynamic allows audience members to raise their hand and potentially participate in the discussion, offering a chance for visibility and a platform to share their perspectives.

TC: What factors lead you to believe Clubhouse’s growth will be sustained?

PP: The arrival of marketers on a platform is a significant indicator. When professionals offering courses on wealth creation – in areas like real estate or sales – begin utilizing a platform, it represents an arbitrage opportunity. They recognize the potential for a higher return on investment, lower customer acquisition costs, and increased revenue compared to established platforms.

TC: How are your portfolio companies leveraging these platforms in 2021? Considering your investments in Liquid Death, your role in incubating MeUndies (a subscription underwear company that recently secured $40 million in funding), and your early involvement with Dollar Shave Club, how do you achieve visibility in crowded markets like water, underwear, and razors?

PP: Platforms serve as launching pads, but long-term reliance is unwise due to evolving rules and feed algorithms. When we launched Dollar Shave Club ten years ago, an autoplaying YouTube video on the homepage drove customer acquisition – a novel approach at the time. MeUndies capitalized on Instagram, reimagining the concept of subscription underwear with monthly holiday-themed offerings.

Liquid Death currently focuses on Instagram and TikTok. However, in all cases, a compelling brand is essential – one that sparks conversation, encourages advocacy, and resonates with consumers.

Mike often downplays our data-driven approach, but we meticulously track every aspect of our businesses, including social reach, engagement, customer retention, revenue generation, and marketing effectiveness. This comprehensive data analysis informs our assessment of a business’s viability and its potential for independent growth, reducing reliance on platforms like Facebook and Google.

TC: How do you foster that sense of community today?

I personally distributed 4,000 cans. In the early stages of Liquid Death, I observed that six out of ten teenagers would photograph a can and share it on Snapchat. This consistent pattern indicated a strong potential for success. During the stay-at-home period in March, April, and May, Instagram feeds became less engaging due to a lack of activity. We recognized the opportunity to provide users with compelling content.

TC: Liquid Death is now available in retail locations, including 7-Elevens. Are consumers purchasing the water online, and what percentage of online sales are driven by subscriptions?

PP: Approximately one-third of our online customers also purchase merchandise, including hats priced at $24 and hoodies at $45. Merchandise sales are consistently strong, reflecting the brand’s identity and lifestyle appeal. As CEO Mike Cessario describes it, we are building a brand akin to a favorite musical artist. The product offers a way to express fandom and aligns with values of sustainability – avoiding plastic bottles and promoting responsible consumption.

It’s a conversation starter, an icebreaker, and a source of amusement. It’s relatable and engaging, offering something worth discussing and sharing.

The current trajectory is remarkable and becomes evident through consistent observation.