Innovation Department CEO Colin Darretta: Consumer businesses are not winner-take-all

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In 2013, Colin Darretta left private equity to start his own company, WellPath, a direct-to-consumer brand of vitamins and supplements. Today, WellPath earns eight figures in revenue annually — and it’s profitable.

Scaling WellPath taught Darretta how to build a successful consumer business from the ground up: Developing products, managing supply chains, and growing marketing funnels. Soon, he and his co-founders began asking, if it could be done once, could it be done twice?

“We came to the conclusion that there were real opportunities to apply the learnings that we’d had at WellPath on a repeatable basis across other brands,” Darretta says.

Darretta is now the CEO of Innovation Department, a holding company that develops wellness-focused CPG brands. Think of it like a modern Proctor & Gamble. In addition to WellPath, Innovation Department’s portfolio also includes Finn, a brand of nutritional supplements for dogs used by the likes of Paris Hilton, and Grummies, an innovative gummies line that launches next month.

Darretta is also an early-stage investor in businesses like Classpass, Saturn, and Daily Harvest. Here, Darretta shares his playbook for operating consumer businesses, leveraging audiences, and developing marketing strategies.

You’ve written that a different approach toward venture capital is necessary for consumer businesses. Can you explain why?

“Unlike with software or even fintech, consumer products are not winner-take-all markets. For social networks like Facebook, you understand why there will only typically end up being one winner to emerge, because the more nodes in the network, the better the overall network ends up being, and the harder it is for anyone else to compete.

Consumer products don’t work like that. If you take a WellPath supplement, that supplement is not inherently a better product by virtue of the fact that five of your friends take it. In fact, whether five of your friends take it or not is inconsequential to the quality of that product. What that means is that there can be a lot of winners on a relatively smaller scale within the same category.

What that also means though, is the economics of those businesses should be very different. Those businesses should pursue profitability at a much, much sooner stage than software company, where it might be viable for a software business to be losing money hand over fist for years and years, predicated under the assumption that eventually they’ll scale out of their fixed costs and get so large that they become enormously profitable enterprises.

For CPG, if a business is getting to $50 million or a $100 million of top line revenue, and you still don’t really have a path to profitable unit economics, you’re just doing something wrong as a business.

In turn, I think there’s a lot of earlier exit opportunities for consumer businesses than there are for software companies, because you might get a consumer business to $30, $40, $50 million of revenue and have it be a really profitable enterprise. And there will be plenty of both strategic as well as financial buyers out there in the market for them.”

How do you implement that thinking across the portfolio at Innovation Department?

“At Innovation Department, we’re creating an environment where we can hit profitability a lot sooner and validate our thesis that unit economics should work mathematically at a really early juncture in the business.

And that’s because we’re sharing resources across most departments of the business and we’re not reinventing the wheel. When it comes to building our websites, the same team that built WellPath’s website built Finn’s website, and is building Grummies’ website. The costs end up being substantially less, because we can do things that go so far as borderline copying and pasting some of the code — just reusing code bases.

That proves true for when we build our supply chain operations and work with 3PLs, it proves true for our design infrastructure, so it’s repeated across so many different levels of the organization.”

What other strategies do you leverage across the portfolio?

“One of our prevailing theses is that audiences are underused assets. In the same way that when Uber was first gaining traction, people quickly realized that cars are a terribly underutilized asset — most people use their car for two hours a day and then the other 22 hours of the day it sits around gathering dust — audiences are the same way.

If you have a big email list and you have 10 products you sell, after you’ve advertised those same 10 products to everyone on your email list several times, there’s less value from you continuing to message them, persistently trying to go after them.

However, if you have multiple brands and they all have their own audience, you can start cross-pollinating those audiences. So WellPath can promote Finn’s products, Finn can promote WellPath’s, and more and more nodes that we build can cross-pollinate within our own network. Then we’re much better able to utilize our audiences effectively.”

How do you think about marketing strategy, whether working with influencers or building an organic social following?

“People fundamentally have a trust in the influencers they closely follow, particularly when it comes to their area of expertise, so when they use your product it makes a difference. And ultimately with wellness brands, you’re trying to build pillars of trust and credibility with your potential consumers. There are different touch points that people will look to when they’re deciding whether they want to trust a brand.

Some people will look to, ‘Hey, have you been mentioned in press that I respect?’ So they’ll look for a New York Times mention, or a Vogue mention. Some people will say, ‘Have you written content that really educates and informs me and substantiates that you know what you’re talking about?’ Still others will look for, ‘Well, do you have the right sort of vets on board?’ or ‘Do you have a big social presence?’ And finally, others will look to, “Is there someone who is really credible in the space attaching their brand to this brand?”

Even though we’re not very aware of it, we all weigh those different aspects to varying degrees. There isn’t one magic button that unlocks it. So we really believe, especially in wellness, it’s super critical that you are figuring out ways to be leaning heavily into all those different factors.”