The Commercial Experience 21.09: Kester Black shows the real value of a strong brand, Ozy Media crashes and burns dramatically, can FB and GOOG make regression modelling mainstream?
Kester Black demonstrates the value of brand. Ozy Media demonstrates the death of a brand. And FB and GOOG focus on regression modelling to demonstrate how a brand grows.
Kester Black - a lesson of the true value of a brand customers love
Kester Black is a brand some of you may have heard of. It’s a cosmetics brand that has been operating for the past 7 years, in that time earning a devoted following both in Australia and New Zealand.
[We] make premium cosmetics that adhere to rigorous ethical and environmental standards. [Our] products are vegan, cruelty-free, carbon neutral, sustainably produced and packaged.
Over time, Kester Black has built up an impressive base of customers. It has over 64,000 followers on Instagram, over 13,000 on Facebook, a mailing list that has ticked over 50,000 receipients. All of this is translating to solid revenue growth. The business is profitable and generated $2m of revenue in F21.
To raise capital for expansion, Kester Black is using crowd sourcing investment platform Birchal. (for full disclosure, Birchal’s founder and CEO Matt Vitale is a friend of mine). The raise is at a valuation of $22m - around 19x F21 revenues - and as of writing (Monday 4 October, 11:30am AEDST) Kester Black has raised $1.65 million.
The minimum aim for Kester Black was $500k for the raise to go through. The maximum raise is $2.2m, which is 10% of the companies shares. It looks, with 9 days to go, that Kester Black will safely hit $2.2m.
For Kester Black the benefits here are significant. It will raise, after fees, around $2.05m that it can use on product, marketing and staff. The business appears cash positive from the financials disclosed as part of the offering, so this additional capital will allow it to speed up expansion and grow at a faster clip. The business has a relatively lean cost base, marketing makes up its largest expense item accounting in F21 for just under 50% of revenue.
Over 1,600 people have invested in Kester Black’s offer on Birchal, a large amount are Kester Black customers. I sent the prospectus to a friend who I thought might be interested due to their interest in sustainable beauty, and they came back telling me they’d already invested $1000. Two other people I know have either invested or will this week. All three of these people are Kester Black fans - who love the products but also equally love the way the business is run.
The unique thing here is not only are Kester Black customers loyal to the product, they’re loyal to the brand to the level they are prepared to invest in it. And Kester Black isn’t a get rich quick investment, the founders are clear that they have a 3-5 year roadmap and don’t intend to compromise their beliefs on product quality or sustainability. And they’ve already knocked back an acquisition offer - which shows they are committed to building a new kind of business that reflects the values of the founding team and not one that they can flip and walk away from rich.
When your customer base is this passionate that they will hand over not insigificant sums of money to help it thrive it’s a special signal. Add to this solid revenue growth over the past 3 years, and macro market trends around beauty pointing towards sustainability and quality, Kester Black has positive signals. And the success of its Birchal raise is testament to the power of its brand and product, which has enabled it to raise money at a very high valuation, maintain control, and provide another way for its already loyal customers to become even more invested in the brand.
A week was a long time for Ozy Media
From a business with a loyal, invested customer base … to one without.
I have to admit I’d never heard of Ozy Media before last week. The first I read about it was a Ben Smith column in the New York Times.
This was 27 September. The story was something out of a fictional drama based on high stakes corporate scandal. But even with that reference point it seemed too absurd.
The basic story is Ozy Media was seeking to close $40m in funding from Goldman Sachs. On a call with GS and the Ozy Media executive team was meant to be a senior representitive from YouTube. This YouTube representitive was meant to validate the claim that Ozy was performing well on YouTube and was a valued partner to YouTube.
All pretty normal yeah?
Prior to the meeting, the video call was moved to a standard audio only conference call at the request of Ozy. No big deal right?
During the call, the members of the Goldman Sachs team felt something was off. The voice of the YouTube representitive sounded manipulated. Fake. Almost like it was being processed through some sort of voice changing software.
Post the call GS reached out to YouTube to enquire about this. YouTube knew nothing of the call. No YouTube representitive was on the call. Or meant to be on the call. Ozy had staged the whole thing. And what’s worse, the person immitating the YouTube representitive was the COO of Ozy.
Not so normal.
One week later Ozy Media has closed its doors. $70.3m of VC funding down the drain. And this money came from some big names. Ron Conway, Laurenne Powell Jobs, Marc Lasry, German media business Axel Springer.
Smith’s article on 27 September basically tore away at the the sticky tape holding up Ozy Media’s business. It opened up debate and questions around the merits of its audience claims, relationships with platforms, engagement rates, commercial deals. And it turned out, none of them stood up to scrutiny.
From the New York Times: “A strange feature of Ozy Media was that the content was all real, its journalism was real (albeit light) and the ad revenue appears to have been real, too. Nobody loves this stuff more than advertisers, who are ever in search of news without, well, news.”
Ozy is a good example of the issues we can face when the will to really really want something to be real can lead to bad outcomes. With Ozy you had an executive team who really really wanted advertisers and investors to believe their story - a smart, modern, cross platform media business that appealed to an educated, affluent audience aged 25-39. Advertisers really really wanted to believe it too - and Ozy generated advertising revenue and large brand sponsors across its properties. Investors also wanted to believe they were in on an investment that had cracked the code of appealing to discerning younger audiences in a ‘news-light’ environment.
And there was a reason to believe - Ozy was valued at $450m just months ago (related to this funding round), and was selling the idea (according to reporting by Smith) that it would be worth $5b in a few years.
It demonstrates what happens when professional scepticism goes out the window and is replaced by an idealist optimism that seeks only to validate everything each party wants to think is true about the investment. Theranos had this (however, Theranos didn’t dupe anyone in Silicon Valley, they were too smart to believe it), as did WeWork (who someone did manage to get SV VC’s to throw money at them). However, those companies burnt through billions, Ozy’s losses are $70.3 million.
The worst thing about this is the biggest victims are the staff. They lose their job, and worst still they will lose any pride they had on the contribution they had made to media in their time in the business. This week they’ll all be looking for new jobs.
Boom times coming for regression models?
Last week Facebook held an event around its beta regression modelling software platform ‘Robyn’ - which was reported in an excellent Twitter thread by Michael Taylor.
Basically Facebook has put a lot of time and money into building the code behind Robyn, which is open source market mix modelling code.
Market mix modelling is basically a form of statistical modelling that seeks to find relationships between events and variables. It’s an interesting area and one that seems to be infrequently used in Australia. The idea is it meant to get the user closer to understanding the contribution of various marketing activities to results/sales. Data is collected on advertising weight, investment, channels, actions; as well as non advertising variables such as pricing, weather, economic data, distractions etc, and assessed against the end outcome the user wants to generally achieve.
Like any model it’s only as good as the inputs. And it’s generally a lagging a model - as it relies on historical data to post analyse the efficacy of events that have taken place. Personally I am bullish on regression modelling as I love the insights it generates and I think it’s a very good positive step towards a more robust view on data and efficacy.
Facebook is looking closer at this approach as privacy changes across browsers and devices make some of their previously used metrics harder to use. Google is doing the same, and released its most noteable work in 2017 when it introduced the Google Aggregate Marketing System Simulator.
Google, like Facebook, is also facing some challenges with measurement due to privacy changes. And like Facebook, it has a big business to protect around advertisers that use their services due to the results these advertisers achieve. If privacy changes alter this perception, the consequences could be in the billions. So both Facebook and Google have a lot riding on figuring this out.
What is also does, or will do, is expose a lot of marketers to market mix modelling who either have been uninterested in it, or unsure on how to approach it. When the two largest advertising businesses in the world both make a concerted effort to raise awareness of something, the chances of it raising in awareness are pretty high.
And ultimately anything that helps enterprises better understand the relationship between expenditure and return is a really good thing.
Listen to Recode Media where Peter Kafka interviews Max Chafkin about divisive business figure Peter Thiel. Known initially for early investments in PayPal, Palantir and Facebook, Thiel has become increasingly associated with right wing views and polarising views on the media.