How Investors Spot the Next Cult Brand
Carol Kruse, Martin McClanan, Eric Rosenfeld – November 2022
Predictive Indicators
Darwin wondered what nature was thinking when it created the peacock and its enormous tail. Why would nature saddle a bird with such a ridiculous disadvantage? A peacock’s tail hampers maneuverability and the ability to fly and makes the bird a sitting duck for predators – it certainly reduces the male’s odds of survival. Darwin concluded it was due to sexual selection. From a peahen point of view, a male must be particularly strong, fit, clever, and suitable to mate with if it can survive with such a ridiculous disadvantage. In other words, the size and quality of a peacock’s feathers are predictive indicators of valuable attributes much harder to quickly ascertain – the strength, smarts, and health of the peacock.
At the Oregon Venture Fund, we too are looking for predictive indicators. In our case, what can we glean from a 1-hour initial meeting with a founding team that might predict future success? For consumer-facing startups, an important source of differentiation and sustainable competitive advantage is the ability to be noticed and create a passionate audience that values the brand. And the most valuable form of brand equity, the kind that creates competitive moats and commands lofty exit valuations, is the rare and elusive cult brand.
A brand is only as good as the product or experience being delivered. How many potentially good brands over-promise and under-deliver? We all know brands that get tarnished by letting their service level slip. Or their product fails to keep up with technology preference. Or, as we are seeing right now with Twitter, a controversial CEO takes over. “Your brand is your experience is your brand” - they’re intertwined. Sometimes even the slightest change in perception can change a brand’s value.
Why Cult Brands Matter
Brand equity is not just perception - it can be measured by the value and price premium a brand commands versus similar products or services. The value premium stems from greater pricing power, higher profit margins, better shelf placement, greater repurchase frequency and, less intuitively, lower marketing costs. With social media, passionate brand advocates reduce marketing costs by publicly promoting the brands they care about. Indeed, the rare cult brand benefits not just from higher margins, but also from inspired and loyal employees, greater repeat purchase rates, and evangelical customers, all contributing to greater brand equity and greater enterprise value.
On some level, we all desire to self-actualize, to try to be the best we can be. Cult brands - those commanding the greatest customer loyalty - express a customer’s identity, aspirations, and world view. These self-expressive brands fulfill human needs at the top of Maslow’s hierarchy and reflect values and attributes consumers aspire to, as Apple and Nike have demonstrated so well – e.g., Apple makes customers feel more creative and think more freely; Nike gives customers the courage to dare, to work hard, and to feel like a high-performance athlete.
Cult Brand Examples
Hydro Flask – Why pay $50 for a thermos, when you can buy a Thermos-thermos for $12? Hydro Flask promises to elevate outdoor adventures and even make you appear outdoorsy and cool at the office.
Yeti – Why pay $300 for a Yeti cooler when you can buy a Coleman cooler for $40? Yetis are authentic, innovative, & unbreakable. They’re not perceived as just a product, but as part of a lifestyle - an aspirational brand, a status symbol, the Range Rover of coolers. Yeti owners feel a sense of brand ownership and behave like they have a personal stake in furthering the brand’s popularity and success.
Rumpl – When Rumpl founder Wylie Robinson asked if OVF would consider investing, we reluctantly agreed to meet. We thought, does the world really need another blanket? As part of our diligence, we spoke with sales staff on the floor at REI and Cabela’s. They raved about the Rumpls as the hottest new category. They said customers were buying them for their bedrooms, their living rooms, and their cabins, and were storing them in the trunks of their cars and sending them as holiday and birthday gifts. Remarkably, a third of Rumpl customers purchase an additional Rumpl within 12 months.
Cult Brand Indicators
How to tell if a startup brand has cult-like potential? You can’t. Brand value = (time) X (absolute # of people familiar with the brand) X (magnitude of how much they care about the brand). Time is an inescapable and unavoidable component of the equation. The truth is, startups start with no brand equity.
That said, there are certain predictive indicators one can look for in a first meeting with a consumer-facing startup, specific to its cult-brand potential:
Is the brand distinctive?
One can easily identify a Rumpl or Pendleton blanket from a distance. Not only that, but one is also immediately reminded of the quality and the premium price, especially if compared with a run-of-the-mill Macy’s blanket.
Dutch Bros and Starbucks are stark examples of distinctive branding. Dutch Bros offers an upbeat, utilitarian experience, complete with Rebel (yell?) energy drinks prepared by “bro-istas” at drive-thrus in suburban and rural areas. Dutch Bros refuses to support carbon cap-and-trade legislation. Contrast that with Starbucks’ reinvention of the “third place,” backed by its commitment to sustainability, social responsibility, inclusivity, racial bias training, neighborhoods, community building, and fair trade. Each brand is distinct and appeals to different, non-overlapping demographics, and even reflects and reinforces their different ideologies.
Does the brand promote self-differentiation?
By self-differentiation, we mean augmenting one’s identity by associating with the distinct values inherent in a brand. For example, shoppers at Wildfang, a fast-growing gender-fluid, tomboy apparel brand, can feel like they are entering and joining a safe, supportive, and empowering community of like-minded individuals. Some Harley Davidson customers - Harley Owners Group, or affectionately known as HOGs - have become living billboards for the brand. Can you think of a brand more frequently and proudly permanently tattooed to human limbs?
A compelling, relatable origin story?
Brands with short, memorable origin stories are more conducive to word-of-mouth retelling, viral marketing, and therefore cult-brand potential. A compelling origin story can define why a company exists and make a brand more relatable. After serving several prison sentences, Dave Dahl returned to his family’s bakery where he found renewed purpose and salvation making really good bread. Dave’s Killer Bread was eventually bought by Flowers Foods for over $275 million. Christy Goldsby wanted to create something healthy and comforting for a friend with an auto-immune disorder. She came up with Honey Mama’s, a line of high-quality nutritious, delicious, dairy-free, easy-to-digest cocoa truffle bars, first for her friend, then for the Portland Farmers Market, and now for millions of health-conscious consumers nationwide.
Famously, in 1984 Apple borrowed a page from George Orwell and David vs. Goliath and pushed an origin story of courage and daring with its single Super Bowl XVIII commercial directly and publicly challenging ‘Big Brother” IBM. Having a clear enemy “Goliath” galvanized Apple customers and employees to rally behind their “David.”
A compelling social mission?
The days are over when a brand can exist separately from the values and practices of the company behind it. This is increasingly true with younger consumers who demand transparency and may only want to do business and associate with brands that reflect their values. If they love a brand, it can be an accelerant. If they don’t, an ocean of 2-star reviews can halt a brand in its tracks.
Consider Patagonia’s full commitment to social and environmental sustainability and Whole Foods’ commitment to all things organic, sustainable, and fair trade. Bamboo Sushi earned a cult following for the restaurant’s commitment to “certified sustainable” and for rethinking and re-engineering the entire supply chain from ocean to table. The result: seafood you can feel good about. Great brands like these walk the walk and talk the talk.
Evidence of grassroots marketing?
The ultimate predictor of a cult brand is evidence that customers, journalists, and other influencers are doing all the marketing, for free. It’s truly remarkable, and incredibly valuable, when a brand starts to become a household name and there is no marketing budget in sight. Salt & Straw spends less than 1% of its revenue on marketing vs. 18-20% at Ben & Jerry’s. When Salt & Straw opens a new location, or launches a new set of flavors, media firms, bloggers, and customers jump into marketing action at a scale - and in a fun and authentic manner - that would be impossible to achieve through paid advertising.
Have you seen an Amazon ad in the last 10 years? They rarely promote the Amazon brand, but it is nevertheless the de facto destination for online shopping. More recently Amazon has successfully expanded the brand to being producers of original content as a major player in streaming. How many other retailers are competing with Netflix and Disney? Amazon stands for choice, reliability, customer service, and good prices, which – even with concerns about it being a monopoly – consumers value these key brand benefits and keep shopping and watching with Amazon.
Measures of an Embryonic Cult Brand In-the-making
What metrics do we study when evaluating the cult-brand potential of an early-stage startup? If a company is so early in its development that consistent and statistically meaningful metrics are not being generated and tracked, we will typically wait to invest and support the company in other ways. Consumer markets are so fickle and unpredictable, and cult brands so rare, the risk/reward profile of pre-product-market-fit consumer startups are too unfavorable for VCs to seriously consider. If a consumer brand has reached a point where it enjoys a repeatable, scalable sales process, here are a few metrics of a nascent cult brand we will study and consider:
Viral Coefficient > 1. This is the ratio of new customers generated from existing customers, divided by the number of existing customers. Or, more simply, the number of new customers an existing customer generates. The viral co-efficient measures how well a product sells itself via word-of-mouth, a key marker of a cult-brand. Over 200 of Honey Mama’s customers, for example, regularly rave about their favorite flavors on Instagram and TikTok. These unpaid influencers, wielding a near religious fervor for the brand, reach a monthly audience of over 25 million. While one needs to be careful these days about saying a product has “gone viral,” a viral coefficient is indeed analogous to the R0 value in epidemiology.
Repeat Purchase Rate > 40%. A measure of customer passion and loyalty, this is the percentage of customers in a cohort who make at least a 2nd purchase within 12 months and is especially telling when evaluating discretionary consumable products. In general, investors prefer to back products that are repurchased frequently – e.g., in its early years, Dave’s Killer Bread had a repurchase rate of over 70%. RISE Brewing, the fastest growing ready-to-drink cold brew coffee brand, enjoys a repeat purchase rate of 49%, the highest in the category. In comparison, Starbucks’ repeat purchase rate for its similar products is 47%.
Word of Mouth Marketing & Net Promoter Score. NPS, a widely adopted metric using a single survey question, asks: How likely would you recommend X brand to a friend or colleague? For a young company, a high NPS score could be an early indicator of strong customer loyalty and a potential cult brand. On a scale of 1 to 10, “promoters” rate 9 or 10, “passives” rate 7 or 8, and “detractors” rate 6 or lower. The NPS is calculated by subtracting the % of respondents who are “detractors” from the % of “promoters”, the “passives” get thrown out.
If a startup has a high percentage of loyal promoters, that could be a very positive predictive indicator of a cult-brand in the making, as there is generally no more effective form of marketing than “word of mouth.”
Premium Pricing. Price can connote superior quality and value. Cult brands are more likely to command a higher price than immediate competitors and therefore can produce excess earnings and value. Apple’s premium pricing strategy generates a market-leading 43% gross margin and has enabled the company to amass over $60 billion in current cash. Rogue Ales, one of several Oregon craft beers with cult brand status, is reputed to regularly scour grocery aisles and insist on being the most expensive beer on the shelf. OVF invested in Salt & Straw, in part, because its pricing is higher than Ben & Jerry’s…and its ice cream tastier…and its lines longer.
Social Savvy. Young brands seeking cult status must demonstrate a mastery of social media nuance. Travel platform TrovaTrip, for example, requires trip hosts to participate in a short social media training to learn how to best align with and reinforce the TrovaTrip brand. Social media influence can be so transient and fleeting that the ability to capture the moment when things are trending is a vital skill for amplifying a nascent brand’s voice and accelerating a brand’s reach. Brands with clear values and identities are better positioned to react instantly and authentically to both unexpected opportunities and challenges. Wildfang has many notable examples, including mocking the First Lady’s famous “I don’t care” jacket. When a startup amplifies its message and positioning with social savvy, the results are observable through rapid audience and sales growth and growing brand recognition. “Carpe Tweetum!”
Other Metrics. Depending on the nature of the product and distribution channel, here are a few additional metrics OVF will research to identify potential cult brands in the making:
Customer Reviews and User Generated Content (UGC)– Thanks to Amazon, Google, Facebook, Yelp, TikTok, Twitter, and Instagram, customer reviews and UGC can easily be found and aggregated, and one can glean an early indication whether customers are raving or enraging. The more passionate the reviews and posts, the more positive or negative the impact on the brand.
Search Volume – Google has made it easy to track search volume for a specific brand, as well as the rate of growth in such searches over time.
Media Attention – Regional and local media often identify cult-brands first. Ruby Jewel – a small but fast-growing ice cream sandwich brand – often makes the local news when entering a new metro. Salt & Straw often makes the national news – from the NY Times and NPR on down – when they announce new monthly flavors. These stories then fuel more social media mentions and followers.
Loyalty Programs – Consumers are increasingly selective about which loyalty programs with which to share their personal information. If a startup’s customer loyalty program is experiencing a high adoption rate, that too could be a sign of fandom and a nascent cult brand.
Return on Ad Spend [ROAS] > 4. ROAS is simply total revenue divided by total ad spend. If a startup is generating at least $4 in additional revenue from each incremental dollar spent on advertising, it could be on a track for cult brand status. Blanket-maker Rumpl, for example, is nearing $50M in revenue, built on a ROAS of >8.5.
Remember, brand building is hard and rarely successful and cult brands are even more rare. Consumers possess long-held loyalties and biases, are inherently skeptical of anything new, and are reluctant to abandon their favorite brands. A new brand cannot, and will not, generate consumer love and loyalty overnight, or even after several years. Time is an inescapable and unavoidable factor in the reputation and brand-building equation.
The above list is by no means exhaustive. We would love to hear your predictive indicators of a cult brand to add to future updates. Now that we have shared some of our indicators, join us in keeping an eye out for consumer-facing startups with viral brand potential. Perhaps evidenced as a tattoo on someone’s arm.
-----------------------------
Carol Kruse is a professional board member and former marketing executive at ESPN and Coca-Cola. She has led three venture-backed startups. Martin McClanan is a former director at Prophet Brand Strategy and former CEO of GiftTree, Norm Thompson, and RedEnvelope. Carol and Martin are venture partners of the Oregon Venture Fund, which was founded by Eric Rosenfeld.