Capital & Clarity: Building a Productive Asset
What I Look for in High-Quality Consumer Brands
“The most important thing [is] trying to find a business with a wide and long-lasting moat around it … protecting a terrific economic castle with an honest lord in charge of the castle.” - Warren Buffet
Running a consumer brand is hard. The path from achieving product-market-fit to a durable, cash-generating enterprise is strewn with organizations that scaled too quickly, overspent, or never fully grasped the financial architecture underpinning their success—or failure.
At its core, a great consumer brand is a productive asset—one that converts capital into sustainable profits, compounds free cash flow, and requires diminishing incremental capital over time to maintain or accelerate growth. In my experience underwriting opportunities for institutional players, advising and investing in startups, I see far too many founders fixated on top-line growth. Yet revenue without robust underlying economics is ephemeral.
When evaluating whether a brand qualifies as a productive asset, I screen for the following criteria:
Strong gross and contribution margin profile
Operating leverage (should increase over time)
Strong CCC (I wrote about this here)
LTV / CAC ratio
Differentiated (and exceptional) product that has strong demand (I’m not afraid of tackling fragmented markets)
Brand performance and expanded MOAT
Balance sheet health
Let’s take a deeper dive.
Gross Margin: The First Gatekeeper
Strong gross margin is my initial filter. If the margin is inadequate to cover appropriate targets against CAC and opex, the business model is inherently fragile. For DTC brands, strong GM% is a prerequisite for scaling comfortably without perpetual infusions of external capital. Wholesale or retail-driven models, by contrast, carry different margins—same structural concept applies just with greater velocity.
Within consumer verticals, product margins (which exclude fulfillment, merchant fees, etc.) can vary. For example, I like to see beauty and personal care categories in the 75-85%+ range, whereas apparel in 70%+. Benchmarks can help you contextualize your brand’s performance. At some point, I’ll try to share my POV on GM% across different sectors… that’s an essay on it’s own.
Contribution Margin: The Real Driver of Growth
While GM% is informative, contribution margin (net of variable marketing spend) truly dictates how much a brand can scale. If there was one metric I care the most about, it would be CM%, as this gives me assurance that the business can reinvest in growth without continuously raising capital.
Non subscription companies achieving first-order profitability means you’re not simply “buying revenue.” If your initial purchase from a new customer already covers the cost to acquire them, every subsequent purchase creates upside. This dynamic underpins a high LTV and offers evidence of strong product-market fit.
For subscription brands, I care about payback periods. In general, I want them to optimize for < 3 months of payback. Anything in the 3-6 months means, capital constraints will create a pinch, and anything in the 6+ months means, founders will always be raising.
I wrote about stages of consumer brands growth back in 2021 that captures this in detail (link here).
Marketing as a % of rev can vary, but for companies doing 70%+ GM% and low opex, can comfortably spend 45% on marketing in the earlier years of growth. This eventually comes down overtime as retention comes into play. For this same company, I would normally see 25-30% of rev allocated to marketing after the brand has crossed $25M+ in top line. It generally stays steady in the 20-30% range going forward as companies eventually explore new distribution channels.
It’s been ~6 years since I wrote this tweet and it still (partially) rings true; albeit CPMs are much higher nowadays.
Operating Leverage: Scale Should Drive Efficiency
True operating leverage isn't simply about top-line growth. It's about efficient growth. We're talking about fixed costs – infrastructure, tech, payroll – growing slower than revenue. That's the magic. Think declining overhead as a percentage of sales. If your headcount or other opex costs scale linearly with revenue, you're on a treadmill. You'll constantly need more capital just to stay in the game. Real winners build a machine where revenue accelerates while expenses lag. That's how you generate free cash flow and fuel the next leg of growth. It's not about cutting corners, it's about building a scalable engine.
For reference, the best companies in my network (8-9 figure brands) are spending < 15% of top line in overhead expenses (payroll). They reduce fixed costs and manage variable costs. Most dollars are allocated towards GM% and CM%.
Net Margin: The Ultimate Scorecard
Most DTC and CPG brands trade on EBITDA multiples. I care immensely about maximizing shareholder value and increasing enterprise value when I advise my founders and their investors. That said, I don’t like to run my businesses on “EBITDA.” I care about net margin. To me, net margin is the ultimate truth serum. It cuts through the financial engineering, revealing how much bottom line a brand is generating. Strong margin signals efficient production, real pricing power, and disciplined cost control. It's the foundation of sustainable value creation.
You can sell on your EBITDA multiple, but don’t run your business on EBITDA. Interest expense, tax, depreciation are all real cash considerations.
Working Capital: The Difference Maker
Liquidity constraints, rather than stagnating sales, often topple consumer and retail brands. Working capital gaps can emerge over time; brands become inventory heavy, AR accounts from wholesale growing, etc. The resulting time lag can create real problems on liquidity if not carefully managed.
Scrutinize historical working capital data to see if the brand struggles with extended cash cycles. Ideally, the CCC remains strong, supported by either strong inventory management and sufficient cash reserves. Prolonged misalignment of payables and receivables invariably leads to a reliance on expensive short-term financing—or worse, equity dilution.
I wrote about brands driving working capital efficiency 2 years ago (link here). And if you’re looking to raise debt or credit solutions, here’s last week’s letter (link here).
Inventory Management: Think About Weeks of Supply
Inventory is an asset, but it can sometimes feel like a liability. Over-ordering ties up capital and risks obsolescence, while under-ordering can impact growth momentum. Tracking days inventory outstanding (DIO) helps us get a pulse on operational agility.
Rising DIO during flat or declining sales portends problems—often symptomatic of mis-aligned demand plan or overzealous growth projections. Inversely, strong organic demand can help maintain efficient inventory turns, reducing the need for discounting to clear unsold product.
What I ultimately care about when it comes to inventory:
Maximize working capital efficiency
Get economics of scale for margin improvement with your suppliers
Manage weeks of supply carefully
Dial in your demand plan (minimize variance on budget to actuals).
I generally see (+/-) 5% variance on budget to actuals for growing brands; this signals strong direction from management.
If your pro forma had $3M in revenue plan for March, but you actually did $2.7M, that’s a 10% miss. Create an MD&A and document why the miss occurred. Refine your forecast and work the plan to get your variances close to +/- 5% across all major accounts.
Liquidity: The Oxygen Mask of Business
Cash isn't just king; it's oxygen. As brands grow, operational complexity grows. Strong liquidity position provides strategic flexibility. Good quality brands maintain a minimum of 6+ months of cash reserves – at least.
Robust cash reserves also provides optionality. Think about it: CPM and CAC on ad platforms can fluctuate, consumer demand can shift, supply chains get disrupted, and opportunities arise unexpectedly. This is how the best brands do it: They proactively manage working capital, optimizing inventory and payment terms. They build strong relationships with lenders and explore diverse financing options before they're needed. They prioritize profitable growth over growth, understanding that sustainable profitability fuels long-term ROIC. They also selectively pursue strategic partnerships and acquisitions that are accretive to cash flow. Cash allows you to seize those opportunities – expanding into new channels or internationally, investing in R&D, etc. It's the difference between reacting to the market vs. shaping it. It's not just about keeping cash on the balance sheet; it's about capital allocation. Liquidity isn't just a buffer; it's a weapon.
The Balance Sheet: Competitive Edge in DTC & CPG
The P&L is like a film. It tells me how your business is doing over a period of time. Your balance sheet is like a Kodak moment. It tells me how you’re doing at a single period in time.
My team generally teaks a prescriptive approach to improve balance sheets for our clients. Every company has nuances. For the purposes of this essay, here’s my over-the-counter recommendation on how to think about (and potentially improve) your B/S:
Inventory as a strategic asset: Don't just manage inventory; optimize it. Lock-arms with your CMO-CFO-COO (or equivalent talent “head of”) to refine demand forecasting and agile manufacturing to minimize excess stock while maximizing availability.
Cash conversion is king: Shorten the CCC. Negotiate favorable payment terms with suppliers while accelerating collections from customers. Explore working capital financing options (e.g. ABL, LOC, factoring) strategically, not out of desperation.
The best time to get cash is when you already have cash.
Debt - a tool, not a trap: Use debt strategically to fuel expansion, not to plug holes. Match the term of your debt to the useful life of the asset it's financing. Avoid short-term debt for long-term investments. And always maintain a healthy debt-to-equity ratio.
Remember: the best companies finance working capital gaps, not margin problems. And certainly aren’t using debt to drive growth.
Equity - fueling the fire: Equity isn't just capital; it's a signal. A strong equity position demonstrates financial strength and attracts top talent. Raise equity strategically to fund growth initiatives, not to cover operating losses.
Beyond the numbers: A best-in-class balance sheet is more than just a collection of numbers. It's a reflection of your operational excellence and strategic vision. It's a competitive advantage that allows you to seize opportunities, weather storms, and ultimately, win. It's your silent partner in building an incredible business.
The Bottom Line: Build for Durability
A productive consumer brand transcends mere revenue by focusing on durability and capital efficiency. Founders who understand these levers— margin expansion, operating leverage, working capital discipline, and net margin sustainability—don’t just build ephemeral companies. They engineer compounding assets that generate lasting economic value, fund their own expansion, and ultimately merit long-term ownership.
This is the essence of investing in high-quality consumer businesses that withstand market cycles. In a world awash with “grow-at-all-costs” strategies, the real winners are those who methodically construct businesses with high margins, superior product-market fit, and an unassailable balance sheet. Over time, these brands become the “productive assets” that enrich investors, delight consumers, and define entire sectors.
What I am reading:
I am reading more history, less forecasts.
It’s forecasting season… Between annual letters, earnings calls, I am trying to refine my thinking, aiming to build a connective tissue between the past-present-future. I stumbled across this essay (link) by Morgan Housel that sheds light on this.
For paper reading, I’m still working through Buffet’s shareholder letters. If you’re curious, he published his 2024 letter yesterday (Feb 22, 2025)… hot off the press! (link here).
