Maximizing Your Shopify Store’s Valuation with Drew Fallon, CEO of Iris

Drew Sanocki

Drew, thanks for joining the Nerd Marketing Podcast. Can you tell us a little bit about Iris?

Drew Fallon

Of course, happy to be here. Iris is effectively the financial operating system for retail and e-commerce brands. So essentially, I spent the better part of the last decade in senior finance leadership roles, most notably, slash recently, as CFO and COO of a beauty brand called Mad Rabbit. And I found that there was a glaring lack of financial planning and analysis tools within the industry that kind of catered toward this market because this market has such unique requirements out of a tool like that. You know, it's the only industry where it's like sales can change every single day and there's huge inventory requirements and you're selling in different channels that have different margins. And it's just, so complicated that, you know, my belief was that there needed to be a really dedicated tool and sort of the overarching vision for Iris is that if we can basically gain a critical mass of customers on the platform, we can use all of that information to actually train our own AI  to eventually take over the sort of fractional CFO role. So one of the things that you'll see us start to talk a little bit more about is sort of like the agentic modeling workflow where you literally just type into the computer and you say, build me my 2025 budget and then it's done for you. And you can iterate and build as many of those types of models as you want. So that's kind of the gist of Iris.

Drew Sanocki

We did a whole episode on budgeting and forecasting. The reason, and we also wanted you on here is because you put out some of the best content, I think, on the internet, let's say, but especially on X. I love it because Mike and I geek out on M&A and we always like to see what's happening to brands. And you are one of the best sources of deal information out there.

Michael Epstein

And the teardowns are really well done.

Drew Fallon

I appreciate that. They're less laborious than they used to be, but it's still a decent amount of work.

Drew Sanocki

Where are you getting these all like they're not all Iris customers?

Drew Fallon

No, they're all not Iris customers. Actually there's been some brands that have come to me and been like, I would let you use this for content. If you like, do it for free, basically, which I haven't elected to do, but this is, everything that I post about is publicly available. It's all, you know, it's just deep in like the sec filings, honestly, is kind of like where you like, don't even know where to look if you haven't done this stuff, but prior to Mad Rabbit, I spent a couple years on the sell side research, sell side doing research on like these types of companies. Like I covered Wayfair, Carvana, Amazon, Google, Facebook, all that good jazz. They taught me where to look back in the day.

Michael Epstein

I'd love to hear sort of your take on recent trends, particularly in M&A and how those have changed most recently. So there was this period obviously where DTC from a valuation perspective and investment perspective sort of fell out of favor a bit. Interestingly, we're in a weird macro economic climate at the moment, yet we're still seeing some interesting acquisitions from like just yesterday and some other folks. like what's your take on how things have changed and where the state of play is today?

Drew Fallon

So I would say, okay. Like obviously you had like the 2021 mania that probably leaked in 2022. 2022 actually didn't feel so bad. Um, you know, I was kind of out fundraising during that time. Mad Rabbit had a $10 million series A, so this is a little bit different than M&A. But you know, a downtrend, over the last couple of years, and I'm kind of on record as saying this is the starting gun of the race. I do believe that we are back. so, you know, as far as like what I'm seeing, like one of the main things I track every deal in this industry and like, what I was really kind of blown away by over the course of 22 to maybe, you know, 24 really was like, the only companies that were trading were like companies that had been around for like 30, 40 years, right? And you're starting to see that duration kind of shortened. So for example, Poppi, I mean, it's still longer than it used to be. Like it's still 10 years. But, you know, Pepsi is paying, you know, I think over 3x sales, there's an estimation on the sales front of that number, but like, let's just say it's 3x+ sales. And so there's a slightly premium multiple for a slightly younger brand, which just tells me that people are getting a little bit more eager, you know? And it happened with Alani Nu and Celsius. And so like, I think that like, when you start to see these companies, like really snap up, you know, more emerging brands, as opposed to like, established like financial assets, right. It kind of makes me really bullish because I think, you know, within the case of Alani Nu,, I think I already, I sort of wrote something about this, but if you look at the top 10 energy drinks by market share, they're all gone. Like they're all owned now by some big conglomerate except for like the exception would be Celsius, which is like a $7 billion publicly traded company. And then Red Bull, which is like a hundred billion dollar plus privately held company. But all of those independent assets are now sort of off the market, like monster bought bang energy. A lot of you knew obviously it was bought by Celsius, Ghost Energy went to curate Dr. Pepper. And so now like, if I'm like Coca-Cola or Red Bull or whoever else I'm looking around and I'm saying, oh shit, I just completely missed that. So I missed the energy trend, but I can't miss the next one. And that's like, obviously like the psychological sort of cycle that begins the bull market. So I don't know how public stocks are going to behave. And I don't  pretend to know that. But I do think, based on my observations, like I feel pretty optimistic about the sort of 2025 M&A in this category too for sure.

Michael Epstein

And if you're operating a brand today, in your opinion, what's the, what are you optimized for? If you're looking to either raise or ultimately have an exit.

Drew Fallon

Yeah, it's such a hard question, right? Because, you know, by the time you answer it, it's already changed again. I was in the business world, right? Because like, if we decide that we're going to optimize for revenue growth, like it might take us six months to actually start to move that unless you're extremely small, nimble kind of team, which a lot of these, a lot of these brands are, but, um, I think, I think you have to maintain focus on your profitability. I think you can just have a little bit of hope at this point,  like the sort of minority capital markets will unlock. So I think like, you know, because like these big strategic are buying, kind of makes private equity a little bit more comfortable buying. Cause they see a path towards liquidity to the strategic buyers. And it's not as linear, but you know, then the VCs get a little more comfortable buying because they see liquidity to the private equity. And so it kind of like, you need like this, the domino to go before the markets really open up. And so I think you're never going to lose. I don't know that we'll ever get back to like the mania of 2021. At least not like in my lifetime maybe. But I do think that growth will come back into favor, but like decent growth, not like, you know, growth at all costs kind of a thing. So I think if you're a brand, if you're doing below 50 million in sales, it doesn't really sort of apply to you. I don't think it's at least not like that in the near term. But I do think, you can, you can start to look at your model and kind of wonder how are we going to push the gas a little bit. because at the end of the day, like you do want to be growing, you know, if the last couple of years, you kind of focus all, know, you cut all costs and you're shrinking revenue. Like if you're shrinking revenue, you're just never going to be valuable anyways. I mean, maybe you could trade off some shitty, you know, even a multiple, but, yeah, I, I'm curious what you guys think. Like, do you see clients kind of starting to shift focus or what do you think in general?

Michael Epstein

Well, I really like something you said just a moment ago about cutting and revenue shrinking. And I think it's an important thing that we talk a lot about, which is like, you can't cut your way to growth. Yeah, I mean, if you're thinking short-term survival mode, maybe you just have to do whatever it takes to stay, to keep the lights on. But if you are actually thinking about how do I make this a brand that has significant enterprise value going forward, you got to invest in actual growth and you got to start being able to expand your top of funnel and drive growth outside of core bottom of funnel, circling the drain type activities. And I think we're seeing a lot more brands start to do that and open their eyes, maybe because they're reaching a greater level of scale and they're starting to tap out on Meta, as they're starting to see significantly more diminishing returns, or maybe it's just because they're becoming more wise to the notion that to continue to grow and to become a big company, you've really got to expand outside of that universe and build broader top of funnel awareness for people that aren't in market at the moment.

Drew Fallon

And it's such a tricky balance, right? Because like, see, like the pendulum always swings. Like you gotta be growth and profits don't matter or you only profits matter or you're not in retail or you're, you know, in retail. It's such  a moving target. So I think, you know, you can't over rotate on like any one, you know, deal or headline or whatever, but it is kind of like a slow, you know, assessment of like, we have to move it. We have to shake or bake kind of a thing. and, and it's not like if you make the wrong call, you can't like undo it a lot of the times, but, yeah, you know, to answer the question, maybe a little bit more succinctly, like I'm not changing my business plan, but I'm feeling pretty good about, you know, the opportunities ahead of me. If I'm an operator.

Michael Epstein

And what are those, as the operator sort of with the CFO hat or the Iris hat on, like what are some of those core KPIs that you're tracking most frequently or that you're really focused on and that you think brands should focus on?

Drew Fallon

So we have a lot of retail companies. I'll, maybe just speak a little bit,  kind of like the e-commerce stuff that we really focus on. I think one of the healthiest things that kind of came out of the downturn is just this idea of tracking your contribution margin. Um, and there was this whole debate for like two years basically of like, what even is that? I think that was a really healthy question for folks. Um, because I think it's fairly intuitive to understand, right? Like, like contribution margin in general is fairly obscure, like management accounting, like, you know, no, like idea. but because like our businesses in e-commerce, because we have such high variable cost structures, it kind of got forced to the forefront. and so I think like daily contribution margin tracking, and this is probably a little bit biased to the Iris side, but it's paramount. I mean, like, you know, fixed expenses are fixed and variable is variable. So, just like aggregate contribution margin is almost like still the North star KPI, I think, even, even in the, in the era of growth, because it kind of comes back to what I said earlier of like, you want to grow, but like, you don't want to be burning contribution essentially. Like if you can break even on contribution, like if you have any semblance of repeat in your business, like you're going to be in an okay spot. Whether or not you're spending a billion dollars on OpEx, you know, it almost doesn't even really honestly, because it's not really indicative of the actual business, at least maybe not to a certain extent. But like you're seeing a contribution margin, obviously like stick and then kind of the derivatives of that, right? So like LTV to CAC, which was like never, it was always talked about, but never truly understood, I don't think. And then eventually people kind of realized that like, okay, like LTV is a contribution margin in that calculation. It's not revenue, so I've seen a lot of people think a lot about more, more about their LTV to CAC. Similarly, as we abandon this idea of LTV, some people are even saying AOV to CAC, because I don't want to say abandon the idea of LTV, wish less for future purchases, and take what we have sort of, when we get it. So yeah, anything with sort of CAC denominator, I think is like a healthy metric to track. And if you can even kind of proxy it towards, you know, first order contribution, that's going to be pretty healthy. Are there specific KPIs that you guys kind of like to point to for PostPilot or anything that you believe kind of captures the essence of the funnel itself?

Michael Epstein

Incremental revenue, incremental ROAS is typically the North Star that brands are looking at.

Drew Fallon

With Iris, we don't do any, we have like a hard line in the sand. Like we're not like an attribution tool. We're not an incrementality tool. Cause like, I can't really think that that stuff is very like opaque. and we're basically like a financial system of record. So I just like, I'm, I'm uninterested in it, but I do think it's really important for people to go to other places to find those things. Because you can kind of, you know, it's a lever. It's a lever for changing the contribution margin that we want you to look at. We're just not today telling you exactly all the tips and tricks to kind of like move, to inch it forward, which maybe is a weakness of ours, but it's just so hard to do accounting basically for like incrementality.

Michael Epstein

There's a million other tools that can help you with attribution, MTA, MMM, whatever it is. 

Drew Sanocki

So if you're running a brand, you already touched on one lesson, which was like, get over 50 million in revenue. If you're looking for an exit or to maximize your exit, would the other lesson be to become a beverage brand? Are you seeing anything in any other category?

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Drew Fallon

Maybe, yeah, honestly, like it's funny because like no short answer. No, like, like food and beverage, specifically beverage is like what's going on right now. I mean, I do, I do think supplements are, are having like a bit of a moment as well. I think those dominoes are going to start to tip though, kind of Q2, Q3, maybe into the end of the year. Like, I think the pro mix acquisition was actually a really important deal. You haven't seen the trickle down of that just yet, but I know of a lot of adjacent brands, maybe not like the fitness protein, but like supplements kind of in general, that are starting to kind of, attract, attract certain buyers. And, it's, it's interesting because, they're often a kind of beverage too, like Liquid IV, for example, you know, like it's like supplementary, but is it a beverage? It's a little bit of both. So I think like, you know, by far right now, like beverages are easily the hottest thing in the world. I mean, specifically energy. I'm curious what you guys think of this. I think the better for you trend kicked off from a venture perspective and like 2014, 2015 ish, maybe even through like 2017. And I think you're just like seeing a lot of those funds start to kind of return. And that's like, it's been like 10 years or whatever and so I think that, you know, it started with the sort of obvious, like food and beverage. And I don't know what your guys' first-hand experience with this is, but there are funds like, like Boulder Food Group BFG where like, you know, they've kind of stamped their flag on better-for-you food and beverage. And then by 2020, 2021, it's kind of like, there's not much left to do here. You know, there's only so many better-for-you oatmeal cakes that can pop up. So like, and I don't mean to call out BFG specifically, funds in that category, they're, just a really well-known one. They started to kind of think about beauty products and they started to even look towards enablements. And so they started to diversify with fun, you know, two, three, four, five. And so I think like the next wave, you'll start to see some of those, you know, targets get acquired, but for right now, it's all about food and beverage.

Drew Sanocki

Yeah, I think the last thing we heard at a very high level, there were a lot of apparel brands being bought out by apparel roll-up companies.

Drew Fallon

The apparel stuff, just, it's just, it's such a train wreck. I mean, it's actually worth calling out Drew. It's worth calling out cause it is happening. but it's just not, it's just not exciting. It's kind of like bottom feeding buyout type stuff. Every single apparel deal that you've seen has been trash, like probably cashless too, like the feet one, the Rowing Blazers, like Rag and Bone, like these are all like zeros. But it's actually worth highlighting though. I do think there's like some level of consolidation in apparel for sure. It's just not exactly making people rich.

Drew Sanocki

Everybody who listens to this, who runs an apparel brand, is crying right now.

Drew Fallon

You know, we've got a number of really exciting apparel brands and like I've, I've been, you know, our, our companies will come to me, and ask for, for fundraising advice a lot of the times. And. You know, if apparel is the one, the one category where, like, even if you're like, even if you're crushing, just, kind of go, I don't really know. because there's so many people that just like, they just, I don't do apparel. We don't do apparel. No, thanks. Like they won't even look at it. And I'm kind of like, but these are really nice businesses with large markets. And like, if you boil it down to like the LTV levers, like apparel is the best category. It's the hardest from a supply chain perspective, but it's the best one from a revenue perspective because what other category can you get somebody to spend $300 with you five times a year? Right. Like there's no other category. 

Drew Sanocki

That's interesting. I think it's the riskiness that if you don't get the merch right, you're all or you're not on trend, you know, that the business could go down just as quickly as it goes up?

Drew Fallon

They're kind of fragile businesses, honestly. Like you really have to nail it. And like, I've written a lot about Allbirds, which I mean, I'm sure you guys are familiar with the story. Like it's just like fell off a cliff. They were the hottest thing ever, went fricking public and then all of a sudden they're in the gutter. And then it's like, what ends up happening is like, you know how apparel brands have like the, like Lululemon has made too much like a section of their website. Are you guys familiar with that? Yeah. So like, what happens is like it's March. There's some trends that's going on for the summertime and like, you know, we don't make enough in time or whatever. And so now it's September and like, didn't sell enough of our new shorts that were supposed to be hot for the summertime. Then you have to discount to move that product. Like we made too much , it's like half off or something. The more that you mess that up, the more it drags on your gross margin. And the more that it drags on your gross margin, the less dollars you have to reinvest in customer acquisition or even like remarketing. And then the less that you have to drive revenue, the slower that inventory turns anyways. And so it's just like this terrible death spiral. like when you combine that reality with the fact that like consumers are just like tough to please on like an ongoing basis, like it's, I get why people are afraid of it, but I think like the niche, you know, power brands that are like really servicing like an audience that like isn't going anywhere. I think they're some of the most powerful businesses that there are. It's just so hard to nail it. It's so tough. I don't know if I would ever get into that one, to be honest with you. 

Drew Sanocki

We've had Mike Maher on here before, who's a buddy who runs Taylor Stitch, and they've done really well and are now backed by Carson Bitterman in Boston. He runs Digital Fuel Capital. So they're doing essentially like a men's apparel roll-up called Digital Stronghold. They've got Boston Scally. They've got The Tie Bar. There might be a fourth company there, but they're just gradually adding these apparel brands, buying them, I believe, on an EBITDA multiple. Just, you know, the thesis is they'll get big enough and then have a bigger exit someday at a higher multiple.

Drew Fallon

Yeah, it's a classic multiple arbitrage.

Michael Epstein

What's your thoughts on that too? Everyone's always asking, how do I get to a revenue multiple versus an EBITDA multiple? What are the characteristics that you think differentiate the valuations?

Drew Fallon

This is Michael, a fantastic question because the answer is they're not different. It's the same thing. That's like, so like oftentimes companies will like the press release will say, you know, ghost lifestyle is bought for 3 X sales. The sales multiple is one of two things. It's either a hypothetical earnings multiple or it's an earnings multiple. Right. And so like, let's just say like, we're a company that does 10 million in revenue and we have 20 % EBITDA margins. We're doing 2 million in EBITDA and we sell for 30 million. That's 3 X sales, right? Or is it 15 X EBITDA? Or is it both? It's both, right? Yeah. And so like, you know, the reason that I always report on the sales numbers, because it's the most widely reported multiple, like across the brand, it's the easiest way to compare brands. Like nobody ever comes out and is like, well, actually, I mean, Celsius did it in the case of Alani Nu, which is the whole other conversation where they were like, they called it 12 X and it was really like, you know, adjusted pro forma, fully synergized EBITDA. 

Michael Epstein

Oh, really? I didn't take it.

Drew Fallon

They had maybe it's like they had 69 million in net income and Celsius found a way to adjust it up to like 135 million or something. The headline number was 12 X, which is like a really modest acquisition. But really they paid 26 X, which is like desperate desperation. Yeah, I thought it was pretty funny. But yeah, you know, you don't get valued on sales or get valued on earnings. It's you just get valued and then like, you know, those are outputs. It's the classic, like you're worth whatever somebody's willing to pay. And like, usually they're willing to pay somewhere around, like where somebody else is willing to sell kind of a thing. And so like, that's like why comparables even it's like buying a house, right? Like that's like something that honestly that we could unpack in like a whole episode about sort of the sales versus EBITDA multiple. Cause like, I get pissed when people are like, I don't know, Albert is trading 0.2 X sales and somebody's like, well, they don't trade on sales. It's trading on an e-bill of multiple. And I'm like, well, yeah, but it's the same fricking thing dumb ass. So people do need to understand that a little bit better, honestly. They send me voice notes, that's literally how they sound. 

Drew Sanocki

So you were both like you were a CFO and you were a CMO too, right or you're a CMO now

Drew Fallon

No, I was never a CMO. I would never pretend. I was the CFO at Mad Rabbit and then I was a COO. Now I'm the CEO of Iris. I don't have what it takes to be an MMO.

Drew Sanocki

But I mean, you're doing the marketing too at Iris. That's what I meant. 

Drew Fallon

Sorry. I misunderstood. Yes. In that regard. Yeah, I am the CMO.

Drew Sanocki

We did an episode on how CMOs can communicate better and work better with CFOs. It's one of our more exciting episodes, Mike. Do you have any tips? Like for how to get along with your CMO? I mean, I guess you were a DTC CFO. Like, did you work closely with the CMO?

Michael Epstein

It's one of the most important relationships in a business. So curious how you think about how CMOs can communicate better with CFOs and vice versa.

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Drew Fallon

This is the most important topic of the last 10 years in our industry. And sort of what I've been kind of preaching about is like the CMOs, they know how all this stuff works because the marketing in DTC, it's the foundation of the entire business. Like when you, when I build a financial model for someone, if I do that these days, the first number that you type into the Excel sheet is the ad budget. It drives every other possible inventory purchase, it drives every cashflow, it drives every repeat rate, it changes everything. When you think of the CMO in one corner and the CFO in the other corner, and they're both doing business analysis, as long as the CFO is decently strategic and it's not just some boomer credits and debits kind of guy or gal, they're looking at the same stuff. It's like an equation from left to right. And at some point, the conventional CMO stops understanding the equation, even though they're going down the same equation. And then similarly going down the other way, the CFO kind of stops to understand the equation, stops understanding the equation. And if they would just start reading the equation a little bit more, they would realize that they're feeding into each other, right? So CPMs change my balance sheet cash at the end of the period. If I have a model with a CPM input, I could play with that number, but like the CMO, as soon as they get to the balance sheet, they just shut off. And they're like, I don't know what that means or what any of that stuff even is. And similarly, you know, typically the CFO, as soon as they get to the ads manager or whatever, they just shut off and they're like, I'm a CFO. I don't know any of that stuff. When in reality, it's just, it's all just algebra. What is the point where those two folks stop progressing? It's actually at the contribution margin. So contribution margin is the output of all the marketing. And then you get down to like the P&L and you're at like the OpEx line. And then, you know, the CMO goes, okay, not my job anymore because now we're talking about fixed expenses and balance sheets and cash flows and that stuff. And then the CFO, you know, they'll go the other way starting at like cash flows, you know, all the way through OPEX. Then they're like, okay, well, everything else is controlled by marketing. So not really my problem. But like, if you can get the, this is my whole theory with Iris, honestly, if you can get the CFO and the CMO both looking at the same contribution margin and not just like the same formula, but the same number in the same platform, that's where you can really achieve sort of transcendent alignment within performance of these businesses, because you have the CFO building the budget who can actually understand how that budget is being manipulated, how the leverage are being pulled and all that stuff. And then you have a CMO who actually understands that they are driving the performance of the entire business. So I've been talking for a little bit too long right now, but it is kind of a hot point for me. That was why I started all of this, honestly. It's extremely important. And if you can get these people to look at the same contribution margin number, then I do think it will go really well. 

Drew Sanocki

Make it available for SAS.

Michael Epstein

Yeah, somebody needs to make this tool available.

Drew Fallon

I'm actually looking for a fractional CFO right now for iris because I was like I actually do use the casual model in our platform for my business. But there's no AOV in my software. I mean there were a couple of people that tried it.

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Drew Sanocki

Well, Drew, I know you had to punch out. So I thought we could just wrap on that. I really appreciate you coming on.

Michael Epstein

Well, if you want to hear Drew nerd out on finance with our other buddy Mehtab, both really sharp guys, they now have their own Operators podcast. One of our favorites. We love Operators. We love Marketing Operators and now we love Finance Operators.

Drew Fallon

We're two episodes in, so hopefully we get better and better. 

Drew Sanocki

Awesome. Well, thanks for coming on and good luck with everything. 

Drew Fallon

Yeah, thank you guys so much for having me.

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