‘Trad VC is done’, The Craftory’s website declares, ‘We are Cause Capital’. The Craftory deliberately positions itself as a challenger brand in a sea of otherwise similar investment companies. With $375m of private capital behind it, the London and San Francisco-based fund intends to be the ‘P&G of challenger brands’ - that is, invest in and grow a portfolio of challengers. The Craftory’s co-founder Ernesto Schmitt sat down for an interview with eatbigfish’s Adam Morgan on the 6th of July to discuss what he looks for in an entrepreneur to invest in and why challenger brands are one of the most effective ways to create dramatic change at scale.

Tell us about your background first of all. Are you a challenger by nature or nurture?

I'm not at all a conventional financier investor. I'm from the other side of the table; I'm an entrepreneur. I started that journey 20 years ago in the first wave of the dot com boom and subsequently created half a dozen ventures. I was lucky to sell four, one went bust, and one runs without me. So it's really from being the entrepreneur and witnessing what it meant to try to create entirely new businesses and try to take on the status quo and the establishment. It was being on the receiving end of conventional venture, and corporate capital that lit a fire inside me and I thought there must be a better way of doing it, which is why we created The Craftory.

So you now have your own challenger in The Craftory. Tell us about The Craftory as a challenger and what aspect of investment is it challenging?

We only half-jokingly describe The Craftory as the counter-corporate anti-VC, not because we’re anti-capitalist or anarchist, but simply because we believe that there’s a better way of aligning the interests of capital and the entrepreneur. So what The Craftory is trying to do is challenge the conventional notion of how capital and venture come together. We look at the structural barriers that exist, and those have to do with investment funds having a fund structure with a fund horizon where by definition, they need to return the money to their own investors, which can cause all manner of misaligned interests between what the company or venture needs and what the capital needs.

But we also challenge the convention of the type of people who work at a VC fund. We felt that the value-added from funds filled with financiers and not people who understand what it means to grow a business and nurture it, and build a brand, is limited. So we set up The Craftory to take down the conventional model of venture capital. We’re staffing our fund primarily with brand builders, creatives and entrepreneurs themselves. And we’re dealing with a structural problem by having a permanent capital structure rather than a conventional fund structure, which means that we don’t have to return the money to our own investors and brands can be with us for as long or as short as they want.

So tell us about the brands that you've invested in, and are nurturing. How many brands are in The Craftory’s portfolio?

We've invested in five. I think the commonality amongst all our brands is that deep at their heart, they've got a burning desire to radically change the category that they're serving to the benefit of consumers, the planet or society. They are all mission-driven challengers first and foremost. They are not challengers for the sake of being challengers, but because they're trying to bring about change. Our five investments were all created by entrepreneurs who were profoundly frustrated with the category that they entered into and decided to build a better version themselves.

Dropps is a US-based subscription laundry care company. It calls out the stupid, and it calls out the BS and instead creates products that are good for the planet, have zero plastic, zero unnecessary ingredients. It's a no-nonsense, humorous and very efficacious challenger to the hegemony of Unilever, Procter and Gamble and Henkel.

TomboyX is a US-based brand serving the underwear category. It’s the antithesis of Victoria's Secret. For decades, the marketing of women's underwear has typically used a highly sexualised representation of women that are subservient and objectified. TomboyX is counter to that. It is for women that are non-subservient, non-sexualised and empowered.

It's perhaps no surprise that as TomboyX rises we see Victoria's Secret filing for bankruptcy and the likes of Calvin Klein and others, ditching their highly sexualised objectification of female bodies and instead adopting a much more inclusive representation. And that's what's so exciting about challenger brands. They sense the underlying need for change and they are then bold in executing a new vision. It's then immensely flattering when the incumbents react and adopt that as the mainstream itself. It also requires challenger brands always to be one step ahead. You can never be a single issue challenger brand. It's better to be much broader in what you're trying to attack because otherwise incumbents simply respond. It's an everlasting game of trying to make the category better.

NotCo is a Chilean brand that does incredible work in using plant-based proteins to replicate animal-based foods. So it's not-meat, not-dairy, not cheese, things like that.

Ruby Love is an African-American female founder-led brand reinventing period underwear, period care and menstruation products for women.

Finally, Present Life is a London-based plant-based wellness brand that uses cutting edge technology to unlock the power of natural ingredients such as CBD. Those are the kinds of brands that we invest in.

You’re wonderfully energetic and declarative in the way you present The Craftory. The website, for instance, says ‘Trad VC is done.’ Is that the case? Do you think the world has moved on and we require a whole new way to think about funding?

Whether you’re in venture capital, or consumer goods or even in the early days of Silicon Valley when tech entrepreneurs set up their ventures in garages and created the Amazons, Apples and Googles of this world, the common characteristics of any challenger is to be both optimistic and imprecise. Why do I say that? I think you have to be optimistic because it means you see the opportunity, where the world only sees issues, barriers and obstacles. Because if everybody else believed that an opportunity was there the same way you see it, the idea would already exist. And you have to be imprecise because of course, the truth is nobody knows how you build a great business until you’re doing it. You set out on that long journey of giving birth to something which is merely an idea in the palm of your hand, and you figure it out as you go.

There’s a certain declarative absoluteness, as you say, implicit in having optimism and imprecision. You need to believe that what you’re doing is fundamentally different rather than just a little bit better. And you need to believe that the path or solution you’re offering has the opportunity to transform whatever category you’re entering into.

I believe that the path that we’ve taken is indicative of what could become a bright new future for the investment category. And I think that is just part and parcel of what it means to be a challenger.

Clearly, brands can make a substantive change in their category and the world without necessarily having an explicit cause at their heart. But you see something inherently valuable in the notion of having this very clear flag of a cause to rally behind. What different kinds of value does that represent for you?

It's to do with human psychology fundamentally. We live in a time where thanks to the abundant availability of media, it's becoming very clear to most, perhaps not all, but most in the world that times are difficult. We live in a fractured, increasingly divided and polarised society. We live on a planet, with natural resources being depleted at an alarming rate and in an unsustainable way. We're dealing with big issues in our society around mental health and happiness. These are not happy times.

Consequently, as a consumer, the awareness of these challenges in the world and society causes anxiety. People want to do their bit to try to make the world a slightly better place. They don't want to feel guilt. But they don't know what to do. And that is where consumer goods become so powerful. Because there are maybe three ways in which you can affect change at scale.

The most powerful one is that you're in government so that you can change policy, but very few people get to be in government. The second might be that you've got infinite means. If you're Bill Gates, you can single-handedly vaccinate Africa and solve sanitation in India. There are maybe five people in the world who can do that.

So in the absence of those two, the other way that you can affect change at scale is to change the behaviour hundreds of millions of consumers who collectively make billions of small consumption choices every day. If you shift them to a slightly better direction, the whiplash effect of change can be dramatic.

We see it all the time. Consumers cannot buy plastic straws anymore. Single-use plastics are basically on the way out. Calvin Klein or Victoria's Secret, like I mentioned earlier, are ditching their objectified representation of female bodies to be much more inclusive. What caused all this? It came from small numbers of consumers, maybe 20-30% voting with their wallets and debit cards and choosing products that represented an alternative to the status quo.

How did they choose that alternative? It was the alternative that spoke to what mattered to them and flew the flag with the cause it represented high in the mast. The cause and the championing of the cause is the reason why consumers will choose that product over the big brand incumbent.

And it is the cause that allows these new young brands to go entirely against everything that conventional marketing theory teaches. Marketing theory says only the brand leader commands a brand premium; everybody else has to be cheaper. Well, if you're a cause-driven challenger brand, you have the might to take on Procter and Gamble or Coca Cola or L'Oreal with unknown brands at a premium price compared to the incumbent because the cause is the one that consumers will rally around.

The cause gives challenger brands the benefit of the doubt, and that's why cause stands at the heart of everything.

This interview was recorded for Overthrow II: Challenger strategies for a new era - a six-part podcast series from eatbigfish and PHD Worldwide available now on Apple Podcasts and Spotify.