Capstar betting on e-commerce

Early-stage investor Capstar Ventures sees more digitally-native consumer brands growing post-pandemic and will focus on that sector as it closes its debut fund.

Kathryn Cavanaugh, managing partner at Capstar, said the pandemic accelerated many trends in the consumer space, making customers more willing to try out brands they see online.

“During the early days of the pandemic, I frequently spoke with my portfolio companies to reassure and support them as they made decisions to ensure business continuity,” Cavanaugh said. “It was a stressful time navigating an unforeseen global pandemic, given the uncertainty in projecting consumer behavior. Fortunately, our portfolio companies were digital-first, so in that way, they were ahead of the curve.”

She added that people stuck in their homes found themselves with more time and willingness to try new brands that they find online. This came with increased digital adoption across all generations, which Cavanaugh said will continue beyond the pandemic.

She warned, however, that while social media is an excellent way to reach out to customers, it’s not exactly a good fit for all brands as sometimes virality doesn’t make sense for the product.

Austin, Texas-based Capstar announced in July that it had raised $41.3 million for its inaugural fund. Cavanaugh said fundraising began in April 2019, but she took a six-month break at the height of the pandemic to work more closely with portfolio companies, so total fundraising time was 18 months.

“During that time, I already had nine portfolio companies, so I focused my energy on working with each founder to ensure business continuity during a time of great uncertainty,” she said. “I started raising capital again in October of last year and closed in Q1 2021.”

E-commerce is one of the growing sectors for venture funding. E-commerce companies raised $16.3 billion in the second quarter, up 23 percent from last quarter’s $12.9 billion, according to the Q2 2021 State of Venture report from CB Insights.

E-commerce’s power is most evident with the LPs Capstar works with. Before the pandemic, Cavanaugh said they often had to educate potential LPs around e-commerce, but the need for this has diminished and more people understand digital native brands. More consumers turned to brands with a digital model and sought out direct-to-consumer products.

Capstar invests at the seed and Series A stage for consumer start-ups. Cavanaugh said the fund’s focus is on digitally-native companies that focus on Millennials and Gen Z. She added that she also looks for founders who “address their own problems and unmet consumer needs,” as this fuels a level of authenticity that resonates with the public.

One of the significant trends Capstar is paying attention to is the dominance of mobile. Stylust, one of its portfolio companies, allows users to buy products through texting. It’s become a way to develop a one-on-one relationship with consumers.

The fund’s investments illustrate its interest in brands with a digital-first credo. Capstar’s current portfolio companies include plant-based food company Culina, e-commerce technology platform Stylust, health and wellness platform The Class, luxury shoe brand Sarah Flint, lifestyle brand Packed Party, home décor company St Frank, community insights platform Intraloop, and the Museum of Ice Cream.

Its LPs include Capital Creek Partners, Tiger Partners and JP Morgan. Capstar was part of JP Morgan Asset Management’s Project Spark, a program that invests in emerging fund managers, and is the first fund to close in that initiative.