In one of the recent episodes, I had Ben Fenton on the podcast, Ben is a partner at BFG which is a venture capital firm investing in early-stage consumer product goods companies, Ben shared his take on raising capital in the CPG industry, key metrics investors look for & importance of Brand Story
How to approach raising capital in CPG Industry?
Ben: I really would encourage brands to connect with investors well before you’re looking to raise capital and try to just plant that seed, leverage LinkedIn, leverage your networks to get intros so that hopefully you can get on the firm’s radar before you need to raise cash. When you are going to raise money, ask questions. What are your key investment criteria? What are you looking for in a founder? What are you looking for in a business from dollars that you’re looking to invest in or growth profile or other financial profiles? I think you really want to start early, and I think you need to do your diligence on the firms or the folks that you’re partnering with, just as they’re going to do on your business and you, your founder, or your leadership team. And so you should absolutely seek to understand the background of the firm, the types of businesses they’ve invested in. Ask them to connect you with a couple of founders that you’ve partnered with, and so you can really gauge how they work and how they operate. And really just try to get out ahead of your capital needs because there’s no shortage of capital, certainly in this environment and market. But with that comes a lot of saturation and no shortage of brands and businesses looking to raise capital. And so doing what you can to stand out and cut through the noise is really important
What are the key metrics investors look for CPG Industry?
We’re typically looking at businesses that are at least a million in trailing sales, up to 30 million. And beyond just the revenue threshold, we really focus on capital efficiency. We think of that in a pretty straightforward manner. We look at the amount of capital or dollars invested into a business relative to how large the business is. And I think that picture can tell you a lot about the financial profile and ultimately the leadership and discipline of the founders. We’ll look into a company’s gross margin profile, Obviously, a higher gross margin is going to allow more dollars to flow to the bottom line to invest in building the business and reinvesting back into the business. That’s certainly one metric that we think about. We’re not a huge fund. And so that’s why for us, it’s critical. We’re attracted to founders who are scrappy, who are entrepreneurs, who can take a dollar and stretch that to multiple. That’s something key that we look at.
For a brick-and-mortar business. To the extent, the data is available, which for a lot of grocery store brands and certainly through other syndicated channels, you have access to your point of sale data. And so we really try to key in on what your productivity on the shelf is. A high growth brand might be generating a lot of month over month or year over year dollar growth, but peeling that back is that a function of purely just distribution gains or selling versus actual sell-through and how quickly your product is turning on the shelf, the latter being in our mind, just a much stronger indicator of the longer-term viability and health of the business. How well can a product move or turn on a shelf? And so, I think that is, for us, is a really key metric that we really try to drill into.
On the digitally native side. We’re looking across all the various KPIs, but ultimately trying to understand across Cohorts what your lifetime value is. We’re not looking at that on a revenue basis, but really on a gross margin or contribution margin basis relative to what your acquisition spend is and how quickly can you cover your acquisition cost? How quickly or how frequently your consumers are coming back, how efficiently you’re able to acquire customers and retain them and get them to come back early on in a brand’s life cycle. Some brands might with relatively small marketing budgets, maybe driving really strong metrics. The challenge that we see putting aside the current landscape with changes to iOS and Privacy, is that can you do that at scale, or can you do that with a much larger marketing budget? So we really try to look into your mature cohorts relative to your more recent and how 36 or 12 plus month lifetime value trends. So those are a couple of areas that we really look at.
And, of course, those are the tangibles for us. As a minority investor, the big intangible is the people. And so as a firm, we really try to establish relationships with founders. Well, before they’re looking to raise capital, to really develop that communication and rapport with founders, we really take a partnership approach. Our team of six has a lot of experience as owners, operators, founders, and certainly over the last seven years as investors in early-stage CPG brands, we like to think that we can be a strong strategic partner and want to work with founders who are excited to work with us and who are looking to lean on us and our networks to help them grow. But ultimately, we’re really trying to back great people, and determining that takes time and takes a number of conversations. And so we really try to meet founders well, before they’re actually looking to raise capital to help us develop that.
Importance of Brand Story & Understanding your “Why”
I think in the better for you space, there is an expectation, I think from a consumer standpoint that brands have real authenticity and the real why to exist. I think it’s not just enough to have a better for you product, but tying it back to solving a need for a consumer, maybe bringing some sustainability element, whether it’s from a manufacturing standpoint, across a lot of brands doing something innovative on the packaging front, whether reusable recyclable. And so to me, I think as a founder, really understanding your “why” can hopefully allow you to be really focused and disciplined in terms of who you’re trying to sell to and really just allow you to focus your resources, which for early-stage brands can be really limited.
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