Interview with Future Founder and Jeremy Smith, Launchpad Group USA | #39
In this episode, I speak with Jeremy Smith, Founder and CEO of LaunchPad Group USA.
We discuss what it takes to successfully launch a brand in Costco, how to deal with failure, and why a college degree is not necessarily required for success.
In this episode we trigger up some thoughts from three serial entrepreneurs who share their close encounter with it, how they crossed over to the other side and some daily best practices that keep your heart and mind healthy.
A huge thank you to our guests on the show:
Jeremy Smith – CEO of Launchpad
Mark Samuel – Founder & CEO of iWON Organics
Hugh Thomas – Co-founder & CEO of Ugly Drinks
Listen by Clicking Here.
This marks the sixth year of CircleUp25, our awards recognizing some of the most innovative consumer and retail brands of the year.
CircleUp25 is decided on by our expert judges and Helio, our machine learning platform that identifies, classifies, and evaluates 1.4 million brands. This year saw fierce competition across a number of categories which should come as no surprise to anyone who knows the sector. The finalists and winners produce a number of indicators about where innovation in consumer is heading. In addition to crowning the finalists, we’re excited to dive into some of the data which underscores why these are the next generation of innovative consumer and retail brands––keep in mind it is just a sampling!
But first, we want to review the selection process and methodology. As with last year, we announced the awards and allowed brands to submit themselves or be nominated by their peers. Following the call for nominations, we reviewed all companies via Helio to better understand each nominee and check for relevancy. After separating the nominees by category to ensure representation across the multi-faceted consumer industry, the judges voted independently to determine the finalists. Since launching in 2012, CircleUp has worked with more than 300 brands in the consumer industry and we would like to call out here that after much deliberation and in keeping with the spirit of Forbes, we chose not to include companies that have received an investment from one of CircleUp’s equity funds.
So without further ado, we bring you this year’s class of the 25 Most Innovative Brands in Consumer and Retail.
The Winners
Ancient Nutrition | Palm Beach, FL
Founding Team: Jordan Rubin, Josh Axe
Investors: VMG Partners, Hillhouse Capital
Why? Ancient Nutrition sits at the heart of the booming wellness and supplements industry. On a mission to bring whole food nutritional products to the modern consumer, the company pioneered all natural and easy-to-digest pure bone broth protein powders and in March announced $103 million in funding from over 100 investors.
Beyond Meat | El Segundo, CA
Founding Team: Ethan Brown
Investors: Kleiner Perkins, Humane Society of the United States, Tyson Foods
Helio Insight: A star with our judges, Beyond Meat makes 100% plant-based products that look, cook & taste like meat, without sacrificing on taste or juicy satisfaction. Helio surfaced Beyond Meat as the company with the strongest brand score of companies tracked in the meat and seafood alternatives category. The brand has great distribution and has seen significant yearly growth in door count.
Distribution and Brand Score for meat and seafood alternatives companies
Brew Dr. Kombucha | Portland, OR
Founding Team: Matt Thomas
Investors: Castanea Partners, Townshend Tea
Why? Did you know that kombucha takes up to one-third of the refrigerated functional-beverage shelf space in Whole Foods? With a market that is projected to reach $1.8 billion by 2020, Brew Dr. Kombucha takes an innovative approach by removing the alcohol without the use of heat, preserving the beverage’s health benefits and live, active cultures.
Caulipower | Studio City, CA
Founding Team: Gail Becker
Investors: Boulder Food Group
Why? In a world that loves to snack or dig into a yummy pizza, Caulipower makes better-for-you favorites without the guilt. Leading an all new grocery category, the company makes convenient pizzas that taste like conventional recipes and are easy for any family to enjoy. Since launching in 2017, Caulipower has quickly become the fastest growing frozen pizza brand in the U.S. and the #1 gluten-free pizza. A year ago the brand had almost no offline distribution, but here, Helio shows today how in the course of a year, the brand has grown quickly spread to major distribution areas across the country.
Cece’s Veggie Noodle Co. | Austin, TX
Founding Team: Mason Arnold
Investors: Encore Consumer Capital
Why? Cece’s Veggie Noodle Co. has pioneered the first pre-packaged USDA organic spiralized vegetables available in Zucchini, Sweet Potato, Butternut, and Beet. Their spiral noodles are made from 100% fresh vegetables and are a healthy alternative to grain-based noodles. As the company puts it, “simple, but twisted”.
Credo Beauty | San Francisco, CA
Founding Team: Annie Jackson, Shashi Batra
Investors: NextWorld Evergreen
Helio Insight: In a health and beauty industry often dominated by products with toxic and dubious ingredients, Credo makes a point of only stocking clean label health and beauty products. In fact, the clean labels of many of this year’s winners stood out to us in Helio.
Daily Harvest | New York, NY
Founding Team: Rachel Drori
Investors: Lightspeed Ventures, VMG Partners
Why? Daily Harvest is bringing farm-frozen ingredients in pre-portioned, no-cook recipes to your doorstep. The smoothie ingredient delivery service helping people get regular servings of their fruits and veggies.
Farmhouse Culture | Watsonville, CA
Founding Team: Kathryn Lukas
Investors: 301 INC, Renewal Funds
Why? Farmhouse Culture is a leader in its category for making probiotic-rich foods and beverages. Originally founded as a line of Krauts, the company has since expanded to include four varieties of fermented vegetables, a probiotic drink line, and Kraut Krisps, a line of kraut-based snacks.
Four Sigmatic | Santa Monica, CA
Founding Team: Mikko Revonniemi, Tero Isokauppila
Investors: Accel Foods, Able Partners
Why? Medicinal mushrooms have been on several lists as a trend to watch in 2018 and the global mushroom market is expected to hit $50 billion dollars within the next 5 years. Voted highly by our judges, Four Sigmatic makes drinking mushrooms easy-to-do with their variety of superfood beverages.
Herbivore Botanicals | Seattle, WA
Founding Team: Julia Wills, Alex Kummerow
Investors: N/A
Why? Since co-founders Julia Wills and Alex Kummerow started Herbivore Botanicals in 2011 out of their kitchen, the brand has gone from being sold at farmer’s markets and on Etsy, to becoming a direct-to-consumer powerhouse that is now widely available at the likes of Sephora and Space.NK in the UK. With a newly launched Prism Exfoliating Glow Potion, this cult favorite natural beauty company shows no signs of slowing down.
Health Warrior | Richmond, VA
Founding Team: Daniel Gluck, Nick Morris, Shane Emmett
Investors: VMG Partners, NRV
Why? Health Warrior is a fast-growing natural food companies in the U.S. The company makes “super snack” Chia Bars—with chia seeds as the #1 ingredient—and Superfood Protein Bars—packed with 10g plant protein from chia, quinoa, oats, and peas. They are on a mission to inspire healthy diet and exercise habits and to deliver superfoods – the most nutrient-dense foods on the plant – in convenient form to power everything that you do.
hims | San Francisco, CA
Founding Team: Andrew Dudum
Investors: Institutional Venture Partners, Forerunner Ventures, Thrive Capital, Redpoint Ventures, Maverick Ventures, Atomic
Why? Launched in November, hims is a one-stop shop for men’s wellness and personal care. As the latest direct-to-consumer darling, hims follows in the footsteps of DTC brands like Casper and Warby Parker that have skyrocketed to success with their quirky and approachable branding. According to CEO Andrew Dudum, the company has ambitions to build a full-service prescription medicine brand for men of all ages and backgrounds.
LOLA | New York, NY
Founding Team: Alexandra Friedman, Jordana Kier
Investors: Lerer Hippeau, Spark Capital, Alliance Consumer Growth
Helio Insight: LOLA is challenging the lack of transparency in feminine hygiene with 100% organic cotton tampons. In a world where many brands start are now starting out as direct to consumer, it’s important to be able to measure signals that a brand is heating up online. Helio pinpointed Lola as having significant monthly web traffic and noticeable increases in that traffic over the past 6 months compared to other brands in the feminine care category.
MM.LaFleur | New York, NY
Founding Team: Miyako Nakamura, Narie Foster, Sarah LaFleur
Investors: Grace Beauty Capital, 645 Ventures
Why? The wardrobe solution for professional women. MM.LaFleur creates luxury apparel and accessories with the same attention to detail as a high-end fashion house. Their clothes are designed and made for the everyday woman on the go.
Naadam Cashmere | New York, NY
Founding Team: Matt Scanlan, Diederik Rijsemus, Hadas Saar
Investors: Torch Capital, Vanterra Capital, Plug and Play
Why? For disrupting the cashmere industry. By cutting out the middleman and purchasing directly from herders, Naadam responsibly sources & produces luxury knitwear while preserving the nomadic lifestyle in Mongolia.
Once Upon a Farm | San Diego, CA
Founding Team: Ari Raz, Cassandra Curtis, Jennifer Garner, John Foraker
Investors: Cambridge Companies
Helio Insight: From the farm to the fridge, not the shelf, Once Upon a Farm delivers cold-pressed and nutritious baby food. Each ingredient used is sustainably grown, certified USDA Organic, Non-GMO Project Verified, and can be traced right back to the source. Helio tagged that all of Once Upon a Farm’s ingredients are organic, compared to just over half for the baby food category as a whole.
Rothys | San Francisco, CA
Founding Team: Roth Martin, Stephen Hawthornthwaite
Investors: Lightspeed Ventures
Insight: It’s clear that being mission-aligned has propelled this year’s list of consumer brands to success. Rothy’s, which are made from recycled water bottles once destined for the landfill, has catapulted into the spotlight.
Spindrift | Charlestown, MA
Founding Team: Bill Creelman
Investors: VMG Partners, Prolog Ventures
Why? Spindrift is America’s first sparkling beverages made with real, fresh squeezed fruit.
ThirdLove | San Francisco, CA
Founding Team: Heidi Zak, David Spector
Investors: New Enterprise Associates, L Catterton
Helio Insight: For challenging the reign of Victoria Secret. ThirdLove was the first bra and underwear brand to offer half cup sizing and a mobile app that allows women to measure themselves at home. The company now offers 70 bra sizes and takes the hassle out of shopping with a 100% fit guarantee. Helio flagged the strong ways in which ThirdLove’s brand is resonating with its consumers across a variety of factors.
Urban Remedy | Richmond, CA
Founding Team: Neka Pasquale
Investors: 301 Inc, Slow Ventures
Why? Urban Remedy is a plant-based organic food company that embodies the belief that Food is Healing. The company makes ready-to-eat, certified organic salads, bowls, wraps, snacks, desserts, juices, nut milks, and shakes delivered to your door.
Vital Proteins | Chicago, IL
Founding Team: Kurt Seidensticker
Investors: CAVU Venture Partners
Why? Collagen peptides are here to stay. Sourced from pasture-raised cows in Brazil and New Zealand and wild-caught fish in Hawaii, Vital Proteins is making collagen accessible with their colorful branding and availability on the shelves of Whole Foods and Anthropologie’s latest wellness shop.
Vive Organic | Venice, CA
Founding Team: Wyatt Taubman, Kyle Withycombe, JR Simich
Investors: N/A
Why? Vive Organic packs the highest quality ingredients into Wellness Shots to deliver the closest possible match to a living plant. Their shots are cold pressed––not heated––made without artificial colors or sweeteners––not even honey, stevia, or sugar––and certified USDA Organic, Kosher, and Non-GMO.
Youth to the People | Los Angeles, CA
Founding Team: Greg Gonzalez, Joe Cloyes
Investors: Strand Equity Partners
Why? Youth to the People was founded on the principle that the products we put on our skin should be as whole, clean and packed with nutrients as the best foods we eat. That’s why their products combine superfoods, adaptogens, and science. Youth to the People is the best of plant-based skincare.
A big thank you to our judges for the time and effort they put into voting on this year’s finalists! And a big thanks to the CircleUp25 winners, the nominees, and the countless other consumer entrepreneurs out there who help make this sector great.
In the coming weeks, we’ll be posting more data deep dives into some of the companies and categories surfaced here. Stay tuned for more!
Disclaimer:
In accordance with Forbes contributor standards and to avoid bias, companies who received an investment from one of CircleUp’s equity funds were excluded from consideration. None of CircleUp’s equity funds participated in the selection process.
Helio is CircleUp’s machine-learning platform that identifies, classifies, and evaluates 1.3 million brands. The data presented here is derived from a variety of proprietary, public and partnership sources and includes data from one of our partners Nielsen.
Ryan Caldbeck is the founder and CEO of CircleUp, the investment platform that provides capital and resources to early-stage consumer brands.
,
Read the complete article in FORBES here.
Welcome to our annual Consumer Catalyst Awards, where we honor the top dealmakers, leaders and influencers in the consumer industry.
There is no question that the early-stage consumer market is reshaping every aspect of the broader industry, with new brands stealing market share and exciting new entrants launching every week. Monster exits like RXBAR’s and Blue Bottle’s seem to drop every other month, while numerous smaller, yet strong exits like Native Deodorant’s, Sir Kensington’s and Yasso’s are consistently peppered in between.
What’s less obvious is who the dealmakers and leaders are behind this boom. We generally know the brands, as their sleek Instagram ads pop up in our feeds and they line shelves of Target and Sephora. However, many often don’t know who’s working behind the scenes and at the crux of the business and operational functions keeping the brand innovation at pace.
Similar to how CircleUp25 shines the light on the year’s top brands, Consumer Catalysts shines the light on the other side of market—on the investors, CEOs, merchandisers, editors, reporters and bankers helping make emerging brands pop.
To determine this list, CircleUp distributed a survey to over 1,000 entrepreneurs to gather nominations and feedback, and gathered our team’s insights based on the hundreds of investors, retailers and influencers we work with throughout the year. Because we have worked with thousands of investors and companies, we have a unique view on which investors, retailers and experts are most influential in the space.
Without further ado, here’s the list of Consumer Catalysts this year.
Unilever Ventures has upped it pace significantly this year, making several investments in unique beauty brands where is can pair its operational and distribution expertise. Of note, we’re especially excited about her and the firm’s investments in Beauty Bakerie, Nutrafol and LXMI.
While Arif’s firm, Blueberry Ventures, only came into play in 2015, it already has a portfolio of some of the latest and greatest companies in Food and Beverage. Arif has led investments into Rhythm Superfoods, REBBL, Ripple Foods, Barnana, Revive Kombucha, Fishpeople Seafood and several other breakout brands.
Bill Weiland has grown Presence Marketing into the largest independent natural and organic products brokerage in the U.S. In working with leading national brands as well as successful startups, Bill has a keen eye for the trends driving the rapidly growing healthy lifestyles market. Bill also is a big advocate of consumer transparency and GMO labeling, using his expertise to have a positive impact.
Brad Barnhorn sits on the boards of some of the most exciting food brands of today. Kevita (sold to Pepsi), Chameleon Cold Brew (sold to Nestlé), Health Warrior, Rhythm Superfoods, Biena and Fishpeople all turn to Brad for consultation on brand strategy and growth.
Few other consumer industry firms have seen so much early success as CAVU Ventures, which despite being only 4 years old, was early to invest in Bai, Kite Hill, Health-Ade Kombucha and Thrive Market. After leading CAVU’s investments in Hippeas and Vital Proteins this year, Brett is sure to have big things in store for 2018.
Carol is one of the undisputed leaders in natural foods media. She has deep access to entrepreneurs and investors alike, coupled with a profound understanding of how all angles of the industry work. In addition to writing compelling stories, Carol helps manage Project Nosh’s flagship event Nosh LIVE, which has quickly grow into one on the industry’s most influential conferences.
In the food world, Food Navigator is a primary destination for trends and analysis on the products, brands, and leaders shaping the industry. This is largely thanks to Elaine and the rest of her team, who demonstrate incredible depth and critical thinking in interviews and articles. Elaine is also heavily involved in Food Vision, Food Navigator’s flagship event, which is recognized as one of the food industry’s most influential.
Simply put, Janica Lane is one of the most important figures in the business, behind most major investment banking and M&A deals for consumer companies spanning healthy, active and sustainable living, with a focus on food and beverage. Additionally, she is widely regarded as one of the most respected and well-liked in the industry, from her conference presentations to 1-1 meetings.
Brand is very hard to get right, but if accomplished effectively is extremely powerful—and arguably no one knows that better than JB. JB and his team at branding firm Red Antler have refined the craft of building incredibly sleek, empathic and modern brands, which people everywhere fall in love with. It’s no coincidence that JB and Red Antler are behind the genius branding of Brandless, Allbirds, Casper, Burrow and more.
Jeannette knows what people love – and what people are sure to love next. Her blog Shut The Kale Up has amassed a cult following of conscious consumers looking to discover emerging, craft products that are healthy or satisfy a unique need. For the early-stage consumer brands lucky enough to be included on the blog, Shut the Kale Up is a powerful way to reach highly engaged audiences.
Jeff Klineman, alongside his teams at the three publications, has built a media powerhouse that leads industry conversations around beverage, natural foods and beer. Under his editorial leadership, the teams consistently produce thought-provoking analysis that keeps the pace of the fast-moving categories. Between the publications’ news coverage and events, Jeff has had an invaluable impact on the industry.
After more than 35 years in strategic sales, design, branding and marketing, Jeremy has been a boon to early-stage consumer brands getting off the ground. He now runs LaunchPad, which is reshaping the traditional retail food broker network as a full service business strategy, branding and representation group for emerging food brands, highly specialized in Costco representation and strategy.
While Josh initially climbed the ranks in consumer investing while sitting on the boards of Suja Juice (acquired by Coca-Cola), Babyganics (acquired by SC Johnson) and Shake Shack (NYSE: SHAK), he’s shown no sign of slowing down, and continues to lead deals in category-defining companies. At consumer-focused private equity firm ACG, a few of his most recent include fast-casual salad chain Tender Greens and popular natural skincare line Tata Harper.
While corporate consumer venture may be a relatively new phenomenon, General Mills has long been leading the movement, as one of the first big CPG company to launch a venture arm. To the this day, it’s still the most active of the bunch. Under John’s leadership, General Mills 301 INC has become a powerful hybrid of capital and legacy industry insight for emerging brands to tap into.
Recruiting is a challenging, pivotal area for any business field. Those in CPG turn to Josh and his recruiting firm Force Brands for expertise in finding and acquiring top talent, ultimately helping get businesses off the ground with the right minds and experience on board. Currently working across food, beverage and beauty, Josh is the top resource for hiring needs across sales, marketing, finance and operations.
Encore Consumer Capital is widely regarded as one of the top consumer industry firms, from the success of its portfolio to the hands-on, strategic guidance of its investors. Kevin has helped his companies become market leaders since joining Encore Consumer Capital in 2005, serving as Chairman/Director for LONDON, Fantasy Cookie, Juice Tyme (acquired) and tarte (acquired).
Kirsten Green hardly needs any introduction after her and her firm’s investments in runaway successes like Glossier, Outdoor Voices and Away, as well as massive exits like Jet.com and Dollar Shave Club. Kirsten continues to bring to market some of the most fascinating consumer brands straddling e-commerce, beauty and wellness, fashion and technology. Of note, we’re particularly interested in watching how her latest investment, men’s care brand Hims, develops.
Nick Giannuzzi is the most prominent early-stage consumer industry lawyer, and an indispensable strategic partner to those executing M&A deals, manufacturing contracts and fundraises. Several of the most exciting early-stage CPG brands turn to Nick’s expertise, including Malin & Goetz, Califia, Dang, REBBL and more.
After pioneering a new wave of innovation in the previously dormant popcorn category, Pam Netzky and Andy Friedman sold SkinnyPop to Amplify Snack Brands, which later IPO’ed, taking the popcorn brand from zero to $1.35 billion business in just five years. That success was just the beginning for Pam and Andy, who are now dedicated angel investors helping usher in the next wave of exciting early-stage food brands.
Despite his firm only being a few years old, Pat has led investments into fast-growth, dynamic brands like Barnana, Tatcha, Ripple and Marine Layer. Pat focuses on the lesser-served, very early side of the market, specifically companies doing less than $10M in revenue with healthy margins, which is an approach that has so far served him very well.
Sephora has become more than just the most comprehensive retailer for skincare and beauty. The makeup and skincare giant’s refreshed dedication to carrying early-stage brands – everything from natural, Korean, to clean beauty – has made it a playground consumer discovery and powerful channel for incubation. Much of this is thanks to Priya, who helms Sephora’s merchandising in skincare and haircare.
Tom, along with the rest of the team at his early-stage investment firm Boulder Food Group, is ushering in a new wave of better-for-you food products breaking grounds in their categories. Some of the top investments include Malk, Fourth & Heart, Caulipower and Quinn.
Good PR is hard to come by in any field, and the CPG industry is no different. Luckily, brands and media have the benefit of getting to work with PR mastermind Sabina Gault, and the rest of the talented team at her firm. Sabina and Konnect are behind the storytelling of some of the most exciting brands, including 4505 Chicharrones, Rhythm Superfoods, Kite Hill and more.
When it comes to investment banking in the beauty industry, Vennette is a key leader, working with companies at a crossroads and either looking to sell, find a partner or fundraise. Vennette is known for her expertise in maximizing value for brands, whether it’s improving valuation, contract terms, or partner fit. As indie beauty brands continue to gain speed at an alarming rate, we’re sure Vennette will become even more renowned dealmaker.
You’d be hard pressed to find a CPG entrepreneur who doesn’t know of Wayne Wu. Despite his seniority and utmost expertise, he dedicates time and effort to meet with many, and get to know people in a meaningful way. The approach has certainly paid dividends for him—he and VMG led some of the most exciting deals of the year, such as Drunk Elephant and Spindrift.
CircleUp has relationships with some of the organizations in this article.
Ryan Caldbeck is the founder and CEO of CircleUp, the investment platform that provides capital and resources to early-stage consumer brands.
BEVNET Article can be found here.
In Part I of this series we talked about some of the misnomers related to valuation for early-stage and growth-stage natural products companies. Our key advice is to avoid getting too dug in about a particular valuation if the market tells you it is not the right number, and also to avoid marketing a number that may appear to be clearly above-market.
So how does one arrive at a fair valuation for shares of a private stock that has not recently been transacted (by NON friends and family members)? Like anything else one might wish to sell, such as a house or a car, it begins with “comps.” Using the common analogy of real estate, think about it this way: if you own a 750 square foot one-bedroom apartment on the Upper West Side of Manhattan that you have decided to sell (perhaps because you want to upgrade and come live in Brooklyn, Yo!) you begin by checking the most recent sales for other one-bedrooms on the UWS. Once you can stop patting yourself on the back for how “smart” you were to buy that apartment years ago (and once you are done daydreaming about how many thousands of square feet, and acres of property, you could trade it for if only you could get comfortable with the idea of waking up every morning in central Jersey) you have a basic range of value that might apply to your apartment. Then, you can justify a premium (or concede a reasonable discount) to the average price based on whether your apartment is bigger or smaller than most, is on a nicer block, contains a recently-renovated kitchen, has a better or worse view…. Comparables (or “comps”) are the second most useful guide for arriving at a fair valuation on any asset. And what makes for a “good comp” is that it is most similar to your own asset.
What’s a bad comp for an early-stage natural products company? Krave! Krave is a bad comp. I am aware that Krave was sold at a very high multiple to sales. However, unless your business already generates over $30MM in annual sales, is enjoying stunning triple-digit growth, makes a ground-breaking natural product that has completely revitalized what was formerly a stale category, and is about to get purchased by one of several large and uneasy strategic acquirers who are losing market share on many of their core products… your company is not (yet) Krave. Here’s another: Bai. In the context of an early-stage CPG company a premium or discount to average valuation isn’t imparted because of the size of the apartment or the view. The factors include things like growth rate, size/scale of the business, sales velocity, margins, previous successful exits by management, size of the category, industry tailwinds, etc. A young business that is kicking ass at a run rate of, say, $3.4MM (up from only $1.9MM just a year ago) still isn’t Bai. Don’t get me wrong: a unique product that’s enjoying nearly 100% growth is amazing, but it still doesn’t make sense to compare that apple to Bai’s.
When I ask a prospective client what they think might be a fair valuation for their business I am not looking for a hard answer. After all, it isn’t ultimately up to them any more than it is up to me—it’s only decided by someone who can sign a check (that clears). What I am looking for is a rough sense of what you expect and whether it is fair and reasonable based on the current market. That gives me insight into whether exploring the opportunity is a good investment of my time. My job as a banker is to get the best possible price and terms for my client. If he/she is looking for something completely unrealistic, I am less likely to achieve his/her goals (and less likely to earn a living, as the vast majority of my compensation comes only in the form of a “success fee,” paid if and when a transaction closes, and my time is my most valuable—and limited—asset).
The natural products space is on fire. According to an article in AdAge (by Jack Neff, 9/30/2015) Catalina stated that 9 out of 10 of the 100 largest CPG companies that sell food or beverages (in other words, essentially “all” of them) had lost market share from June 2014 to June 2015. That trend has not changed, and market share is being lost to startups and growing companies, almost all of which are disrupting large and established categories with natural/organic and other better-for-you alternatives. To a guy like me this is amazing and inspiring, and I feel gratified all the time for opportunities to work with such entrepreneurs. (“Those who can’t do, teach,” and those who can’t found and then exit, bank.) Anyway, valuations are high. They may or may not be too high, but the fact is that they are high. Still, there is high, and there is really high (like a THC-enriched product available only at dispensaries in CO). Founders/CEOs of sub-ten million dollar food and beverage brands often tell me that they want to get a valuation of three, four, or even ten times sales. That’s high.
When I was raising money for my own company a decade ago I sometimes referenced Vitaminwater. I cringe now to think how some investors may have been smirking on the other side of those phone calls. More recently, it was commonly reported that DPSG paid around seven times trailing sales for Bai. So let’s break it down:
So what is the right valuation for a growing brand, generating perhaps $5MM or $8MM in revenues, that makes a cool and timely natural product, with good growth and healthy margins? Answer: whatever the market will bear. Guidance: in a normal universe, the answer might be a range of one or one and a half times LTM (last twelve months) sales, but these days, it’s probably closer to two or three times sales. Still, it’s not five, and it is certainly not nine—despite what our heroes got for vastly different businesses.
Unfortunately, there aren’t a lot of other tools that one can draw upon to assess (or defend) the valuation of an early-stage business with a limited operating history and/or not yet generating positive cashflow. I asked my colleague, Jeremy Friedman for his input. Jeremy’s the “finance guru” on our team. (He spent a lot of time at Booth perfecting Excel skills and just generally being real smart. Just ask him…) Anyway, I asked Jeremy whether he thinks that a Discounted Cashflow Analysis (DCF) really has merit when applied to early-stage businesses. I got a two part-answer, the first section of which I kind of expected, and the second part of which was very insightful to me, and may therefore be helpful to you.
About DCF: The use of a Discounted Cashflow Analysis, wherein the analyst assesses the future cashflow-generating capacity of a business and then backs into a current valuation by applying a certain discount to market-rate multiples based upon the degree of perceived risk, is not necessarily applicable if there IS NO cashflow. Analysts will often rely on projections, but that only raises another question: How reliable are your projections? Early-stage companies rarely hit their latter-year projections. It’s okay. We get it. No one is going to love your baby as much as you, and you may not be wholly unbiased when it comes to your progeny’s potential, so being a bit overly optimistic about where you’ll be in five years is normal, and easily forgiven by investors. However, sophisticated investors are not going to agree to a valuation that is based on little more than your hopes and dreams. Having one or two great years of sales growth does not necessarily make for a reliable trend, and explaining all of the reasons that your business is going to Krave-Bai into the stratosphere at some point in the future doesn’t mean it will definitely happen. Sometimes, early-stage businesses actually fail to achieve their projections. I swear. It can happen.
So when I asked Jeremy to give me suggestions for other tools that growth-stage business owners can utilize to try and ascertain reasonable valuations, he advised me to advise you to not try and rely too heavily on math, or DCF analyses. I thought he might say that. What surprised me was that he then suggested empathy. Empathy. I swear. It happened. I had already suggested using comps with some “artistry,” but then he threw empathy into the mix. At first I thought that perhaps it was time to cancel the article. Then he explained: Just try to put yourself in the shoes of the investor. If you have a $5MM or $10MM or even a $16MM revenue food or beverage business, there is still a lot of risk. At its core, every investment is a balancing act between assessing the risk and the potential reward. Jeremy pointed out that the majority of entrepreneurs fail. Of the ones who succeed, only the smallest fraction ever found a business that one day grows into having a value of a billion dollars. Only a very small fraction launch a brand that ever even achieves an enterprise value of $100MM. Is $100MM shabby? From our perspective, if one started a business on nights and weekends that somehow grew into a real company and then one day was worth $100MM, that would be an incredible accomplishment.Now think about the investors who were asked to fund such companies during their Seed or Series A financings. If the company was generating $7MM in sales and the owners insisted on a $12MM pre-money valuation for a $3MM capital raise (meaning a post-money valuation of $15MM) achieving an enterprise value of $100MM someday would translate into a nearly 7X return on capital for early-stage investors. That’s good, even if they did take a lot of risk. Conversely, if the owners insisted on a pre-money valuation of 4X trailing sales, or $28MM (as some attempt to do) achieving a $100MM enterprise value someday would only translate into a return of around 3X for investors who took tremendous binary risk (“binary” as in maybe win a lot, or maybe lose it all). Even institutional investors deserve a little empathy. Sometimes. Seriously, it’s simply not market (or fair) to ask investors to make an investment wherein the only chance of them getting a return that is commensurate with the risk they took, is if your brand becomes the one-in-a-million-unicorn worth billions.
So now you know the secret. How does one arrive at valuation on a growth-stage company? With artistry and empathy. Check Wikipedia; it says so right there. And this entire discussion of empathy reminds of a parable which I will now share with you in closing the second installment of this series: If you encounter someone who you think is a jerk (or wrong about your valuation!) don’t judge him until you walk a mile in his shoes. If you do, and you then decide that he’s still a jerk, well at least you’re a mile away. And you do have the guy’s shoes.
About the Author: Stu Strumwasser is the Founder and Managing Director of Green Circle Capital, a leading boutique investment bank focused on the natural products space. He spent the early part of his career at firms that included Paine Webber (now UBS AG) and Oppenheimer & Co., and has been a licensed investment professional for over twenty years. He was also the founder of a natural beverage company which he ran as CEO for six years. Stu is also an author whose novel, “The Organ Broker,” was named a finalist for the Hammet Prize. Securities transactions are conducted through StillPoint Capital. LLC, Tampa, FL. Member FINRA & SIPC. Stu can be reached at stu@greencirclecap.com and www.greencirclecap.com.
About the Author: Stu Strumwasser is the Founder and Managing Director of Green Circle Capital, a leading boutique investment bank focused on the natural products space. He spent the early part of his career at firms that included Paine Webber (now UBS AG) and Oppenheimer & Co., and has been a licensed investment professional for over twenty years. He was also the founder of a natural beverage company which he ran as CEO for six years. Stu is also an author whose novel, “The Organ Broker,” was named a finalist for the Hammet Prize. Securities transactions are conducted through StillPoint Capital. LLC, Tampa, FL. Member FINRA & SIPC. Stu can be reached at stu@greencirclecap.com and www.greencirclecap.com.
Part I: Evaluating Valuation
As an investment banker in the Consumer space (focused on natural products) who often talks with the CEOs and owners of early-stage and growth-stage companies I am frequently asked, “What’s my valuation?” My short answer is: “Whatever the market will bear.” It rarely satisfies.
The long answer is some version of a conversation that all entrepreneurs, business owners, executives, investment bankers, accountants, corporate and M&A attorneys, investors and others have had countless times—a discussion of the methods and metrics utilized to arrive at valuation for investment transactions involving businesses with limited operating histories and/or at a stage in their development where they have not yet generated consistent positive cash flow. The productivity and tone of those conversations depends on the experience, sophistication, and personality of the participants, but also includes a myriad of other factors such as the temperature of the respective rooms they sit in, the “breaking news” on CNN, the direction of the NYSE that day (or minute), whether Mercury is rising (and/or in retrograde) and possibly the early-morning tweets of our elected officials…. As any forensic accountant will explain, the most important data point in any assessment of the “fair market value” of a private stock is what an objective and unaffiliated party has actually paid for shares. (In the parlance of my Brooklyn neighborhood: “Money talks; bullsh*t walks.”) In the case of a large, publicly-traded company on a major exchange, one might only need to look as far as the closing price on a particular day in history. For a private stock, it is more complicated. If that private stock hasn’t been transacted recently (or ever) it can be far more nuanced. I’ve had these conversations more times than I’ve seen a new plant-based, protein-fortified, organic, meal-replacement bar at Expo West, and they often devolve into unproductive philosophical musings or even awkwardly contentious debates. I am sure that every investment banker who works with early-stage or growth-stage companies has asked themselves, on many occasions, “Do I tell this guy the truth and risk losing the opportunity?…. as well as another twenty minutes of time?…” After all, in the end it isn’t up to us (the intermediary investment banker); it’s what the market will bear. Or bare.
“What’s My Line?” was a panel game show that originally ran on the CBS Television Network from 1950 to 1967. The game required celebrity panelists to question a contestant in order to determine his or her occupation by attempting to learn new information and narrow down the options. “What’s My Valuation?” is vaguely similar. The more early-stage the business, the less the valuation is a function of traditional metrics (such as multiples to EBITDA and/or revenues) or “math,” and the more it becomes a function of artistry. It’s actually one of the reasons I like working with smaller company clients (for us, typically $5MM-$50MM in revenues) as it is more creative, we have a greater opportunity to make an impact, and we can add value for our clients by deftly creating the right environment for a transaction and by generating competition for the asset which we endeavor to sell. Unfortunately it also often sets the stage for those meandering “What’s My Valuation?” debates, so I thought that it might be helpful to some CEOs/CFOs, business owners, investors, and my colleagues, to jot down some of the thoughts I have shared many times on this subject over the years in individual conversations.
When I meet leaders of growing businesses I ask them to, “Tell me about your business.” What I often get in return is a thirty-minute dissertation on their product, often replete with some hyperbole about future (and uncertain) sales opportunities, and very little about what I was actually interested in: the existing distribution, sales velocity (the “mother of all metrics”), gross margins, gross and EBITDA margin goals that are achievable with the evolution of scale, go-to-market strategy, capitalization to date and…. the company’s future financing needs and plans. “Important Paradigm Number One” for founders: If most startups that fail do so because they run out of cash, maybe you should spend even more time focused on understanding and securing the financing you need (and less time dreaming up marketing campaigns that you can’t yet afford). I became a vegetarian when I was fourteen (and I have now turned 39 twelve times, so that was quite a while ago) and I founded a natural soda company in 2005 partly because I genuinely wanted to help save consumers from harmful chemicals contained in traditional CSDs. So I get it if money isn’t your sole priority. However, if it isn’t near the top of the list perhaps you should live on a self-sustaining family farm (albeit an organic one) and not be asking other folks to invest millions of dollars in a for-profit business venture.
Why are so many founders/executives/owners of growing businesses deeply concerned—or even obsessed—over valuation? I don’t know, but it really can be counter-productive. When I raised capital several times I was of course committed to getting a fair market value, but I was never clutching some hypothetical and somewhat-arbitrary figure with cold, dead hands. I made countless mistakes as a founder and operator (for a summary list just take a look at the playbook for Zevia, check out everything that they did correctly in terms of execution, and then just assume that I did the opposite)—but getting stuck on a valuation goal was never one of them. It leads me to Important Paradigm Number Two: No one ever went out of business due to dilution.
Some business owners think, “Well, can’t I just start real high and know that I can always come down in price if necessary?” Um, not necessarily. When you are trying to make a deal with someone who you think is asking for something unreasonable, do you always make a counter-offer and try to work it out? In the case of a prospective investor assessing a potential investment, bear in mind that the biggest factor in his or her decision will often be their evaluation of you, the entrepreneur. Appearing unreasonable or, perhaps, potentially uncompromising or difficult to work with, is not a good way to begin.
Here’s one other thing to consider: If you think that your deal, inclusive of proposed valuation, is “fair,” is that really enough? When you go shopping, whether it be for a car, a skateboard, a stock…. A private stock in an early-stage natural products company…. Do you find yourself looking for a “fair deal” or “the best deal?” It is sometimes lost on Founders and CEOs that the investors they are pitching (sometimes with the help of a firm like mine) see a lot of investment opportunities. In fact, most institutional investors or serious angels look at a few hundred each year. They might make perhaps one or two investments each fiscal quarter, and some even less. So, whether one acknowledges it or not, you are competing with hundreds of other investment opportunities, some of which are surely also attractive. You are soliciting investors who may “pull the trigger” on around one percent of the opportunities they see, so anything that may give them a reason to pass on a deal is actually helpful to them in managing their time and dealflow, and narrowing down their choices. Don’t let getting stuck on an above-market valuation be the reason you miss out on getting the cash you will certainly need to grow a capital-intensive CPG business, or lose a chance to connect with some folks who might have been excellent value-added partners. Closing on a timely financing or acquiring great partners can turn out to be a critical component in your success, and giving up a few extra points in dilution will never be the reason you fail.
In Part II, Strumwasser examines the methodology for actually arriving at fair market value for growth-stage natural products companies using comps and other tools. Check back next week.
Listen to the podcast here.
Written by Matt Aaron / June 29th, 2017
For Steven, it’s all about patterns. He has spoken to over 1,000 founders and has developed a sense for which startups are going to flourish.
He focuses on sourcing and evaluating premier brands and coaching entrepreneurs through the fundraising process at CircleUp.
CircleUp is the platform providing capital and resources to innovative, early-stage consumer brands, and opportunities for sophisticated investors to participate in their growth.
From machine learning data to predict CPG success to the do’s and don’ts of fundraising, we cover a lot: