Meet the Investors: 3 CPG Investors on the State of Fundraising

Founders across the world know the struggle of stretching a dollar like it’s taffy and producing gold. After the past few years of COVID and now an impending recession, fundraising is top of mind. But what do investors want? We spoke to a few investors to learn what they are looking for in founders, the hurdles most often faced by those founders, and how they will be shifting their investment strategies in the coming year

Startup CPG: WHAT ARE THE HURDLES YOU SEE CPG FOUNDERS FACE MOST OFTEN? HOW CAN INVESTORS HELP FOUNDERS OVERCOME THESE CHALLENGES?

Dickinson: Many founders struggle to process the financial implications of channel and product decisions they make early on in the business. Whether it’s pushing on DTC for too long, expanding SKUs too quickly or overcommitting to retailers, the unit economics and cash flow dynamics of CPG are tricky. The best investors help these founders see around corners and make these key decisions with more clarity.

Brown: The largest hurdle I see CPG founders face most often is access to industry connections and expertise. Founders often find themselves running into walls that can be easily overcome by others in the industry who have faced them before. Without that network, those issues can feel impenetrable. Providing access to this network is where investors can help. Vanterra Capital reviews hundreds of deals every year and we understand the histories of our portfolio companies. While founders are the true visionaries for their brand, investors’ industry knowledge and connections can help position companies for future fundraising opportunities, retail expansion, and marketing optimizations.

Additionally, investors can help with prioritization of time and resources. Founders are expected to wear so many different hats and every piece of the business needs attention early on. Investors can identify speed bumps, open doors, and share best practices given their ability to see the whole market.

Fowler: Two things an early-stage CPG company has to juggle are growth and the ability to fundraise. For growth, scale matters. You aren’t going to get to your highest level of profitability until you're at scale, and you're not going to get to that scale without growth. In terms of fundraising, a lot of liquidity has disappeared in early stage CPG. What you have now is a lot of people focused on getting profitable. It’s true that profitability is the goal of business, but at early stage, you have to burn capital to grow. If you don't have that fundraising gene, if you don't have the ability to tell your simple story and why you’re worth the capital burn, then fundraising is going to be really difficult. Investors can work with founders to understand how much of an iterative numbers game fundraising is. No means no right now, not no forever. Investors can help founders generate the muscles to go out and do the long term marathon that is multiple rounds of fundraising.

HOW ARE YOU SHIFTING YOUR INVESTMENT STRATEGIES GOING FROM COVID NOW TO AN IMPENDING RECESSION?

D: Consumers are still looking for healthier products and aren’t looking to cut back their spending at the grocery store. That said, they are certainly not shopping online as often as they were in 2020 and are harder to reach through social advertising. So we’re more focused on retail traction now than before.

B: We’re focusing on the fundamentals. Meaning, we’re backing businesses with stellar management teams, authentic missions, and clear competitive differentiation. While growth continues to be important, the businesses we expect to last will maintain strong margins, deploy capital efficiently, and hold strong repeat rates no matter the market conditions.

F: We’re looking at later stage companies. And if we are going to invest in early stage companies, we need to be convinced that the cap table has staying in power. In addition to focusing on later stage companies, we’ve become pickier on valuation.

WHAT CHARACTERISTICS DO YOU LOOK FOR IN A FOUNDER / WHEN MAKING A DECISION ON INVESTMENT?

D: The most important thing is a deep clarity on the consumer problem they’re trying to solve, and a credible reason for why they’re the one to solve it. That can be the result of personal experience. Our portfolio has a non-drinker that launched a non-alcoholic wine, a caffeine-addict who launched a coffee alternative and a pet parent who launched a cleaner line of dog supplements. What needs to be there is clarity of vision and a passion to solve their identified problem. From there, we look for the same operational leadership qualities that you would want in any CEO.

B: I look for a talented entrepreneur who is passionate yet rational. Most founders who are taking a risk to launch their own company have an innate drive and unwavering dedication to make their business successful. But it’s also important that these founders demonstrate a willingness to listen and adapt their strategies when consumer preferences and market dynamics change.

F: Number one is the ability to communicate the value proposition. At the very least I want to know why the founder thinks consumers are buying their product. Second, the founders that are taking the time to provide written updates, phone calls, etc. that don’t always have an ask attached to them, stand out among the rest. That's everything, especially in times when everybody needs money.

IS THERE A SPECIFIC CATEGORY OF CPG THAT MOST INTERESTS YOU FOR 2023 IN TERMS OF INVESTMENT OPPORTUNITIES?

D: We continued to be excited about the opportunity to provide more education and clarity to the vitamins and supplements space. Combining superior efficacy with simpler messaging can overhaul a massive but intimidating market that is still not fully meeting consumer needs.

B: I’m very excited by the clinically focused beauty space. With the rise of 'Skintellectuals', consumers are educating themselves about the efficacy of certain beauty products. Since clinically backed beauty products have proven effectiveness, I believe they will better retain customers, experience organic acquisition flywheels, and ultimately be more sustainable long-term businesses with attractive acquisition opportunities.

F: We really liked beverage, but it may be difficult in 2023-24 since the category requires such a high capital burn. We might also look more at food and pet products. The American consumer has demonstrated such an affinity towards pet that even in a recessionary environment, I don't think they cut back on the on the extras — the higher quality food, toys, and care.

HOW DO YOU FIND NEW INVESTMENT OPPORTUNITIES?

D: We try to always be learning from thought leaders and media sources across the industry to inform where to seek out new disruptors. Our favorites are Bevnet/ NOSH and Fitt Insider.

B: Some of my favorite online resources for sourcing new investment opportunities include CPG Wire, CPGD, Exploding Topics, Spate Trends, Celebrity Packaged Goods, Beauty Independent, and Glossy.

I also carve out time each weekend to walk through a retailer (Whole Foods, Sephora, Target, etc.) to see what trends are being promoted in-store. There is no better way to see what CPG brand excites you than viewing it on a shelf beside its closest competitors.

F: I spend a lot of time in retail to focus on what's selling the most and what consumers find most valuable. Then I talk to those companies.

WHAT IS THE FUTURE OF DTC AND RETAIL?

D: DTC should be about building proof, testing and learning, retail should be about scaling the business profitably. That has always been the case, but somewhere along the way our industry got excited about DTC as an identity rather than a channel.

B: In today's market of rising customer acquisition costs, I believe the importance of an omnichannel presence for CPG brands will continue to grow. However, DTC still provides a powerful channel for brands to educate new consumers and to prove product-market fit to investors and retailers. DTC traction in the form of growing revenues, strong repeat purchase rates, and capital efficient unit economics can provide the proof of concept for emerging brands to enter retail. Once in retail, we find brands who prioritize high velocities in anchor accounts are more successful than those who say yes to every available retail door.

F: DTC and e-commerce are going to become increasingly more important. Between 2017 and 2021 a lot of companies were given extra investment to use DTC and e-commerce to appear national and drive top line growth — even though that top line growth was unsustainable. Now that tactic will not be possible. Now you’ll see more companies finding ways to make DTC breakeven and more of a marketing channel, especially for heavier products where shipping is an issue.

WHAT ADVICE WOULD YOU GIVE TO FIRST TIME FOUNDERS SEEKING INVESTMENT?

D: Clarity and succinctness. Don’t talk about your brand until you’ve convinced the investor that there’s a problem worth solving. Don’t talk about traction until you’ve convinced the investor that your brand solves that problem. There’s a tendency to over-explain and overshare, but there are truthfully very few concepts and data points that ultimately matter in getting an investor to yes. When you do receive a no, don’t be defensive or try to talk them into re-considering — use it as an opportunity for candid feedback. If that investor is thinking it there’s a good chance others are feeling (but not saying) the same thing.

B: Come to the table with plenty of proof points of your product-market fit. You need to show why your product solves a consumer’s needs better than any other on the market. You should also show that your economics can grow sustainably. Proof of community, strong reviews, and repeat rates are critical. Furthermore, you should be able to show if you can expand beyond the early adopters. Give investors clear priorities on what you will use the capital for and how that will drive the business.

F: The right investors are more important than the right valuation. For first time founders at very early stages, you need to go out and find angels and institutional funds who really believe in your value proposition and vision. Those are the people who are going to introduce you to additional sources of capital and, potentially, become follow on sources of capital. That's the whole game right now.