HOT + NOT FUNDRAISING IN 2023

WHAT’S HOT

Retention + strong velocities

Impressive acquisition alone is no longer interesting for today’s investor — they want to see sticking power. While strong velocities can be a result of high trial rates, sustainably strong velocities are a result of retention. If you can cite both in your pitch, you’re demonstrating a stable path to profitability that is far more attractive to investors than trial alone. Investors care about long-term growth and want to see strong potential for a high LTV. If you’re seeing low churn, emphasize it.

Community as a metric

The term “community” is being used ad nauseam these days – yet it is still largely misunderstood and misrepresented as a metric. To stand out in a pitch, consider finding ways to quantify your community beyond your social media following. As Mike Gelb, host of The Consumer VC Podcast explains, “Community isn’t just about having a following. It’s about demonstrating your following’s ability to activate.”

“Think about ways that you can show a direct correlation between your virtual following and their physical footprint,” Gelb suggests. “Sometimes this is anecdotal, like showing DMs of followers who found you online but purchased in retail. Other times, you may have to get creative.

Consider capturing the zip codes people are searching for in the ‘find us in stores’ on your DTC site. This demonstrates intent to purchase in retail.”

Demonstrating “coachability”

"Having a plan, but being open to changing that plan, is actually really relieving for people who are trying to invest their money in your idea,” explains Dylan Barbour of Barbour Ventures. “The best founders I work with aren’t the ones painting a beautiful picture of a rocket ship – they’re transparent. Sabeena of Deux is a great example of this. She is confident, but knows where Deux is struggling and knows how to communicate where they need help. Be super convicted, but also coachable.”

Better-for-you

We’ve been hearing about better-for-you (BFY) for years now – and it hasn’t shown signs of slowing down. BFY allows the promise of both natural and conventional channel success; products in this category are considered both suitable for the natural consumer’s standards, as well as a feasible alternative to BigCo brands in the conventional channel.

Today’s investors, though, are extra skeptical about the “better” piece. “You have to demonstrate a really good narrative,” says Gelb, “But you also need to have that narrative tie back to your product rather than just your marketing.”

In other words, investors will do their due diligence. Every nutritional claim needs to be easily backed up.

Literacy

Reading is hot. Before approaching a potential investor, make sure you are well-read in the space. Know what a term sheet is (check out Y Combinator’s free template), be able to reference and understand the success of other CPGs, and know your category in and out (try NielsenIQ’s Byzzer tool for this). Check out these book recs from Paul Voge and Dylan Barbour:

Dylan’s Picks: Secrets of Sandhill Road by Scott Kupor, Never Split the Difference by Chris Voss, The Hard Thing About Hard Things by Ben Horowitz

Paul’s Picks: Venture Deals by Brad Feld, High Hanging Fruit by Mark Rampolla, Mission in a Bottle Seth Goldman

WHAT’S NOT

Debt Funding

“The debt market right now isn’t very forgiving,” says Gelb. “Early stage brands are playing in an asset class that debt providers simply don’t want to be in. It may be possible to get a bank loan, but you are likely looking at giving away equity in 2023.” However, if you plan on using debt for working capital needs, there are some companies that can provide you with that, such as Ampla and Clearco. “If you’re able, you should avoid looking for debt funding right now and bootstrap until you gain traction.”

DTC-only

“Acquirers and VCs in 2023 want to see 80-90% of your business coming from retail,” says Barbour. Or, at least, a clear path to this metric. If you haven’t made your way into retail yet, you may not be ready for fundraising. However, if you are conducting a raise anyway and want to get investors excited sans retail presence, there are ways to get crafty: “Show why you could have a really compelling wholesale business and demonstrate that your gross margins are potentially higher than some of some of your competitors,” says Gelb.

Barbour suggests that you start out by growing a successful Amazon business, demonstrate some DTC success, then raise with a clear plan of using the funds to get into retail.

Relying on volume for better margins

“We often hear ‘we're going to get better gross margins through volume,’” says Wayne Wu of VMG Partners on the Startup CPG Podcast. “And unfortunately, I haven't seen that come to fruition many times. I found that most brands either start with great gross margins and they keep them, or it's something that plagues them throughout their existence.”

Moral of the story? Build great margins into your brand early on, even if it may be costly upfront. “Investors are looking for a great story in the natural channel, but one that can seamlessly switch over to conventional,” says Gelb. “Pay attention to how you think about price for a future in conventional. At the early stage, really dial in on margins and focus on what that could look like at scale.”