While tempting for a food or beverage producer to take money from any investor offering money, companies should instead seek one with industry experience.
“Think of your investment partner as a business partner. Who do you want to continue to build your company with?” says Ashleigh Lockerbie, co-founder and CMO of Better Booch kombucha (pictured). While it’s great to find an investor who simply wants to write checks, she advises looking for someone with industry knowledge and networking contacts. “There’s a value that goes beyond money with that kind of experience.”
Lockerbie spoke on raising capital during a panel at Natural Products Expo West. She was joined by Bob Nakasone, managing director of private equity firm First Beverage Ventures (and acting CSO of Health-Ade Kombucha), and Robert Parzick, managing director of food- and beverage-focused capital advisory firm Cody Peak.
After a pandemic-induced lull in 2020, last year saw a capital raising boom, with venture capitalists investing over $300 billion. The number of deals in 2021 was up only 10% from 2020, but their dollar total was roughly two times higher.
“That’s a big trend from the investment standpoint,” Nakasone says. “It speaks to the level of competitiveness out there and the capital required to break through.”
What the capital raising environment in 2022 will produce is unknown. With supply chain challenges, rising material costs and labor shortages affecting every food and beverage producer, it’s become more expensive to do business. Here are some of the attributes investors are looking for in a deal.
Skilled Founder and Management Team
When considering an investment, Nakasone says they want a company with a proficient founder. Or, if a founder doesn’t have management experience, there needs to be someone in the company who does. This expertise is needed to support the business as it grows.
“The management team is valued far more now than 10 years ago,” Nakasone says. It used to be assumed an investor would take on a management role, but investors now want the brand to have that skill set. “A lot of businesses they’re buying are for their capabilities. They may be buying a kombucha company for example for broader fermentation capabilities that they don’t have today.”
Lockerbie pointed out that Better Booch has structured their advisory board with three members with different backgrounds — one in finance, another in marketing and the third with CPG experience.
“Raising money is a full time job, and when you’re a founder, you have 10 full time jobs,” she says. “I think anytime you can outsource to someone who knows more about the subject than you do is always a plus.”
Profitability Over Growth
Many startups weigh focusing on the company’s short-term profitability versus sales growth. Capital raising has long valued growth, but that’s changed in the last few years, Parzick says.
“Four to five years ago, everybody was hell bent on growth, but nobody cared about profitability. Now everybody cares about profitability,” he says. “The first question we get, almost more important than what the growth trajectory is, is ‘Are they profitable?’ Or ‘Will they be profitable?’”
Parzick advises companies to come to an investor with a 2-3 year budget. And, importantly, don’t wait to start raising money until you’re almost out of it, he said.
Adds Nakasone: “My favorite introductions are when entrepreneurs do not need money. It’s a less pressured conversation; there’s not a ticking clock, so to speak.”
Diverse Portfolio
Companies are breaking out of specific categories, especially in the beverage space. Nakasone said major non-alcoholic beverage companies are, for the first time, breaking into the alcoholic beverage space, and vice versa.
“They feel the need to be total beverage companies,” he says.
Coffee, too, is trending. More beverage brands are adding coffee lines or coffee-flavored drinks (for example, Better Booch released a coffee-flavored kombucha at Expo West).
“Coffee is continuing to be an outstanding category with a lot of growth and innovation and so it’s ripe for entrepreneurs to enter,” Nakasone added.
Parzick says investors look at the range of a company’s retail locations, too. He points out that many startups “built their businesses on the back of Trader Joe’s or Wal-Mart or Costco.”
“Most growing companies have a fair amount [of] customer concentration,” Parzick says. “But in a perfect world…you’d like to be hopefully well below 50% with one customer.”