Financing for Growth Roundtable Q&A #4: Market Potential & Investment Sizes

Your Questions Answered: Q&A 1st Round of the Financing for Growth Roundtable #4: Trademarks, Market Potential & Valuation

This post finds us rolling into the 4th in our series on the Financing for Growth Panel from our NewPoint Emerging Food Brands Conference. Here’s how this works:

Emerging Food Brands looking to grow have limited options financially. Many we talk to are self-funded through sales.  This can be hard when they need come up with the capital to buy raw materials, packaging or labels to convert into final product when they need to fill orders. The more the sales, the better the opportunity is to have the cash for the next order with a little left over for profit.

This got me thinking. I’m a small business owner, and I tend to operate with a “buy-it-only-if-you-can-afford-it” mentality. But I also have a line of credit and a good relationship with my bank in case I need to invest in new equipment, staffing or training to service new business. But what happens if I am growing faster than my traditional financing relationships can help?

This series explores the finance options emerging food brand have if they want to grow.

Questions about financing? The content of this Financing for Growth Panel portion (and all program content at our conference) was submitted as questions during registration by the 64 food company/brand attendees.  Our expert presenters then addressed the questions—and more—in their programs. In the coming weeks, we’ll be posting each presentation to the “Intel” section of our website. So check back often!

Once again, our illustrious expert panel:

John Hanak (Moderator): Managing Director of Purdue VenturesJohn is the Managing Director of Purdue Ventures and also an Entrepreneur in Residence at the Purdue Foundry.

Andrew Bluestein, Co-Founder & Managing Partner, Bluestein & Associates. Andrew is the co-founder and Managing Partner of B&A, which includes developing the firm’s investment strategy, leading the investment committee, and advising portfolio companies.

Andy Miller, Managing Director, Ouabache Investments. Andy leads the Ouabache team bringing prior experience as Corporate Development Leader at Weaver Popcorn where he focused on sourcing and evaluating more substantial bolt-on opportunities.

Jacob Schpok, Entrepreneur-in-Residence (EIR), Elevate Ventures. Elevate EIRs provide first-time entrepreneurs with business advisory services to help them navigate the uncharted waters of starting a business, from launch to exit and every decision in between.

On to the topics – read on!

Assessing Market Potential

Question: What kind of marketing potential are you looking for when considering working with a new business?

Andrew Bluestein: We typically like look at early stage companies. But, when it comes, a lot of times in product companies, what we tell them is, it’s making a product and getting it into stores, and getting people to buy your stores, doesn’t take that much. And you can always think about it as starting small. Even if you’re like, “I don’t have that much money.” You can always start making this in your kitchen, go into local retailers, getting it on a shelf, getting consumers. You can start posting it on Instagram, and you can start building your brand online. You can start developing a following — all that can be done without using a lot of capital these days.

When people come to us and say, yeah, I’ve got this fantastic plan, etc. Just do it – just start it. Find some money from friends and family. Get your product out there. Start getting it on the shelves and start building a market around it. And you can sometimes just be doing it in a small market.

Everyone seems to think, ” need to get national distribution to show the potential.” Sometimes it’s just crucial about finding one area, one market, getting your product there and building your brand. We made an investment in a company on the west coast called Vibe Organic. They make these juice shots. And they’ve only been in Southern California for about two years. But they went to every single channel in Southern California. They went to coffee shops. They went to Yoga studios.

They got their products at Whole Foods. They went to local retailers. And, it’s L.A., so it’s a key market. But they’ve developed such a strong brand, such a strong recognition in that one market that now, as investors, everyone just we’re betting that they can now bring this to other markets. They’re not even selling it in Chicago, and New York, different markets, and they’re getting some excellent investment.

So sometimes it’s not about saying I’m in a thousand stores, it’s about I’m in a hundred stores, and by the way, my product is selling. We want to see sales. One of our key questions we ask people when they come in is, “What’s your turns?” “How many units a week are you selling?” If you’re like, “Well, I’m in stores, and one or two units a week.” Well, you’re going to need to get into a million stores for this to be interesting.

If you’re this shots company, they have stores where they’re turning 70, 100 units per week, and we’re like, wow. That’s traction. That means people want your product. They want to come back and buy your product, etc. And so, you say, hey if we can get into ten thousand stores, it’s going to be a big business.

Andy Miller: One of the great things too about CPG and food products is, you can go and get some robust data from Nielsen/IRI, and you can demonstrate not only what my turns are but here’s how I’m performing against the competition because that goes a long way. I know we’re getting ready to close on a beverage company that was able, in a small market, to demonstrate their performance against other competitors. Because the turns thing sometimes varies by category. But if you can show, I got a 5% share in a relatively short amount of time, and Nielsen data, you can do that for two, three thousand dollars. And so, it’s not like you have to invest in a database like we have, that costing a hundred thousands.  This goes back to being ready if you lay the data out in front of a potential investor, that goes a very long way.

What is a Typical Investment Size? Part 1: Dollars

Andrew Bluestein: On our kind of first investment we typically write a check between 100,000 and 500,000. We’re kind of in that midpoint level. One of the things that we do is look for other investors in the deal. That’s important because other investors help share the risk. Usually, that’s part of a round that’s between $500,000 up to two, three million dollars. And sometimes we’re the lead investor, sometimes there’s someone who’s writing in a bigger check, and we’re just co-investing alongside.

Frankly, when the round is less than $500,000 it’s almost the business for us is almost too soon because it means that they’re just trying to raise some capital to build it out. But we’ve been part of companies that even raise rounds that are like five or six million dollars, but frankly, food versus technology is going to have smaller rounds, particularly at the Midwest, etc.

Not as like, when you read about these huge 10, 15 million dollar finances, they can sometimes happen later in food but not as often than the earlier stages.

Jacob Schpok: Pre-revenue, under a million. Once they start generating revenue, anywhere from two to four million for that first round, round A, and then any series after that would be higher than four million. So as long as this continues to see that growth in general.

Andy Miller: We will always do post-revenue when we’ve demonstrated some 500,000 in sales. Unlike you guys, we prefer to have a smaller group of investors. So we’re not afraid to do the whole thing in a particular round. Again, just given our investment model and how we can make a significant impact on the operations. Our check size can range. Still, being open to the opportunity so we’ll write a check as big as five million if the opportunity presents itself.

What is a Typical Investment Size? Part 1: Percentages

Andy Miller: I’d say for us, I mean, 20 to 30 percent is probably about the lowest we would go. But again, we’re looking at an opportunity right now that we think has tremendous upside potential and it’s a 15% stake that we’re taking. So for us, a lot of it is just being opportunistic and looking at the deal and making a decision toward it.

Jacob Schpok: We don’t care what percent we get. Our rule of thumb though is to go from zero to one, so 20% of your business is probably going to be, given the equity given to investors. And then, from there, it’s the revenue multiple that we’ve been talking about really decides the value. But we’re not too focused on the percentage of the company that we give, as much as we are on what that return is going to be when that next round goes.

Andrew Bluestein: For us, it can be as low as a couple of percents, up to 10%, 15%. This is a rule of thumb on early-stage financing that I heard an experienced investor once say,

“The valuation of an early-stage company is how much
money you’re raising is 20% is how much you sell.”

So if you’re raising a million dollars, the company’s worth four. You’re raising two million dollars; the company could be worth eight. I’d say it is a little bit more of a tech. Food maybe is not as but that sometimes the rule of thumb, usually people sell somewhere between 15% and 30% of their companies on financing, on a growth company.

This is the 4th in our series of “Financing Growth” posts. The Financing Growth Panel continues in our final post: Financing for Growth Roundtable Q&A #5: Trademarks, Valuation & Exit Strategies

We Need to Say this…

Here is the fine print: just like in our first two workshop Q&A series (Social Media Marketing and Vetting a Co-Packer):

Do you have some questions about investing, finance or want to talk about something in this post? I’d love to hear from you. Contact me at patrick@dev.newpointmarketing.com.

And, as always, Keep Moving Your Brand Up the Food Chain!

Patrick Nycz
Founding President