“There's been a lot of doom and gloom over the last 12 months, [and] it's a really challenging fundraising environment. I think the good news is consumer products aren't going anywhere, and ... we will come into a time — and I'm willing to bet it's in the next two to three years — where strategics — [large CPG companies] — are looking to snatch up relevant brands again. So, buckle down, make it through this year, and there's massive light at the end of the tunnel,” said Melissa Dolan, director at Emil Capital Partners.
No one-size-fits-all approach to building toward profitability
Over the last couple of years, many food and beverage startups have shifted their strategies from growing at all costs — often leveraging venture-capital (VC) funds to obtain growth — to ensure that they are maintaining a profitable and sustainable business. Now, startups are unable to aggressively grow and maintain profitability at the same time, Dolan said.
“There was always that slide in pitch decks that said, ‘This is our path to 100 million in sales,’ but ... I remember the day where every pitch deck coming in started to have a slide right after that, that said, ‘and this is our path to profitability in 18 months.’ And one of those things can't be true. We can't all be on a growth-at-all-costs rocket ship to $100m and be profitable. It just doesn't work that way,” Dolan said.
However, brands have “many paths to profitability,” which can include leveraging their manufacturing capability to expand into new categories or lines of business, Dolan noted.
“Perhaps building a huge facility when you're only going to be using it at 5% utilization, then you've just created a massive fixed cost base. However, volume could be the answer to making a profitable business, and ... taking on private label could be a great [solution] there.”
Though still in its early stages, AI technologies might provide a way for CPG brands to save money and deploy capital more efficiently, Asher Hochberg, venture partner at Redbud Ventures and founder at Rootspring Ventures, told FoodNavigator-USA.
“I hope that all the large language models and AI and all these new applications are just making it that much easier to be more capital efficient and to scale these brands. And I'm not sure it all is quite making its way into early-stage consumer [brands], but I would hope that when I'm speaking to founders in at least a year or two that they're able to use some of these tools to get a little bit closer to profitability,” Hochberg said.
“Profitability is the North Star” when it comes to exits too
Startups and investors also need to be realistic about the current funding environment, with its lower multiples and higher interest rates, Hochberg explained.
“As an investor, I hope other investors realize that the multiples that we saw historically — probably for the five years leading up to 2022 — are reflected in a zero-interest rate environment, and now even if rates come down, multiples should never go back to those levels,” he said. “Founders should be thoughtful too because if you raise a really high valuation, it usually comes back to hurt you,” Hochberg said.
Profitability also plays a crucial when a startup decides to exit the market through an acquisition, and companies should build their “brand with enough differentiation so that it adds a lot of value to a portfolio of the larger guys,” Hochberg said.
“Number one thing is just focus on profitability. You have to show that this is a product that can work at a certain margin, and the best way to show the margin is working is if you can get a profitable business out of it. I think if you're growing fast, it's okay to be burning a little bit now but a clear path towards profitability is the North Star," he said. "An acquirer has to see that it's going to be margin accretive, a lot of the big consumer brands don't want to buy a margin-dilutive company right out of the gate," Hochberg continued.
Large CPG brands (i.e., strategics) found that they “were dipping really early” when it came to acquiring a brand and now are waiting a little longer to purchase a company, Dolan said.
“Truly any strategic you think of ... they all have timeless brands that will be around forever and are not at risk of becoming irrelevant anytime soon. But they noticed that other brands were a bit of a melting ice cube, that they were maybe built and steeped in old-school trends that are irrelevant. And so, they noticed that, and they looked around and said we need a bit of a facelift. They got a little excited. They were investing way too early," Dolan elaborated.
She added, “Some of those [acquired] companies got lost inside really large organizations. But I think strategics have noticed that, and so they're pulling back, and they're investing a little later stage. So, all that is to say you are still going to see these large deals getting done, ... which unfortunately means the runway for brands here might be a little longer.”