Let’s talk about the two main funding paths for food and beverage CPG brands and how your funding changes how you run your business. For almost all CPGs, funding is a necessity as you’re building your business. I will pull back the curtain on this sometimes opaque subject by drawing on my experiences at Harvard Business School, as a food founder myself, and as an executive for 3 CPG start-ups so you can make an informed choice about how you raise money.
Read this post if
you're a food brand that needs funding and you're wondering where it's going to come from
you want to understand the world of venture capitalists (VCs) and institutional funding
you are concerned about how your company will change once you raise seven figures
This post isn't a guide on how to raise funding, but rather on how to think about raising money.
Table of Contents
- Two Funding Paths and What Success Means to You
- Brands Need to Raise Funding to Operate Their Growing Business
- Option 1: Institutional Funding Writes Big Checks and Changes How You Do Business
- Option 2: Patient Friends & Family Funding
- How Institutional Funding Changes the CPG Operating Model
- Choose the Funding Path That Works for You
Two Funding Paths and What Success Means to You
There are two main paths for funding: institutional funding and Friends & Family funding.
I define institutional funding as money that comes from venture capital firms, private equity firms, or high net worth individuals. Institutional investors need you to make a 10x return on their investment in less than ten years for their business model to work. For simplicities sake, I use ‘VC’ to refer to the whole group of institutional investors in this article.
Here’s my biggest learning from 13 years in the CPG business – not everyone should raise VC money. Institutional money dictates a certain growth and business operational model (more on these implications later). If you’re a brand that has found your niche and you’re profitably grooving and making money, that’s fabulous! You don’t need to be in every store and every household to be a success. How success is defined is a very personal question and you need to answer this question for yourself. What’s your goal in building your food and beverage brand? How do you define success in your professional life? I highly recommend taking the time to understand how you define success.
Let's dive deep into the two typical funding paths for food and beverage CPG businesses and the implications of each. With this background, you can be thoughtful and strategic about how you raise funding.
Brands Need to Raise Funding to Operate Their Growing Business
Here’s a common growth path for brands. This is a very simplistic view that glosses over a lot of the blood, sweat, and tears during the journey so we can get straight to how your fundraising choices influence your operating model.
1. You make a great product and are in some stores. Nice job!
2. Now, you’re bootstrapping your way to prove traction and show that consumers love your product. You’re dialing in the right target consumer, retailers, product positioning, and messaging. Once your product is flying off the shelves and other stores want your product, now you need more cash to fuel your growth.
You might say, “Wait a minute, my product is flying off the shelves, why do I need to take on outside money to grow?” Unfortunately, the old adage that you need to spend money to make money is doubly true in the CPG industry. Typical CPG profit margins don’t leave you with enough cash to expand your distribution because your distribution growth typically happens in large jumps (ie, 500 Whole Foods stores) and not gradually. The payment cycles of the CPG industry is particularly difficult from a cash management perspective: if you expand to more stores and open up another distribution center, you don’t have enough cash on hand to pay for manufacturing a larger order when retailers and distributors pay you 90-120 days after you’ve made that larger order. The money you need to operate your business is typically called ‘working capital.’
3. OK, now it’s time to raise money. You create your fundraising deck and start to pitch…but who should you pitch to?
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Option 1: Institutional Funding Writes Big Checks and Changes How You Do Business
Institutional funding typically comes with larger infusions of money ($1-3M seed rounds), free guidance from industry experts, and access to a network of partners (eg, brokers, distributors, buyers) that can help grow your business. But, there’s no such thing as free money and institutional funding comes with expectations and strings attached. There’s a clear change in how much you own of the company and how many board seats you have. There are also impactful changes in how you run your business once you’ve raised institutional funding so you can hit VC growth targets (more on this later).
You’ll be on a path to make bigger bets and grow faster when you take on institutional funding (sometimes known as fail fast, fail early). Some of this growth is natural – you have more money, so you can do more marketing to reach more consumers and afford more slotting fees to get into mainstream grocery stores. You have the working capital to ramp up your business and use volumes to decrease your retail pricing so your product is at a more accessible price point. However, some of this growth is compulsory when you take on institutional funding. You need an exit plan or a path to one when you raise money, and you need to grow fast enough that you can achieve your next milestone before your funding runs out. VCs aren’t looking for singles on their return on investment, they’re looking for home runs. They’ll push you to grow as big as possible because more revenue means a higher acquisition price.
You should opt for institutional funding if:
- you have a product with wide appeal and consumers around the country are clamoring for your product
- you have a capital-intensive business and are self-manufacturing
- you are in a highly competitive category where you need money to grab market share quickly before being crowded out by competition (eg, cereal)
- you are in a category where you need significant promotional dollars to break through (eg, chips)
- you are building a new category and must do a lot of consumer education (eg, Perfect Bar)
Check out my Definitive Guide to Creating a Marketing Plan for Food Brands
Option 2: Patient Friends & Family Funding
You can also raise money from friends and family, angel investors, or crowdsourcing (eg, Kickstarter) to get the cash you need to run your business. Money from these sources is typically much more patient with fewer expectations. They expect free product, quarterly updates, and a payout when you make it big.
Your company ownership gets more complicated with more players with many more people in your capitalization table but they will collectively own a smaller percentage of your company because they invest less money.
You should opt for Friends and Family funding if:
- you prefer the tortoise to the hare and building your company slowly and deliberately
- you are disciplined and can say No to opportunities that don’t align with your growth plan (ie, you may not be able to expand to all 1200 Publix stores at once)
- you enjoy the fast-paced, resource-constrained nature of entrepreneurship and being the decision maker.
- you love being the CEO of your own food company and want to stay in that role
Implications
Scrappy start-up
Institutional Funding
Fundraising
Raise $50-500k from friends, family, and angel investors to fund working capital and brand building
Raise $1-3M seed round to build the brand and grow as quickly as possible
Founding Team
Much larger equity % but lower salaries
Much smaller equity % but market-rate salaries
Employees
Hire freelancers and passionate junior employees
Hire industry veterans and build a larger team (5+)
Channel Strategy
Start with your core retailer and expand slowly to additional stores once you’ve got product flying off the shelves
Expand more quickly to increase your sales and drive down COGS and MSRP
Product Development
Focus on one product line and possibly line extensions
Launch many product lines across different categories with the expectation that not all will succeed
Marketing
Small marketing spend focused on building an engaged social media community
Invest to grow with digital and shopper marketing to support new distribution
Exit Strategy
Demonstrate enough success to raise VC funding, become acquired, or continue as a Founder-led brand of a profitable food company
Acquisition by one of the Big Food companies at a ≥ 4x Revenue to Acquisition Price multiple or IPO
Choose the Funding Path That Works For You
If you’re a food founder thinking about whether you should raise VC money, the answer is – it depends. Kudos to you for creating, developing, tweaking, and demonstrating that your product works! No matter which funding path you take, you can be successful.
There are lots of great success stories for brands with VC funding:
- Beyond Meat is the hottest IPO of the last year
- Unilever acquired Dollar Shave Club in 2016
- Vita Coco acquires Runa Tea in 2018 in 2017
There are also lots of great examples of success for brands that didn't raise institutional funding:
- Sweet Loren's is still founder-led and was named one of the fastest-growing private companies last year
- Platform Brewing Co. was acquired by Anheuser-Busch in 2014
- Chomps was also named one of the fasted-growing private companies last year
Now, you must decide what success means for you and how you can achieve it!
