Investing in Food & Beverage? Here’s What to Look For.02.26.19 / David Lemley
As of Q2 2018, food and beverage startups had raised $9.5 billion in venture capital investment, representing more than 2,000 deals over the previous five years. And we don’t expect that to slow down any time soon.
Because they stand for something beyond selling product, better-for-you (BFY) food and beverage brands rally an army of loyal believers willing to try every SKU and stick with the brand when competitors enter the space. That passion — of the audience and of the visionary who founded the company — makes BFY food and beverage brands appealing to investors, both within the food industry and beyond it, including investors typically focused on the tech sector.
As they strategically innovate new products and expand into new channels, BFY brands often hit a point where they need a cash infusion to fuel their growth. The challenge for investors is to identify brands on the rise and get in just at the right time.
How to Know When a Food Brand is Ready for Purchase
Unless you have a contact within the company, you might not know that a BFY brand is seeking investment or ready to sell. As we’ve worked with F&B brands and counseled investors in the category, we’ve come to recognize the key signals a brand gives off that tell the world it’s ripe for acquisition or investment.
Most tellingly, the brand may have had some traction in a channel and that channel is tapped out. Perhaps it’s a vegan snack bar that’s selling like gangbusters through outdoor retailers like REI, but that channel is not big enough to create a viable outlet for the brand to grow or to make it a household name.
Some ready-for-purchase brands have languished for years with flat or minimal growth. The company has added capacity but not generated increased organic sales, so it is seeing more sales but slim profit margins. That scenario usually points to problems in sales or operations, which require outside investment and expertise to fix.
A significant competitor that’s disrupting a category previously led by an early-to-market brand might signal that the once-dominant brand is ready for acquisition. The world is changing around them: This is the brand that’s been marginally interesting for awhile but has leaders who have been asleep at the wheel and awakened too late to the competition.
All of these challenges lead to an inability among the brand’s leadership team to make decisions with confidence. They’ll take small moves, change pricing, stumble into a new channel but not get traction — bumbling along because they’re reluctant.
Manage the Owner, Manage the Brand
Investors find these BFY darlings (or former darlings) that have so much more market cap possibility. What’s holding them back besides a need for capital? Systems, distribution, and innovation, certainly — but usually the psychology of the owner is a major obstacle investors should address carefully.
We like to say that approaching a founder/owner is kind of like approaching a skittish horse: You have to walk slowly, whisper the right things, and maintain a gentle hand. Taking time to understand the psychology of the founder will produce an opportunity to show your investment team as sensitive experts.
People generally start BFY brands because they or a family member has a particular dietary goal or need and they decide to develop a unique product to meet it. Maybe the founder is a gluten-intolerant outdoor enthusiast in search of a gluten-free energy bar to fuel his all-day hikes. He’s not a business person. And so he launches and runs the brand on pure instinct and emotion. His life is intertwined in the company, and he makes choices based on that deep personal connection.
When this owner comes to realize that his company needs investment in order to continue, fear creeps in. He worries about whether he can trust that investors are looking out for the brand’s best interests, whether they “get” the brand’s ethos, whether they’ll preserve the family of employees he’s surrounded himself with.
There are plenty of horror stories circulating in the industry, and owners worry that even considering a deal will reflect poorly on them. Will my brand’s tribe of loyalists think I’m selling out for the money? Will the investors think I’m in the way and push me out? Will my company turn into something I don’t recognize anymore?
As you’re doing due diligence, spend meaningful time with the founder/owner to understand what drives her and what she fears. Dig into the brand story to determine how intertwined it is with the founder’s personal narrative.
Investors: Become a Steward of the Brand
Because of their passionate founders, employees, and consumers, BFY brands need sensitive leadership from funders. A successful investor in a BFY brand either becomes a brand shepherd or brings one to the table to help the internal team adapt and feel safe during the changes.
We often function as that shepherd interfacing between the investment team and the brand team. Commonly, we’re the first stop after a VC firm has purchased a BFY brand. They introduce us to the management team and require that these leaders work with us. That initial meeting can be tough, but we’re adept at building trust, and brand teams eventually come to love working with us.
Alternately, we serve as a resource for investors evaluating brands before purchase. We quickly conduct a SWOT analysis to identify the market opportunity, organizational psychology, brand performance, and other key performance indicators that can inform the purchase decision.
It’s a Seller’s Market
BFY food and beverage is the new tech: It’s a sexy market. Consumers are flocking to these brands, trends open up new product potential all the time, and social media is full of talk about food and health. Right now, we’re seeing food expos overrun with investors seeking brands to acquire; there’s more capital available than there are brands up for sale, which means it’s a seller’s market.
And that matters, because founder/owners seeking capital or acquisition are likely facing multiple suitors. How you interact with that founder can be the difference between “yes” and “no.”
Investors, especially VCs from the tech world, need to understand that BFY brands aren’t based on specs and features but on personas and passion. If you’re going to buy in, you need to understand the ideology that extends beyond just making money. Before you’ve got a deal on the table, or even once you’ve made a move, we can help. We’ve worked with enough BFY food and beverage brands to understand the unique animals that they are.