Filipp Chebotarev is a partner and co-founder of the strategic opportunity investment company Cambridge Companies SPG.
The National Venture Capital Association report in 2011 pointed out that for that year, 60% of $28 billion of venture financing went into the tech and bio-tech industries, while only 4% went to consumer products.
Consumer products account for 20% of the Gross Domestic Product, and over the last five years, consumer products mergers and acquisitions aggregated to over $235 billion of transactions, double that of the tech and bio-tech space, according to Thompson Reuters PWC Analysis.
It’s no wonder that venture firms are starting to pay more attention to food and beverage consumer products, and for good reason with such an abundance of opportunity. Venture investments in food and beverage companies will absolutely yield success, as we’ve seen in our own portfolio. However, investments carry a degree of risk. Thus, it is important to understand when and if it’s the right time to invest in a food and beverage brand.
For example, Cambridge Companies SPG receives around 70 to 100 pitch deck submissions each month. My team and I review about 1,000 deals per year, but we only invest in 5 to 10 of them, depending on the year. We see a lot of different ideas and pitch decks. Some are way ahead of their time. Some are not very thoughtfully crafted and are poorly planned, while others have potential for mass market for this and future generations. After reviewing a few thousand investment opportunities throughout my career, and a few hundred in the food and beverage space specifically, I have fine-tuned my business philosophies regarding when it’s the right time to invest.
The consumer company has turned into a brand: A pouch of baby food is just a pouch of baby food, a commodity really with an easily identifiable market potential. We can assess some things, including how many babies are born each year, the total number of babies in the country or the world and how much money parents are spending on baby food for the average child per year. Once we do that, we develop a better understanding of the total market size and what percentage the company will need to win to have a certain enterprise value. However, in today’s world of social media and online engagement, brand wins. I define a winning brand by both the qualitative and quantitative measurement of emotional engagement the brand has with its core customer. Social or environmental issues the brand advocates for, sponsoring extreme sporting events and generating cooking recipe content, are all good examples of how to retain a passionately engaged and loyal customer. Once a consumer company can engage with their customer on an emotional level, they become a brand.
New category or better mouse trap: New categories are the most exciting! In the past few years, we have seen extraordinary sales from new categories, such as alkaline water and kombucha, which hardly existed not too long ago. Naturally, new categories with potential are a rare find. Therefore, most of the companies I invest in are a better or upgraded version of something that already exists. We have seen this in coffee, for example. Multi-origin, mass-produced, instant and convenient powders have evolved to ethically sourced, single-origin blends served consistently at the local coffee shops that Starbucks has turned into the baseline consumer expectation. Now, a new evolution of carefully curated artisanal coffee houses offers an elevated bespoke consumer experience. Regardless of the product or category, I ask myself the following questions: “What is the ‘value add’ to the consumer?”; “Is this completely new or is this a unique approach or value proposition in a multi-billion-dollar category?” If the answer is neither one, it is a quick pass.
Velocity or “Rate of Sale”: This is one of the most important quantitative aspects we look for in a brand. The two most common sources of revenue growth in a retail consumer product or direct-to-consumer e-commerce product are new distribution (new stores or new direct customers) and same-store-sales growth / repeat online orders. Repeat sales are the most important sign that the brand is working and genuinely connecting with consumers. If we can see strong product velocity, we can extrapolate it across new channels. But if the rate of sale is slow, then there is a strong chance that if the business doesn’t identify the reason for the low velocity, and correct it, then it will inevitably fail.
Psychology of the Company: Having studied industrial psychology at The University of California, Irvine, this is my personal favorite. There are two components to “Psychology of the Company,” one is quantitative, the other is qualitative. The quantitative aspect is one that every VC will look at. It involves unit economic analysis per SKU, cost of goods (COGS) and its relationship to margin and margin improvements (e.g., effective supply chain and process for scale, etc.). The qualitative involves a deeper understanding of how effective the team is and what is missing (e.g. “How easy is it to improve?;” “Are we hiring a head of sales or a new CEO?;" etc.) Before investing, I think it’s essential to spend a significant amount of time with the leadership team. I have seen companies that have amazing consumer facing marketing, strong velocity and other important business metrics, but a poor company culture that can lead to an internal disaster. Once you know the business is good, make sure the people are just as good and your chances for success are vastly higher.
While determining the “right” time to invest involves a variety of factors, ultimately there are certain things for an investor to look for beyond the size of the opportunity or brand innovation. A brand can be doing something unique or notable to catch my attention and receive our support, time, and mentorship. However, to receive a check, I need to see performance and the aforementioned attributes to know that the “right time” is right now.