Do Your Investors Have the Right Time Horizon?

On a webinar hosted by Gary Hirshberg in May, Wayne WU of VMG Partners pointed to a common problem before the pandemic.

“[Brands chasing a pre-determined exit] are generally not the best brands to invest in because … they haven’t focused on surprising and delighting consumers. Rather they’re focused on trying to grow revenue just purely for the sake of a perceived economic outcome that they want.”

Cocky founders combined with greedy, inexperienced investors have repeatedly made this mistake. The blow-ups and faceplants don’t get covered by the trade media, unfortunately. I know of at least five brands that grew improperly, exited to strategics in such poor shape, the strategic acquirer had no time or skill to sort out the mess. They literally didn’t understand the poor quality of the acquisition, because they too get caught in monetizing the valuation at the time of purchase.

Tactics of explosion are the ones these bad faith investors will force you into executing. Why? They routinely network with big strategic acquirers to keep up to date on ‘what they are looking for.’ This leads to a very near-term bias in their strategic advice, especially once you hit eight figures OR the fund gets closer to maturity and returns must soon be demonstrated to Wall Street partners.

What are the Tactics of Explosion?

  • ramping up omnichannel or MULO %ACV by 10-20 or more%
  • heavy, single-item TPRs to force velocity growth on an annualized basis
  • launching lots of new SKUs to force baseline sales growth via sell-in
  • lots of national PR to drive a trade frenzy

Both sell-side bankers and VC/PE players have browbeaten founders into this kind of package, either after investing or as a condition of investing (a more ethical way of handling it, if only founders had any idea what it all meant).

In the early years on the way to eight figures, you should ONLY sign up investors who have a 10 year horizon or longer AND who don’t require an exit up front. Smart owners leave their options on how to monetize their business once they begin to scale. Exiting for a multiple of revenue or EBITDA is just one way.

The other reason to vet your early investors’ time horizon is that 7-10 years is an above-average time to scale for the average premium CPG brand. The more your symbolism or sensory experience is ahead of the market the longer it will probably take…if you want consumers to drive the growth through multi-year, same-store velocity growth. Anyone who talks about getting your brand to scale in three or four years is most likely plotting a premature exit of a weak, poorly built brand to an acquirer with motives other than growing a strong business.

Dr. James Richardson

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