The Risks of Raising A Lot of Money Too Early
Up until the pandemic, I saw lots of strange over-investment in emerging concepts in CPG. ZX ventures invested $1.5M in a brand new switchel brand as they began building investments in a non-alcoholic portfolio. $1.5M for a brand that has sold less than $500,000 is an awful lot of money. You would think it is a blessing, but without the right leader and strong advisement, that kind of money can disappear pretty quickly. Then, the founder will find it nearly impossible to raise money except for the super forgiving angels out there willing to ignore a massive failed investment.
Here are the top risks I see, all of which can contribute to cash burn and underperformance:
- Investing in paid media too early – when your brand is less than three years old, you ironically have to pace your creation of brand awareness with limited capital. $1.5M is not enough to turn on a BigCo megaphone. The reason is that paid media, though it does work in creating initial awareness, doesn’t work at small-scale. Moreover, there are too many Skate Ramp brands that have grown exponentially in the early years without any. Chobani. Kind. SkinnyPop. The list is very long. Paid social is very expensive per impression and insanely expensive per unit purchased at retail. Earned media is the best option for founders in Phase 1 and Phase 2 of the Ramp. But the most crucial awareness-building device should be the innovative nature of your product itself. Not paying for marketing allows you to understand the organic demand at the shelf for your thing at a certain SRP. The more you promo and advertise and push, the more you introduce signal noise that disguises problems with your product. I guarantee there are problems with your product. Almost always. Too many paid push techniques lull you into naive complacency and false confidence in the first few million $ of sales.
- Investing in too many staff – A common problem with any startup that starts with too much money. And what it does is distract you, the founder, from managing an iterative experiment with the external market. It keeps you distracted with internal visioning, messaging, and leadership duties. It introduces bureaucratic slowness way too early in the life of an agile organization ready to radically iterate if necessary (without a bunch of internal resistance).
- Investing in high-salaried CPG talent with little-to-no startup experience – these are often the people you will be urged to hire when you raise too much money too early from the wrong institutional investors. However, if you hang out with the folks in Boulder, you will learn one positive truth: people fleeing directly from BigCo are generally worthless in a startup environment, AND they want the same kind of corporate salary and benefits they had. They’re useless because they overthink every decision, won’t take a lot of direct ownership over anything, angle for more resources and influence immediately, and are generally stuck-up sh#t-heads, especially the men. If BigCo is on a candidate’s resume, make sure they worked for at least three years at a startup (at a low salary) before joining yours. The majority quit within months to a year.
- Brokering too much %ACV too quickly – Lots of capital means hiring expensive brokers to turn on lots of doors by caving to every pay-to-play-package on the route-to-market to too many channels. OIs. Free Fills. Slotting. Throw money at it all to get prematurely grandiose access in too many doors. If you do this before, you have proven that your naked product grows same-store velocities when sold in the right zip codes and retailers.
- Buying demand through BOGOs and excessive single-item TPRs – If you go the rocket ship distribution route, you will have to pay lots of non-working trade to get early access. At the same time, it may enhance your visibility. Enhanced visibility for a non-innovative or poorly developed product will not yield the promised fruit the broker network thought might happen. Slashing your ARP right away with trade promo $ is a great way to attract weak purchase intent consumers who only buy you on deal or, even worse, just bought you once on sale and weren’t even slightly appropriate for the offering. They laugh and move on, while your topline collapses. Illusory HH penetration increases occur.
If this post got you rethinking anything about your 2021 plans, then you may want to attend my Ride the Ramp webinar this week. On Oct. 9, my next cohort will go through my Riding the Ramp Strategic Planning webinar. If this post touched a nerve and you don’t have a 2021 strategic plan. Then I encourage you to grab a spot. Only 9 left.