Why You Need Dry Powder if You’re Growing Fast

A general rule in startup finance you may have heard before is: growth solves most financial problems.


Growth provides the cash flow to cover your fixed costs, allowing you to spend more gross profits on activities that service increased demand. Fixed costs are the non-variable operational costs to do anything (salaries, rent, utilities, office supplies, debt payments, etc.).

Gross profit can now be invested back into growth once you’ve covered fixed costs for a CPG brand, which usually happens between $500,000 and $1,000,000 in annual sales. And this IS a mandatory reality if you want to grow quickly in a cost-intensive sector like consumer goods. 

However, if you grow exponentially into the seven-figures, the ecosystem will notice. You may attract me-toos and other venture-backed competitors. Retailers may start approaching you with expensive but strategically valuable offers. Will you have the cash on hand to seize opportunities you want or defend against me-too competitors? The easier it is for someone to hire a co-man to mimic your offering, the greater risk your high-growth brand will attract competition. And this is when the concept of ‘dry powder’ becomes crucial. 

Farther up the Ramp, you will want dry powder available to suddenly deploy in reaction to both strategic opportunities or significant competitive threats. You’ll need to deploy this capital much faster than any commercial loan process would allow you to (even though you probably now qualify for commercial loans). 

In Phases 1 and 2, I don’t recommend new, undercapitalized founders ‘save’ gross profits ‘in the bank.’ Instead, it’s better to use angel and seed funds, in part, to fund your dry powder build-up and to be very upfront with investors. They should believe in you enough to trust this future-use rationale. And they shouldn’t be funding a business rescue anyways. 

Dry powder need not amount to $14M as it does for one of my larger early-stage clients. But $500-$1,000,000 is a good amount of powder to have on hand as you get into the seven-figures, regardless of how you raise that money. Just don’t under-fund initial growth to ‘save’ these funds, or you will starve your business at a crucial juncture when you need to run a break-even enterprise. The best lead investors in the world insist on dry powder reserves from their checks…for a reason.

Dr. James Richardson

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