Valuations that Work for Founders and Investors – Part 2

Conversely, founders often try to go to the other extreme. Hey, Mark Cuban, give me $500,000 for 5% equity. Give it! This is a pre-money valuation of $9,500,000. For a typical Shark Tank business selling less than $1 million, this is a crazy 10x of revenue pre-money valuation. Investors never, ever go for this unless they are family. This is actually what a seed raise should be. 

Expecting a stranger, the investor, to go for valuations that are 5x or more what you are selling in real topline is fanciful. 

What is happening right now in CPG is that some founders who started in the pandemic years when cash was cheap learned that they could point to 12-month projections of 100% growth and get some investors to accept the future topline as an actual number. This would bring a pre-money valuation: trailing revenue multiple down from 10x to 5x based purely on hope. 

Now, investors are demanding purchase orders from reliable accounts to consider any valuation based on future trailing revenues, OR they are simply turning down anyone pointing to next year’s numbers. The old tricks aren’t working, founders. 

You must keep your pre-money valuation between 1.5 and 3x of actual trailing revenue to meet investors where they are today. Sorry. 

All this reveals a continuing problem for founders in food and beverage, especially where net profit is usually negative for years in most cases. The problem is not doing rigorous financial modeling of the required seed money to start your startup. In the 2010s, I witnessed an army of founders launching things with very little seed money, with credit cards, or with a $75K HELOC, all under the assumption that a chain account sale would produce paper growth they could quickly present to investors. And, to be honest, some crazy folks at Expo West did throw money at companies like this. I call them dumb angels. I’m sure they’re still out there, but if you count on finding them, good luck. 

Today, you have to get yourselves to $2-$5M on your own…and then you will be in a vastly better position to negotiate an angel-led Series A in your favor. 

Yes, this means planning a revenue and profit model in which you can lose money for 3-4 years upfront. You don’t distribute through UNFI and Kehe to do this. You must get much more clever than that.

Dr. James Richardson

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