The Glaring Funding Gaps in CPG

Funding money-losing businesses is never easy. This is generally something only your closest friends and family would ever do (and, of course, you and your cofounders). Food and beverage startups tend to lose money for years, especially if they develop much of their early volume using 3P distribution.  

While angels are around to support founders and products they believe strongly in during the red years, venture capital has primarily pulled up and out of this area due to the high death rate of seven-figure food and beverage brands unable to trigger strong word-of-mouth and growth. And the increasing difficulty is pawning off 7-8 figure food and beverage brands to various PE aggregators (private equity firms specializing in acquiring, growing, and disposing of low eight-figure consumer brands). So many venture capitalists have been burned writing checks to keep Phase 2 brands going without seeing meaningful exits or exits at all. 

So, the first gap is critical – between seed rounds and a Series A, when mostly VC investors stepped in to fund the rapid growth of brands with “traction.” VC firms used to help fast-growing companies grow to the point of tapping into sizeable private equity rounds. This is the newer gap that has emerged due to high interest rates from the Fed AND a lot of wasted money in the 2010s that led to nothing.

However, there is a second funding gap, one which is more concerning.  And it is not super recent. Private equity has quietly retreated away from the hordes of amateur-founded brands to funding serial professionals and professional teams. The glory days of funding rank amateurs like Justin of Justin’s Nut Butter or the Keith siblings behind Perfect Bar are pretty much over for established VC firms. Wall Street doesn’t like the known return in CPG from amateurs and amateur-led teams. 

Private Equity is still open to funding someone new to CPG but they need to have a professional business resume – even if it’s just a management consulting or finance career of five years. Something to prove they can speak the dialect that investors speak. Something to prove they are trustworthy in the presence of a money pile.

Sadly, the days of amateur CPG innovators getting the attention of any institutional investors are largely over. I haven’t seen any such deals publicized in years to be honest. 

This long-standing aversion to rank amateurs is part of the insidious misinformation and teasing embedded in the investor/local accelerator/trade show event ecosystem. The latter organizations monetize the volume of starts and have no reason to be as honest as I am here, because then you a) might not start your business and b) will therefore not spend money early on at their events (under the guise of meeting some awe-struck investor who believes in you). 

Teasing hope to amateurs with no connections or experience has made a lot of money for millionaires and venture capitalists. They don’t have any downside in doing so. The more copycat innovation gets out there, the more teams they have to choose from in finding the right ‘fit’ for innovation Z. Welcome to Expo West and the Naturally ecosystem.

The retreat of VC means that starting CPG businesses should, and largely will, retract to a pre-2000s era, when it was the HWNI who started these kinds of businesses, floated losses on with their own personal funds or those of wealthy family and friend allies. 

The exception to this will be businesses already in the seven figures with 60%+ contribution margin, almost all of these being shelf-stable personal, home care and beauty brands. Private equity and venture capital will step in here with the exceptional founder and founding team with a large digital platform (to drive awareness). 

Dr. James Richardson

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