PODCASTS / E12
DEC 15, 2019
00:18 Welcome to episode 12, The Finance Founder. In this episode, I’m kicking off a mini series of episodes drawn from my extensive conversations with food and beverage entrepreneurs in the past few years. Most of these conversations, I’ll admit, were free phone call consults, but I listened very well. Some turned into engagements and regular correspondence.
00:43 You might say I’ve noticed some archetypes. Marketers would call them personas. I hate that word and don’t ever, ever, say it in front of me. What these archetypes consist of are what social scientists call primary biases. But these are personality characteristics, trust me. They’re socially constructed primary orientations toward the world. Thereby, until one develops massive self-awareness, they’re primary orientations towards your business as well. You could say they’re related to a founder’s core skill and that’s often the case, but that skill is simply the one they’ve been the most heavily rewarded for in their social lives. It’s how they consciously define themselves because of all that social rewarding. Inevitably, this primary bias gives them enormous strengths and masks enormous weaknesses.
01:35 As I’ve said in an earlier podcast, there is no fucking lone wolf model that works in scaling a CPG business. The vast majority of successful brands that have scaled use a co-founder business partner model. The exceptions are very, very, very, very talented serial entrepreneurs. But since almost all of you are listening right now are not one of them, this is not terribly inspiring to bring up. Why is this the case? It’s the case because no one founder has all the skills necessary to scale a CPG business. This is not software folks, which an introvert can scale in his pajamas from his laptop in a coffee shop in Santa Monica.
02:22 Okay. With that preamble, it’s time to talk about my most frustrating archetype of founder, the finance founder. Again, I am not talking about personality types. I am talking about the social orientations to the world in which the most valuable thing is money and solutions to business problems are assumed to be financial in nature. When there is a financial problem, such as subpar gross margins, MCBs devouring your gross profits, cashflow insufficient to fund the next rung of growth, these folks nail it most of the time without a lot external guides. Kudos to them. So many founders I meet face plant because they don’t take the accounting seriously enough, and you really need to take an accounting very seriously in the early years when you’re really bad at it.
03:12 However, the same exact mindset folks that wins in those mathematically tense situations is the same one that completely face plants when it comes to many sources of under-performance in weakness in a small growing CPG business. I had a client recently who reached out to reconnect with me. When I asked him his burning questions of the moment, he listed optimizing field sales for maximum ROI and optimizing his TPR programs, like key accounts, again for maximum ROI.
03:47 ROI, return on investment. This is the term most founders do not actually use regularly at all in my experience. But the finance founder will use it all the fucking time to evaluate everything. Probably even his sex life. A small CPG business’s top priority is to grow fast, so it can scale to the point where fixed costs come down and the key variable costs or cogs also come down due to scale. This demands a long term view of your business’s financial efficiency, not a near term one. I’m not excusing people who send shipper displays to Nielsen D counties in the middle of nowhere with no store traffic, because few humans live there. That’s just stupid shit. And it doesn’t require a financial spreadsheet to prevent. But finance founder guy drops the what is the ROI question before every single executional decision. This is where finance founder guy gets in his own way.
04:52 CPG businesses scale on the basis of growing consumer demand. There is no financial trick to accelerate this. The vast majority of executional moves in consumer packaged goods, including food and beverage, are indirect paths to financial growth. In fact, almost every fucking move has an indirect and only partial relationship to growth, especially the capital raise you just got. Shall I regale you, listeners with a list of founders who have raised tons and are now out of business? Scheft was my favorite example of financial arrogance in the recent past.
05:28 The ROI question is extremely contagious in a small team, because it seems so responsible, so mature, except that it is incredibly flat-footed and short-sighted, and honestly it’s just naive in consumer packaged goods. It generally masks the personal problem in my experience. That personal problem is with taking calculated risks on indirect growth investments. This is where most finance founders sucketh taking those bigger risks, unless they managed a hedge fund. And lo and behold, those aren’t the kind of bankers who start CBG businesses, because they’re too busy enjoying their private islands. If only they would behave on those private islands, please.
06:15 “What’s the ROI?”, is the ultimate rookie objection to any move whose value to the business longterm is simply not understood, yet. And in big co there’s actually very little naivete with this question when it is used, because, “What’s the ROI?”, is simply a fuck you go away phrase designed to irritate yet another stakeholder and to get them to back down. In B2B sales, which is my blood, my lifeblood, it’s a massive red flag. And I delete those leads.
06:47 Finance founders ask, “What’s the ROI?”, almost as many times as they swallow each day. They don’t discriminate based on context in most cases. Many investments that work in CBG to drive growth work through indirection and can only be quantified inferentially through sustained velocity increases in point of sale data. Look, a lot of what we’re dealing with here is a lot like publishing. CPG growth is not a laboratory science, folks. But finance founder guy thinks that it really should be. Why? Because he wants that much control over the future. This is not a smart approach to running these businesses, and it’s not a smart approach to growth.
07:31 Field marketing is my favorite example of something that utterly mystifies finance founder guy. What’s the ROI? Well, in the near term, it costs a ton to staff the events and use up cases of product for free samples. Oh my God, we’re not even charging them. We’re not even going to demo table where we get money. Oh my God, how do you know it’s working? How do I quantify the impact? When do I get a return? What the fuck is the point?
07:54 This mentality reminds me of a horrifying anecdote from my school research. Brace yourselves. A 1919 letter from a wealthy American donor to a Christian missionary school in India, “I want to know how many converts I’m getting for every dollar I give you or I can’t continue to give.” Wow, that my friends is some crass Jesus love.
08:19 The problem with finance founders’ constant ROI interrogation is that it dehumanizes the entire culture of the organization. Believe me, this reflects on both the strategy the company takes and the many tactics it will use to scale. It also contaminates that founder’s relationship with their employees, because they catch onto this. Suddenly, they realized that their existence at the company is no doubt being evaluated on a crass ROI basis. That realization, my friends, does not make people leap out of bed in the morning. Take that from a 47-year-old punk.
08:55 Most importantly, finance founder unrestrained by another business partner, who couldn’t call him on his bullshit and present a different sensibility, that finance founder will inevitably create a super narrow playbook of basically trade manipulation moves. Because those are the only moves whose ROI can be directly measured in quantitative data sets. If the goal is to eliminate all moves that have indirect influence, then you will be wind up with the shittiest possible array of tactics in thy playbook. The problem is that those measurable ROI tactics by themselves don’t scale CPG businesses any more than simply selling in through a broker network to 90% ACV can create scale with a new trademark. It doesn’t work that way people. Scale, if it was that easy, the failure rate would not be 80% or higher. Scaling a CPG businesses about a custom playbook of moves with indirect influence on top line success. Just accept it.
09:52 Finance guy’s core impulse, however, is useful. It can be redirected productively to evaluating the ROI of dangerous trade tactics, like TPR programs, that brokers, distributors, and fee hungry supermarket chains love, love, to seduce naive founders with. “Oh yeah, kid, this is how it’s done all the time. Absolutely. How it’s always been done. Yeah, yeah, yeah.” Ultimately I don’t believe finance guys should actually ever lead a CPG business by themselves. They absolutely need to be cross-checked by a co-founder or some kind of business partner who has a long game in mind and who understands that there’s an element of faith involved in experimenting to fine tune your playbook. This involves temporarily investing in a couple zero ROI activities, dude, until you know what’s working and what’s not in your specific business and competitive situation.
10:45 Whew, that’s it for this episode, folks. You may have noticed that these have started appearing every two weeks and that is my sincere intent. And I do not, I do not make that move lightly. I am caving to founder demand for more content. And so I shall feed the peeps. I hope you all enjoy these new and more frequent, but not at all longer, episodes. And remember, be safe out there.