Episode 121 – The New CPG Funding Gap


July 1, 2024


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 or have to make debt payments on equipment and facilities.  


While angels are around to support founders and products they believe strongly in during the red years, venture capital has largely 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 pawning off 7-8 figure food and beverage brands to various PE aggregators (private equity firms that specialize 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. 

Unwittingly to most involved, the 2010s was a toilet bowl of VC money in food especially. 


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


But 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-strucke 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).


A telling piece of evidence to support the gap is the portfolio of the newish VC firm – The Family Fund, funded entirely by LPs who have scaled CPG brands before (no the usual Wall Street suspects). Of the 17 portfolio brands in the Family Fund, only two are edible food brands – Wilde protein chips and Masa tortilla chips. There are four powdered nutrition brands, though, indicating how much gross margin now matters for the earliest investors. The rest of the portfolio focuses on consumer tech, even though this is not the expertise of the LPs. 


Oh, how the world has changed, when successful food entrepreneurs now funnel their money into consumer tech and supplements. Margins. Margins. Margins. 


The drunken sailor days of funding money-losing meal kit brands are definitely over, for sure. Most likely, that level of overfunding in food will never recur, because only a Depression would cause a 0% federal funds rate to return. 


Although many food entrepreneurs have wound down or are sucking fumes right now, I still think that it is better in the long run, if we stop encouraging people to start food businesses without proper seed funding and/or industry connections. 


There, I said it again. There were too many ethically dubious folks engaged in giddy, mass encouragement of money-losing business models in the 2010s. They mobbed New Hope shows like flies to shit. The more starts, the more operators they could filter through in order to find the diamond team…Encouraging excessive business starts does no average entrepreneur any good. It actually creates lots of financial problems and emotional havoc for the majority who fail. 


Failing to scale a professional services business that costs nothing to operate is one thing.


Failing to scale something that burned through your life savings, maxed out your HELOC and has led to personal bankruptcy is another thing. Encouraging someone to stick with a money-losing food startup is not something you’ll ever see me do. I’m more likely to tell someone who asks to wind down. If they’re asking, they clearly are not capitalized or knowledgeable enough to manage the cash burn of these companies. 


Spending $500K on a launch only because you personally love the product and believe in it is a rich person’s risk profile. I don’t support it for anyone else, we should be mandating some kind of business model, CPG finance cross-check before people sink too much cash into something with a low survival rate (no matter how much you plan). 


Part of the disease that continues here is the constant presentation of partial case studies. This is not malicious. It’s just that no private company will ever disclose their true financial track record to anyone. 


But, I’ve been inside the P&Ls of all my clients and can tell you that some of the most unprofitable P&Ls are ones with a lot of PR and smiley team photos. Some are financed to endure this for years. Most are not. They need cash flow positivity quickly and EBITDA positivity as soon as possible (to invest back into the business). 


The need to yield an early net profit is greater than ever, given the VC funding gap…I still think that a well put together angel syndicate (with one combined vote) is the best thing out there for ambitious, hard-working CPG entrepreneurs trying to get through the early eight figures. 


If you can just get to $15-20M and are breaking even, you are quite likely to get a commercial bank loan from down the street. And corporate line of credit is the most valuable ‘investor’ you can have, because the line of credit has no voting rights and does not text you at all hours of the night, because you are the only brand left in the fund with any hope of keeping the LPs happy. 


Think about the retreat of VC as a blessing in disguise. Yes, it weeds out some brands, but, honestly, most of these were not the right businesses to succeed anyways. 


Angels can and should get you where you need to go plus your own personal wealth. If you aren’t willing to risk substantial personal funds, I question how committed you really are. 

Ideas don’t win. Great executing teams who constantly learn produce all the winners, whether or not they received institutional funding or not.