PODCASTS / E125

Episode 125 – Quant-Curious Founders Win

September 1, 2024

Why do some investment firms just seem to have a killer portfolio of mostly winners? What is going on with these folks? 

Their poorly advertised secret is pretty simple: scanner data. The most successful investment firms buy enormous, store-wide pipes of data from SPINS or Nielsen and scan routinely for emerging seven-figure businesses that meet metrics outlined in my book (and others).

These scanner-derived lists are really a hunting ground for them. They have no idea yet, if YOU are a team they want to work with. 

The lesson here is that the most successful investors filter first for products with unusual velocity growth…they begin with math. 

The intimidation factor with scanner data is unusually high for some founders. I think it has to do with the arcane glossary of the scanner data world and its measurements. Yet, most founders are new to P&L accounting jargon for a consumer packaged goods business. And, despite this, operations forces you to learn this math language. You simply have to learn it. 

First-time founders with a creative or liberal arts bias need to get quant-curious before they order any product from a co-man. Not all of them do. It still surprises me how few founders actually model out their business with brutal clarity to understand what it will require of them. 

I suspect a lot of this lack of preparation is due to a cognitive block, a desire not to face the possibility of disaster. I do not think it’s due to math skills, per se. So little advanced math is needed to do these projections.

Lack of quant curiosity and financial projections has killed so many CPG startups, it is thoroughly unfunny. 

All founders should know what kind of working capital their business is likely to need in the first couple of years so they can raise these funds in advance. This is called seeding the business. 

You must be curious enough about working capital and cash burn requirements, if you want to up your odds of surviving long enough in the market to iterate. 

This is the first kind of quant-curiosity you must display: deep financial curiosity in the mechanics of your business. Too many founders in the 2010s got going via cheap personal debt without detailed financial planning and then started reacting to things like “Oh, shit, what are these deductions?” or “I didn’t realize I would need to store product after the co-man produced it” or “If I don’t get paid by the distributor for 120 days, how much do I need to keep things going beforehand?”

Honestly, more founders fail to get to Phase 2 because of this lack of financial  curiosity in how a CPG business works, a curiosity so deep that they don’t order from a co-man until they know every expense item and have a financial projection. 

The beauty of your initial projection is not its accuracy, it’s that you set up a spreadsheet you can rapidly edit as the inputs change (primarily the revenue). You have quantitative visibility into your business. It’s not just a cluster of e-mail threads.

Sometime in Phase 2, though, is when I see a lot of founders just get sucked further into the financial side of things, generally because cash is running low or running out. Time is running out. Then, there is mad fundraising…and now, the founder has little time carved out to learn the most critical math there is in a CPG business not growing hyperbolically, like a unicorn. 

This is the math behind consumer demand, the ultimate fuel for any growth business, including Skate Ramp brands. 

As you enter Phase 2, though, it’s critical to start monitoring your brand health using basic scanner metrics AND benchmarking yourself mathematically against brands ahead of you. 

Obtaining scanner data is not a cheap thing to do, which is why investment firms and large brokerages truly do have the eagle eye advantage over every single stakeholder…including me…

But, there are ways to obtain one-off snapshots before you invest in ongoing, syndicated access. I talk about how to order these more inexpensive investments in my online course – Scrappy POS Data Analytics for Founders. 

Normally, early-stage retail-heavy brands invest in scanner data access because a) they have a ton of seed money or b) because sales leaders now demand it to do their work and provide professional selling stories to their buyers.

But, my recommendation is that founders budget for this data, in historical, category-level snapshot form, as soon as they cross $1M in trailing retail sales. 

This data should be purchased to provide founders and leaders setting the growth strategy and overall budget with critical benchmarks and national competitive context. 

Here’s some examples of the questions this kind of snapshot report should be able to answer

• What does my rolling, quad-week velocity trend look like? Declining? Stable? Growing steadily?
• When I add distribution (ACV) does my velocity also keep growing or does it flatline?
• How does my velocity compare to nine-figure premium brands in my category? The gap you see is your primary upside
• How many large brands are in my category and how fragmented is their market share? This affects how hard it is to secure additional shelf space
• Factoring out price changes and pack size variation, what is the true consumer demand trend for my product (measured in Equivalized units)

I’ll stop there, in case your head is spinning.

There are a number of resources online you can use to learn scanner data terminology. CPGdatainsights.com is still live and remains a great resource for new founders. I have also other other resources I can share, IF you take my online course.

Just go to premiumgrowthsolutions.com/courses for more information.

Be safe out there, folks.