PODCASTS / E127

Episode 127 – Getting Real on Seed Financing

October 1, 2024

Alright, getting real on seed financing. Judging by the sheer volume of complaining and panicked exasperation over unexpected deductions, fees, and UNFI first invoices of near nothing,  etc. that  I’ve seen on LinkedIn in the last seven years (I’m on the platform multiple times a day), I can infer that way too many unprepared amateurs ordered co-man product without doing real financial planning. Of any kind. 

If you’ve ordered your first run from a co-man, you’re too late for seed financing. You have a business now. If you have to raise money, so be it. But, you’re now battling the irrational headwinds of financial desperation as you do. It’s probably  too late to avoid a cash flow shitshow you didn’t forecast. 

Please don’t do this, if you can possible avoid it. 

Seed financing for consumer brands needs to occur before you start or at the very latest as you are developing your initial product and before you place a co-man order (or buy pilot facility equipment). Before you have a packaged prototype that looks retail ready to a layperson, it may be hard to convince anyone in your personal network that you actually are committed to what you’re doing. Unless, YOU have all the seed money, in which case you don’t need to listen to this episode for one second longer. 

A lot of angels were burned in the past decade by silly consumer investments in the 2010s. These folks tended to believe in the product more than the founder, so they didn’t really do an objective assessment of who they were investing in.  Meanwhile, VC has mostly pulled up and out of consumer packaged goods, especially food and beverage brands led by industry amateurs. The pile of brand corpses is too high to ignore at this point. 

I’m saying this because the current era is one in which the average, non-High Net Worth founder should expect to get to $5M ARR with no more than $100K in external funding headed their way. 

This is a very pessimistic statement, I recognize. But, it’s better to seed your business with such a financing hellscape in mind than to beat your chest, wing it, stumble around and well, get lucky.

Luck happens, but luck can not be planned. 

Stop listening to folks who started with $10,000 and a prayer and now have a $100 M+ business. I can tell you that, statistically speaking, this never happens, even if the internet can provide you 1-2 anecdotes. When you poke around in these cases, and some are my clients, you’ll find that they received a lucky acceleration that vaulted them over the rotating abattoir blades of fixed operational costs. You can’t plan a Shark Tank-to-Amazon sales explosion like Dude Wipes experienced. They certainly didn’t. But it made a lot of their early business success possible, that one appearance. 

The way to calculate require seed monies is to adopt a very pessimistic stance focused on allowing the business to survive long enough to iterate and find some spare luck.What I recommend is to project two to three years of cash needs, preferably with somebody who knows how to do these projections in a CPG business. It’s worth paying for this service as well, in my opinion. If you’re new to the industry, you don’t know all the line items and financial risks for every route-to-market you’ll encounter. 

Regardless of how you do the calculations, do them for a worst case scenario which should include a business where initial account velocities do NOT grow. This is very common, otherwise good, business situation, because you can grow the business by adding distribution. This is NOT how you Ride the Ramp of exponential growth, but it sure beats implosion. 

Some of you are probably wondering if I have a seed number in mind. Well, today, in 2024, I don’t really know how you could sensibly launch a CPG business without a quarter million in cash just to start. In no way, shape or form have I ever said and will I ever say that starting a consumer brand is some kind of a middle class activity and when I say middle class, since I’m a social scientist, those are folks living right now in households with incomes basically between $35K and $100K annually.

You’ll never ever hear me encourage anyone with that kind of income situation to ever enter this industry without a rich co-founder. I will say that proportionally, not many of these folks do, but I’ve met them. 

The real group that gets into trouble is the upper-middle-class professional who has been earning $150K+ personally for years, has a nice house, 401K, etc. They more easily get tempted to hit “go” without properly seeding the business.

Not only should you raise $250,000, you have to be comfortable flushing it right down the toilet as you start, you have to be emotionally ready to watch it disappear. Almost like you’re at the blackjack table in Vegas. Just imagine it disappearing. What’s your emotional reaction?

This is where most upper-middle-class professional founders tap out, so to speak. I certainly am not someone who is prepared to lose that much of my personal assets for a business venture.

Losing $250,000 in seed money should generate a calm, disappointed reaction. And now you see why sociopaths excel as founders. They literally don’t care about their investors’ emotional reactions. 

The rest of you need seed investors, including you, who can risk everything they are putting in. 

If you can’t handle flushing your seed money down the toilet right now,  you’re risking too much money and the price you will pay is more than financial. It’s mental and psychological. In this culture there’s not going to be a lot of people rushing to your aid when the business flops, because Americans still do not what to do with a failed businessperson. We say things behind their backs like – “Don’t mention her startup…it didn’t go well.”

While it’s relatively easy for individuals who own pass-through LLC companies to file for bankruptcy, this is a horrendous thing to do to your financial situation, and it will impact your mental health for the worse.

This is a good time to bring up the issue of solo-founders, the ones who don’t launch with a team but who just push on through wearing all the hats.

It’s all very impressive from one perspective, but it poses a problem for raising seed money. Any private investor has only one person to believe in. They don’t see a balanced founding team with complementary operational strengths. My observation over the years is that you better be a finance professional if you hope to operate solo AND raise seed money from strangers. There’s something about a finance background that makes wealthy people trust you more than average.

Otherwise, you, the solo founder needs to see the business internal to their current social network of high trust relationships. If you are solo and don’t have many of the latter and don’t have $250,000 of personal money to deploy, I start to question if you should be taking this risk.

In consumer packaged goods, the number one reason that Phase 1 brands had to wind down was that they didn’t raise enough seed money to ‘buy time’ for in-market iteration.

Seed money is not a pile of cash to fund your perfect business plan.

Seed money is a pile of cash to fund a rolling experiment with a high likelihood of failing.

Seed money’s entire purposes is get the experiment going and to buy time for you to chase some luck. You can nudge luck your way by clever iteration along the 4Ps.

Yes, luck can be chased. But you can’t plan on it. You may, in fact, receive no luck, only a face full of cow shit. This happens to thousands of consumer startups. 

Oh, by the way, please don’t tell prospective seed investors that you’re “buying time to chase luck”…even though this is exactly what you’re doing. 

Seed your business properly. If you only do this one thing, or quit because you realize you can not seed it properly, your future self will thank me.