Good Morning Operators! I hope everyone had a wonderful (long) weekend! NRF is in NYC this week and I’ve been running to different events & meetings over the last few days - hence why the newsletter is hitting your inbox on a Tuesday instead of our usual Monday morning. In other important news, my alma mater won the college football national championship (Go Blue!) which was pretty cool™. Before getting into today’s content, we have a brief message from our first sponsor of the inquisitive operator - Nostra.ai !

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Fundraising 101: What’s the deal? Where’s the fun?

If you’ve been in the consumer space in the last decade, you’ve seen the great rise of DTC Darlings such as Glossier, Away, and AG1 raise truckloads of capital and scale to new heights as they build strong omnichannel businesses. You’ve also seen a few brands with significant venture investment encounter difficulties, such as Allbirds.

So, What’s the deal with Fundraising? I think about fundraising as a way to supercharge the growth of a business through allocating capital in a way that accelerates the pursuit of a 100x market opportunity. In consumer businesses, particularly CPG, I’d emphasize that fundraising $$ is best used to pursue time-sensitive growth opportunities within your category. What does that mean? If you saw a $1B opportunity in your category that you could capture tomorrow (or this year), think of fundraising as a way to deploy an “extra” $1M into capturing that $1B market opportunity. Investors (especially VC investors) are betting on you turning that $1M into $100M of realized value from that $1B investment. This does not necessarily mean that you achieve $100M in revenue (though for most consumer businesses this is a major feat). This means that if investors give your business $1M and value you at $5M (meaning they take 20% ownership share in your company), that your business will be worth $100M after successfully capturing that market opportunity (giving them a 20x return on their investment of $1M). Most startups in the consumer space spend fundraising $ on Product, R&D, Marketing, and Hiring.

I always need $, so should I raise capital? The long-short of this is, it depends. Here’s a non-exhaustive list of options with pros and cons:

• Venture Capital Funding:

  • Pros: 

    • Access to Capital: You can quickly deploy funds to use for marketing, product development, and hiring.

    • *Strategic* Guidance & Industry Expertise: If you choose the right VC fund (more on this later), you can access some of the best and brightest minds within any given industry. Considering many successful VCs are former operators (E.g. Roelaf from Sequoia), you can get very valuable guidance on tactics for gaining market share in competitive industries.

    • Network: Trying to quickly break into/launch in retail? Chances are, your investors have contacts in their network that they can introduce you to in order to help get on the shelves at Walmart or Target. Also, this is very much dependent on choosing the right VC fund.

  • Cons:

    • Loss of control & ownership: Depending on how early you raise, you can give up substantial equity in the company (more on this in the following point) and you often have to run several major decisions by your investors first, such as major hires, product investment, etc. This is why choosing the right VC fund is critical - the best fund for your business will function as a business partner and help you avoid mistakes and unlock resources that accelerate the growth of your business.

    • Equity Share Dilution: In consumer, it’s important to set realistic exit expectations. It’s not likely that you’ll build a $1B business if you’re in CPG (yes, there are exceptions such as Harry’s) so you need to think critically about every dollar and % share you put on your cap table. Assuming you’re aiming for a $100M exit, if you give up 20% of that to investors, you might only have $20-$30M left over after you sell your equity in the firm, after Uncle Sam takes his cut (I’m purposefully glossing over the tax details here for simplicity’s stake).

    • Exit pressure and expectations: VCs typically have an exit strategy, expecting to sell their shares within a specific timeframe. This can create pressure on the brand to achieve quick liquidity, potentially leading to rushed decisions or mergers.

  • Private Equity Fundraising:

    • Pros:

      • Larger capital injection: PE firms typically invest much larger sums than VCs, potentially enabling more expansive growth strategies or acquisitions.

      • Focus on operational efficiency: PE firms often prioritize optimizing existing operations and financials, which can be beneficial for established brands seeking to scale efficiently.

      • Faster timeline to exit: PE firms generally have shorter investment horizons (3-5 years) compared to VCs (5-7 years), leading to a potentially quicker potential liquidity event for the brand. Typically, PE firms engage in later stage fundraising rounds for startups that are seeking to IPO or get acquired within a short time frame.

    • Cons: 

      • Greater control & ownership loss: PE firms often demand larger ownership stakes (Think 20%-50% vs <15%) and exert more control over strategic decisions compared to VCs, potentially limiting the brand's autonomy.

      • Higher financial pressure: The debt burden associated with PE deals can be significant, creating tighter financial constraints and less room for experimentation.

      • Short-term focus: PE's emphasis on quick returns can pressure brands to prioritize short-term profits over long-term brand building and sustainability.

So what does this mean for you? How can you take advantage of the significant resource injection of institutional capital and build a consumer business that achieves long term growth ? Let’s take a look at a few case studies.

Case Study 1: AG1; scaling to “greener” pastures:

Athletic Greens is a longtime DTC Darling that has built a strong, self-sustaining business in the vitamins & supplements space. Note; I do not currently invest in or formally advise this business, I simply thought it might be a cool business to analyze. This is not investment advice.

Here’s a look at some of their headwinds & tailwinds:

Tailwinds: The Bull Case for AG1

• Large & high-growth TAM: When raising a $115M round back in 2022, founder & CEO Chris Ashenden, commented on the rapid growth of the global health & wellness market, which was “approaching $7 trillion” (TechCrunch). They raised capital in order to more aggressively pursue this market.

• Proven Model: AG1 bootstrapped the business to a $150M ARR prior to fundraising. This implies that

• Brand Equity: At the time of its fundraising, AG1 had already garnered a significant following. The New York Times published in July ‘22 that AG1 had become a “household name”.

Headwinds: Potential challenges for the business

• Regulation: New FTC guidance in 2022 demands strong science for health claims. AG1's wide-ranging benefits like energy, immunity, and gut health face potential increased scrutiny under these stricter standards.

• International Regulatory Variations: As AG1 expands into new markets, it will need to navigate the varying regulatory landscapes for supplements in different countries. Additionally, as it enters international markets, it will have to invest resources into researching consumers in these markets so that they communicate the value of AG1 in a way that resonates within the context of the cultures present in those regions.

• Supply Chain challenges: The supply chain and 3PL infrastructure for a $10B consumer business that sells domestically + internationally is very different from a smaller, $1B business that operates domestically. Navigating this expansion effort successfully requires significant expertise in international growth - they will need a team that is able to easily localize & incubate their product and brand in markets that may have zero familiarity with the AG1 brand.

Question Marks: Questions I’d ask the AG1 Team:

• Valuation Pressure: How much will we need to compromise on CAC to hit the growth targets of a $1.2B valuation? 

  • How much can we flex CAC while maintaining profitability?

• Competition: How are we going to continue to win against an incredibly competitive peer set? What is our strategy to retain our customers and continue to grow LTV?

• Scalability:

  • As we reach new potential customers outside of our core demo, how will we evolve our messaging & potentially our product to capture additional market share within the broader health market? 

  • International: How are we going to tailor our messaging & product offering to different cultures and tastes in international markets?

Case Study 2: Allbirds; Shoes are just like SaaS ?

Allbirds is (was?) silicon valley’s favorite sneaker. Like many brands in DTC (casper, glossier, etc) they raised many rounds of financing at significant revenue multiples as if they were a SaaS firm. Allbirds went public in November 2021, and hit a peak valuation of around $4B. Today the firm is worth around $150M, partly a product of market conditions and an evolved perspective by the investment community on consumer goods businesses. So what went wrong? Let’s take a look at their headwinds + tailwinds as a business. Note: I also don’t currently invest in or advise this business in any capacity, I thought their example was interesting. This is not investment advice.

Tailwinds: The Bull Case for Allbirds:

• Sustainability and Ethical Consumerism: In their June 2023 survey, PWC found that 80% of consumers globally are willing to pay more for sustainable goods. If Allbirds is able to efficiently and profitably capture this market, they may be able to turn the business around.

• DTC Success: Allbirds was an early success story for the DTC space, and their core customers still love them. In 2016 Time Magazine called the Allbirds Wool Runners “The World’s Most Comfortable Shoe”.

Headwinds: Challenges to address in this business

• Competition: The sustainable footwear space is a growing & competitive niche and VC & PE firms have taken an interest in it, signified by large funding rounds for brands such as Rothy’s.

• Profitability Problems: Allbirds reported declining revenue (-21%) and decreased operating cash ($5M vs $17M in Q3 ‘22) in their Q3 ‘23 earnings report.

Question Marks:

• Channel Performance & Diversification: What is the ROI of our retail locations to our business today? How can we make this a more profitable channel for our brand?

• Product Strategy: What is our process for identifying new opportunities for new products and SKUs? What did we learn from launching apparel and how can we ensure future launches are more successful in the future?

Putting it together: Should I raise capital?

If I was raising capital as a consumer operator, here are a few things I’d assess:

Market Validation and Growth Potential:

• Problem-Market fit: Have I proven out Problem x Market & Product x Market fit? Does a market exist for my product and are there real people out there who care about my solution to this problem ?

• TAM: How big is my TAM? How much of my TAM have I captured already?

  • How much is my TAM growing?

  • Is my TAM big enough & growing fast enough to justify & validate the equity dilution I will incur from VC or PE fundraising?

• Moats & Competitive differentiation: What is my moat? Is it unique technology or material (E.g. Masa chips that have no seed oil) Branding ?(Liquid Death) or a Distribution channel ? (e.g. Glossier in the DTC early days)

Financial Health & Business Model:

• Is my current model profitable & sustainable? (some examples below)

  • Subscription:

    • What is my CAC:LTV ratio? What are my churn rates? 

    • Customer segments:

      • What is the CAC & LTV for the top 10% of my customers? What about top 20%? Bottom 10%? Do I know what the drivers & draggers of this are?

  • Marketplace/Non-subscription e-commerce (E.g. Allbirds)  

    • What is my AoV? 

    • Am I first-order profitable? (including media spend + COGs + shipping costs) 

    • LTV considerations:

      • What is my repeat purchase rate? How many purchases does someone make after their first purchase within a 1-2 year time frame? 

      • AoV: Does this go up or down after the first purchase?

Exit Strategy:

• What is my Exit Strategy? What is my desired timeline for Exit? (Note, larger exits typically require more time operating the business)

• How much $$ do I want in my pocket post-exit? Therefore, what does my target exit valuation need to be?

Do your “Due Diligence”: How to evaluate investors

• Read the “Reviews”: What are their portco success stories? Where are they now? What was their exit?

  • Talk to the founders of these companies if you can - how did they go about structuring fundraising deals to preserve as much equity as possible? 

    • Which partners did they find to be the most helpful? Are these partners still at the firm? 

    • Which resources did they take advantage of and why? Which resources proved to be the most valuable?

    • What do they wish they did differently ?

• Push on “value-adds”: What “added value” does this firm bring to its portcos? What role is that “added value” going to play in helping you grow this business?

• Do your homework: Talk to the investment team

  • What is their “investment thesis” ? If they were to invest, what would their vision be for your brand?

  • What is the background of their GP team? Have they operated in your industry before? What was their experience?

  • Who are their LPs?  

This was a long & meaty post, so that’s all for today. More to come next week!

Zach