101: Mapping Your Options
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Trying to raise capital in the CPG industry is daunting. On one hand, you are reading about technology companies receiving billion dollar valuations before generating revenue. On the other, you are seeing brands acquired by strategic buyers for large multiples. If you do not run a branded business (i.e.: a co-packer), you may see your peers acquired by private equity firms. To top it off, there is all this debt out there. What does it all mean? How do you even get started? The goal of this resource is to help you understand it all.
You are in the weeds of your business. You are probably working on a million things: a pitch deck, filling orders, finding co-packers, etc. Let us zoom out 30,000 feet for some perspective.
As with any high level view, the details matter but are impossible to ascertain. Someone who has stood on the shores of Lago di Garda can probably tell you a lot about the beauty of the Italian Alps. However, to get there they had to look at a map of Italy. It is assumed going in that the map is not the terrain, but its usefulness is in its simplicity. The purpose of this section, and frankly this entire primer, is to give you an orientation, but to leave you to do the actual exploring of Lago di Garda.
For visual learners, the flowchart below is designed to give you a high-level perspective on the landscape. For non-visual learners, brief descriptions of the options are also listed below. I will likely receive a lot of feedback pointing out exceptions, and most of them will be right. This flowchart is meant to give you a directional view of your options, notwithstanding myriad exceptions.
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Angels, Friends & Family: This is usually the first outside funding a business receives. This can refer to institutional seed investors, accelerators, executives in your industry, high net worth individuals in your community, and truly, friends and family.
Venture Capital & Growth Private Equity: In most cases, the VC world begins at $5 million of annual sales. The private equity world begins at $20 million. There are some PE firms that make later stage venture investments, hence the “Growth Private Equity” moniker. Usually these are investors comfortable making minority investments where their return is based on very high growth opportunities.
We use the term “transformational” often to describe businesses that create new markets with new products. Sometimes this is through technology (i.e.: the advent of plant based proteins that taste like animal proteins), others it is through a completely new approach to a category (i.e.: Halo Top in ice cream). These firms are generally looking for those attributes.
Traditional Private Equity: The alternative to transformational is “incremental.” You may be taking an old way of doing things and adding a layer of improvement. You may be adding a lot of value but have less of a moat; someone may be able to copy you. There is nothing wrong with this (and at Charis, we know it isn’t always true that just because someone can conceivably copy you does not mean they can practically do it). Usually, financial investors look for profitability in these businesses. This is the world of traditional private equity, and the threshold to get in is around $2 million of annual EBITDA.
Debt: This refers to outside money that is due back to the investor by a certain date, comes with an interest rate attached, and is usually collateralized by assets. For now, all you need to know is that debt is a solution when you want to avoid dilution, but there are certain situations where debt is to be avoided.
Click here to read 102: Angels, Accelerators, and Friends & Family.
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