Why It’s a Great Time to Invest in CPG - Webinar Recap
After the past decade of strong investment growth in emerging natural products CPG, investors — rocked by the impacts of the COVID pandemic — have been in a period of super-caution and tightened purse strings during the 2020s.
But advocates for early-stage CPG companies have been speaking out, noting that the fast-rising consumer demand for better-for-people-and-the-planet products sets the stage for win-win deals between investors and founders.
This was the heart of the keynote speech by legendary serial entrepreneur John Foraker at Naturally Chicago’s 2024 Pitch Slam and Investment Forum. Naturally Chicago Managing Director Jim Slama weighed in with an article on the same theme that was published by Crain’s Chicago Business and New Hope Network.
Continuing on that thread, Naturally Chicago on May 1 presented a webinar titled “It’s a Great Time to Invest in CPG.” Co-presented by Naturally New York and Naturally NorCal, the webinar featured the expertise of these leading investors from across the nation:
Arthur Chow, S2G Investments
Paul Mariani, Mesirow
Jason Mercer, Cleveland Avenue
Mollye Santulli, Springdale Ventures
Eric Schnell, Beyond Brands
Wayne Wu, VMG Partners
Slama, who served as moderator of the panel, opened by laying out the theme of the webinar.
“We are so excited to report about the shift in funding for emerging natural products brands,” Slama said. “In the past few years, economic disruptions were followed by higher interest rates, which severely tightened the availability investment capital. Fortunately, the growth and promise of our industry, combined with some large-scale exits and other factors, have inspired new funds to be deployed in natural products.”
Mariani — a Naturally Chicago Board member — prefaced the panel discussion with a presentation about the CPG investment landscape.
“In a nutshell, we believe we've entered a very unique window of heightened M & A [mergers and acquisitions] opportunity across the CPG sector…,” Mariani said. “We're seeing a convergence of pent-up demand and strategic necessity.”
He described “a powerful asymmetry for early-stage [company] investors, the ability to really enter at structurally attractive valuations and, frankly, the potential to exit into a rebounding M & A environment as strategic appetite re-accelerates.”
Mariani noted that investors, while their interest in CPG is rising, are not throwing caution into the wind, with the investment environment favoring young companies that already have a proven track record in the consumer marketplace.
“Scalable brands with loyal followings and DTC [direct to consumer] strength are definitely commanding clearer premiums, while less differentiated assets are fielding a much more muted response from the market,” Mariani said.
His prediction: “We really expect momentum to accelerate through 2025 as capital markets stabilize and our confidence improves… The brands that will lead are going to be those with clear scale, a clear consumer value proposition and operational discipline… and M & A readiness has really become a strategic advantage for all intents and purposes.”
After the panelists introduced themselves and their companies’ approach to CPG investing, Slama invited Wu to reflect on how the investment market has changed over his two decades in the sector, and why the pervasive gloom over the recent capital crunch ignores the fact that there are so many more investment options for early-stage companies than there were 20 years ago.
“There really wasn't any institutional capital in this space…,” Wu said. “So how did people fund businesses back then? The number of times I've seen [founders] mortgage homes or they're raising from ‘friends and family’ or things of that nature. It was really pretty scrappy.”
Wu said the natural products CPG sector enjoyed its first big investment boom as the effects of the Great Recession waned, starting in 2012 and lasting until COVID. And despite the gloom over the recent retrenchments, Wu remains optimistic that there is fertile ground for CPG entrepreneurs seeking capital.
“I would venture to guess we're at one of the highest points still in history of committed capital dedicated to deploying” CPG companies,” Wu said.
Slama then asked a series of topical questions of the other panelists.
Mercer leads the Cleveland Avenue firm’s CAST US initiative aimed at bridging the capital and resource gap impacting Black, Latino and women entrepreneurs. Slama asked how the Trump administration’s attacks on diversity, equity and inclusion (DEI) have affected that program. Mercer responded, “It's been a huge impact,” then discussed how the quandary facing retailers at this moment reflects how complex this issue is in the consumer marketplace.
“I think there's a lot of research out around how Target —who leaned in pretty heavily on doing some diverse focus buying — their store traffic is down because they pulled back on it…,” Mercer said.
He continued, “It's just creating a tension where retailers and different large-scale buyers are saying… I don't want the government coming at me. If I don't cancel these programs, half the country is upset with me. But if do cancel these programs, half the country is upset me. And I think retailers don't know what to do.” Mercer added that in this uncertain environment, retailers are going to stick with tried-and-true products, disadvantaging new suppliers at least temporarily.
In the investment sense, though, Mercer said, the DEI issue is another chapter in an investment environment that always has been difficult for diverse entrepreneurs:
“I think it's only been an issue in that it's another obstacle. I think for investing, raising funds, is tough. For everyone, the data shows for folks that look like me, or women, it's even more difficult. So in a time like now where there's so much combativeness, it just becomes another issue where even if I have a great product, I'm have to defend this component of management. And that's just unfortunate.”
Santulli spoke to how Springdale Ventures addresses company valuations, a key determinant in whether firms invest or not. She said that her company looks at the investment candidate’s product quality and a number of metrics, such as the company’s sales velocity, customer repeat rate, number of store placements and cash flow management.
She then noted that profit margin has become an increasingly important metric: “That helps us inform how we think about evaluation for an early-stage business.” She added that while many businesses want to focus on their own forecasts for the year ahead, Springdale Ventures takes a deep dive into the companies’ performance over the previous 12 months as well.
Chow responded to Slama’s question about the benefits of early-stage companies attracting capital from long-term strategic investors.
Chow said this approach “can be a real accelerant to business development.” He added that while large companies “have a lot of resources, so everything from R & D, to understanding legal and getting help with patents, even to operationally,” some of S2G Investment’s companies “have been able to use strategics in a way of distribution and better warehousing. So there's a lot of aspects that they can bring that are positive.”
Schnell, the panel’s senior investor with more than two decades in the CPG sector, then provided a primer of what brands need to present in order to get an investor’s attention.
“Obviously there's going to be a great business plan, a great thesis. Hopefully they can prove their Category Captain status, maybe top three in a new subcategory… It's a compelling story.”
“You've got a solid business plan for five years to show the size of the prize to investors. And when I say size of the prize, I mean you should whether it's food or beverage or supplement, your five-year numbers should look something around $25 million. If it's zero to 10 million in five years, that's not as attractive to any real investor.”
“It's obviously going to be a national rollout at some period, probably year three, four… Get the margins in place… Raise as much money as you can, not quarter of a million, not half a million. Go for a million on the first round… Go big and go early. That's my number one recommendation for a seed round and a seed round strategy.”
This recap provides highlights of the conversation, but really only scratches the surface of the business-building ideas shared by the panelists. We invite you to click the button below to view the full recording of this informative and engaging discussion.