As retail disruption increasingly pushes the consumer-packaged goods industry into direct-to-consumer and ecommerce channels, new brands in the space are looking more and more like tech startups.
Blurring that distinction too much can be dangerous for both entrepreneurs and investors, according to Plexo Capital founding managing partner Lo Toney. Speaking at the Brandweek: Challenger Brands event in New York to Adweek CEO Jeff Litvack, Toney said venture capitalists too often expect the same kind of growth trajectory from a burgeoning CPG startup as they might from a digitally-based startup and will shower them with cash accordingly. But that can only lead to disappointment down the line.
“The financial structure is different, and the actual operating metrics for success are going to be much different,” Toney said. “The challenge comes when a tech VC looks at a CPG company like they would normally look at a tech company and then they load it up with too much cash at too high a valuation, and then the entrepreneur’s option for being able to have a successful exit are very limited.”
The flip-side benefit of that disparity is that CPGs should also face less pressure to rack up massive funding rounds.
“The benefit though is that if you look at most of the large-scale tech companies that have had a $500-million exit, they had to raise around $50 million to get to profitability,” Toney said. “You don’t really need that in the consumer product space.”
Plexo is an offshoot of Google Ventures that specializes in backing seed funds led by women and people of color as a limited partner and investing directly in some of their portfolio companies. Backers of the $50-million fund include Google Ventures, Intel Capital, Cisco Investments and the Royal Bank of Canada.
The driving thesis behind the fund is that women and minority investors, who are vastly underrepresented in the venture capital industry, bring to the table a unique perspective when it comes to surfacing up-and-coming startup prospects. Toney points to the recent sale of Walker & Company Brands, the parent company behind Bevel, a shaving brand for men of color, and of Form Beauty, a woman of color-focused hair care brand, as an example of how this kind of thinking can pay off.
Finding unique ideas in the CPG space can be tough in an environment where well-funded venture firms immediately pounce on any moderately successful concept with a bevy of imitators, Toney said.
“It seems like brands are coming out and making a big impact quickly, and I think it’s partially because competition happens so fast now. As soon as someone sees a glimmer of traction, you have all these copycats on the market,” Toney said. “This is also because VCs are flush with cash … and anyone that puts a shingle up seems to be able to raise $20 million in two months.”
In that cutthroat atmosphere, CPG brands need to know that there are big expectations that come with accepting any kind of VC cash. While CPGs often require less starting capital to get off the ground, investors are still looking for exponential returns.
“The main thing an entrepreneur should know—especially an entrepreneur that hasn’t taken venture capital before—is that once you take money from a VC, you’re signing up for a bigger outcome,” Toney said. “I think entrepreneurs have to think, ‘What are VCs in the business of?’ and VCs are in the business of taking a dollar down the line from their limited partners and investors and giving them $10 back.”
As for which fledgling CPG brand will get snapped up by a major corporation next, Toney sees potential in Brandless, a direct-to-consumer essentials company that has raised a total of $293 million.
“I think that there’s really something special happening there,” he noted.