Much has changed in the consumer startup market over the last couple of years. For one, SaaS enterprise investors who had dipped their toes into the consumer space are now starting to back away due to lower returns and high failure rates.
But venture funding isn’t the only way to grow a consumer brand and startup.
I recently sat down to discuss the consumer startup sector and alternatives to venture funding with Alexa Binns, Partner at Halogen Ventures, on Burkland’s Startup Success podcast.
We discussed some alternative financial avenues available to consumer startup founders, why it’s so important for CPG to have a firm grasp on margins and inventory, how to build a CPG brand, and how to properly pitch investors on not only the brand, but your business.
How Investment in Consumer Brands and Startups Has Changed
Back in 2014, VCs were just dipping their toes into consumer brands. And it’s no secret that those businesses that were once startups have become massive household names. Think of Dollar Shave Club, or Casper.
The thinking at the time was that when they cut out the retailer, the brand became more like a tech company—which meant it should have tech multiples. Over time, a new realization has set in – the margins that Facebook or Instagram take to reach customers are more or less the same as the margins that big-box retailers take.
The return these companies get today is in the 3-5x revenue range, which is great. But tech VCs in general, are looking for more like 20x. This difference in multiples explains why many VCs have started to pull back from consumer brands over time.
This difference in multiples explains why many VCs have started to pull back from consumer brands over time.
Of course, there continues to be a set of investors who have always funded consumer startups and love those three to five multiples and have never left. Those multiples are strong but not what your typical SaaS investor will see.
As a founder, this means you will either need to work with a VC firm that specializes in consumer startups or look at alternative funding for your startup’s early stages of growth. Using alternative funding early will allow you to prove your concept, product, and model and attract VC investment for later stages.
Alternative Financing Options for Consumer Startups
There are fantastic debt financing options as well as revenue financing for consumer startups.
Purchase Order Financing
A simple one is to have a Shopify store or an Amazon store. These “stores” offer a built-in program where they take a percentage of the sale as you sell it. This is purchase order financing. If you’re working with one of these retailers and have a purchase order, you can finance inventory using that purchase. Financing inventory is an excellent way to test your concept while you scale.
Generally, there is a bit of a cold start problem because, in CPG, your inventory costs require money upfront. Inventory management can make or break a consumer startup. Burkland has an inventory team that offers advice inventory management advice here.
Instant Lines of Credit
As you test your product and work out inventory and supply chain issues, you can also work with alternative sources of working capital which offer an instant line of credit, inventory financing or other working capital loans. These funders include Rho, Brex, Settle, Dwight Funding and even Flexport.
Aggregate Purchase Order Financing
There are also other sources of funding founders can use around their POs (purchase orders) to provide for working capital. It’s similar to the earlier example by Shopify and Amazon but on a much larger scale using your Purchase Orders in aggregate. These funders include Wayflyer, Ampla, Settle, Circle Up, Assembled Brands and potentially venture banks like SVB and Mercury. This gives you the flexibility with your vendors as your POS grows, and/or your direct sales online increase, you can then get access to more capital to grow. One advantage of having a fractional CFO is they can help you determine when and how to use debt financing.
Debt Financing Considerations
Using different types of debt financing can be a bit more time-consuming, and it requires more attention to the details of what this capital is actually costing you (and you’ll need to compare terms of different sources of capital). You don’t get a big check all at once as you do with equity. It’s more like managed growth with working capital, which requires a lot more financial management and attention to detail because it’s not about the big home run – it’s about growing without giving up incremental equity.
It’s about growing without giving up incremental equity.
Alexis agrees and believes debt financing is one of the most overlooked ways to build a brand. More and more consumer startup investors want their investments to be further along in proving their concept. This could mean as a founder, you may need to be willing to try some debt financing to do so.
For a consumer startup, it’s about growing incrementally, and debt can grow incrementally as you prove your product. CPG founders have to learn how to get comfortable with debt. Despite what you’ve been told, debt is your friend, not your enemy. Equity financing is a much higher-risk form of funding. The return the investor is expecting is very high, and you’re giving up a big chunk of your company.
You can then use equity financing for investments in marketing, hiring, and more product development.
Yet equity and debt play really nicely together. As both Alexis and I have seen, there is sort of a natural progression where they work well together. Many of these debt financing products are relatively new, but they allow you to gradually build and finance your inventory over time. You can then use equity financing for investments in marketing, hiring, and more product development.
Growing a CPG Brand Today
During our podcast conversation, Alexis also shared some advice on growing a CPG brand today. Alexis emphasized it is important to have a “secret sauce” with your product. Alexis recommends Kickstarter as an excellent way to vet your secret sauce and product offering. Kickstarter will tell you if you have the right marketing message and product that consumers are interested in putting dollars behind. Kickstarter will give you insight within six months if you should honestly put ten years of your life into your product. Alexis highly recommends Kickstarter – calling it an MVP for market testing and vetting your CPG product.
We also discussed the benefits of using a marketplace to build interest in your product and brand. Marketplaces—Amazon and Walmart.com are examples—attract a lot of potential buyers with their brands. They can help you build reach and word of mouth, collect strong product reviews, and potentially repeat customers. You also don’t have as many inventory challenges with a marketplace, and using a marketplace can help keep your margins low. On the other side, there are some disadvantages to using a marketplace. You are not collecting customer data for repeat purchases or direct marketing. Most importantly, you don’t own your sales process. Customers are more valuable if they buy directly from your website.
When you have proven your concept and are moving into more of the brand-building stage, using equity makes a lot of sense. Alexis shared some good advice for pitching equity investors during this stage, “In CPG, when you’re selling your product to consumers, focus on what makes your brand special. But when you’re pitching to an investor, they want to know what makes your business special. So use charts and graphs to demonstrate how you’ll take their capital and return it to them multiple times over.”
“In CPG, when you’re selling your product to consumers, focus on what makes your brand special. But when you’re pitching to an investor, they want to know what makes your business special.”
Excellent advice from Alexis. You can find more of Alexis’ advice and more of our conversation on financing consumer startups by listening to our discussion here.