The Startup CPG Podcast

Daniel Faierman
In order to build brand awareness that ultimately is going to like drive velocities, like a lot of it is going to take place on social media. I think there's a huge difference between spending a ton on paid media, especially if you're not a DTC focused brand in terms of your sales channel, and like building content for the purpose of like driving velocities on shelf. And so it is important, like we like to look at like, you know, like classic social media metrics and we'll audit like the accounts TikTok and like the Instagram. I think it's something though that like, over time can improve if the right talent and agency partners are put in place.

00:45
Daniel Faierman
Like in the seed phase, it would be like pretty hard to already have 100,000 followers or like all these viral TikTok videos like over like a year's period after launch. And so like we want signs that like the brand can sometimes generate organic virality, that they have a serious focus on social.

01:04
Daniel Scharff
Welcome everyone, to the Startup CPG podcast. Today we are diving into the world of early stage CPG investing with Daniel Fairman from Habitat Partners, which is one of the relatively few VCs out there that actually writes checks for early stage CPG brands. You've probably heard them mentioned as part of the family of the legendary Red Antler branding agency. And today we're talking all about Habitat. What kinds of investments they make and what do they look for in a brand. What are some fundraising tips and red flags for Daniel? What are common valuation multiples that he likes to see? And Daniel even drops the names of some other early stage VCs the founders should have on their radar. So get your notepad out and your headphones in. Here we go. All right, welcome to the podcast, everybody. We've got our friend Daniel here today.

01:49
Daniel Scharff
Daniel, do you mind just kicking us off with an intro about you and Habitat Partners?

01:54
Daniel Faierman
Yeah, absolutely. Thanks so much for having me. Big fan of startup cpg. I got started in the CPG industry in big CPG enterprise. I was at PepsiCo, focused on corporate finance at a time when we bought this business called Kavita Kombucha business. Eventually worked at Denone, the dairy giant was managing their water business called Evian that everyone probably knows. Then eventually went to AB InBev where I got more involved on the brand side with kind of brand strategy, projects, marketing and then innovation with a focus on their global brand portfolio. Budweiser, Corona, Stella, Michelob Ultra. So had a really great cross functional kind of operating experience within CPG at the time, you know, AB InBev was getting very excited about kind of these emerging disruptive CPG brands that were, you know, taking on the big CPG enterprises and their brand portfolios.

02:48
Daniel Faierman
Wanted to really be closer to that ecosystem and had the opportunity to work with a fund called Selva Ventures for about a year before business school. Stayed on part time during business school, went and did my MBA over at Stanford and really doubled down on just VC and the whole Silicon Valley scene and learning the ins and outs of the industry after my Selva experience and also got a little more exposure to technology but knew that I kind of wanted to come back out of Stanford and really double down on venture again. And yeah, I had been co invested in a brand or two, a company or two with the current fund I'm at called Habitat Partners. They were looking for someone who could really lead their CPG practice as well as invest in B2B software that kind of touches consumer brands.

03:32
Daniel Faierman
And so it was a really kind of natural fit. And then to give a little background on Habitat Partners, were spun out of a creative agency that's been around since 2007, servicing the startup ecosystem called Red Antler. Red Antler for many years was taking equity for services positions within a handful of their clients. And that eventually graduated to a corporate venture capital strategy where were writing 50 to 100k checks into our most promising clients. Eventually we had startups that were non Red Antler clients coming to us, just excited to have us on their cap table. And so my teammates really built out this kind of investing track record through the lens of Red Antler.

04:09
Daniel Faierman
You know, we had this unique ability to have a creative point of view balanced out with just years of experience working with early stage brands in a lot of capacities. And so leveraging that track record, we ended up spinning out Habitat Partners at the end of 2021, which is our fund, one with outside capital. And so yeah, we've been deploying that since the beginning of 2022, have invested in 44 businesses across consumer brand and technology landscape. I think we have about 20 consumer brand portfolio companies. And yeah, we are kind of a seed stage investor. We typically invest when companies are anywhere between 2 to 7 million in revenue. We also do a few pre launches like we've done three pre launch investments in the CPG space over the last year and a half.

04:52
Daniel Faierman
But I would say yeah, our sweet spot is a 500k check on average. We can go up a bit or down a bit in the seed stage. And yeah, we love food and personal care and beauty probably the most. We also still look at beverage, but food has kind of been within kind of the realm, one of our more active spaces alongside our personal care and beauty strategy.

05:12
Daniel Scharff
All right, and I see a bunch of familiar brands to our community in your portfolio. Zero Acre, Mezcla, Happy Wolf, ao, the condiments brand that just launched kind of recently with a lot of support. So overall, just because you do invest in both CPG as well as some of the B2B stuff, what are you telling early stage founders right now about fundraising if you're just giving them advice on it? And is it any different for the B2B companies?

05:42
Daniel Faierman
Yeah, that's a good question. So I think, like, they're very different kind of diligence kind of approaches. And generally, I'll just say this on the B2B software side, right? Like, you know, in the seed stage there's just very minimal traction. It's very much an idea with maybe a few customers and a founder who we just have a lot of belief in and like, the way we disagree with the way he or she sees the future. I think what's kind of different about like a B2B SaaS business compared to like this CPG business is just like the variable costs, right, on the CPG side are like, very material in the early days. Whereas, like these B2B SaaS businesses, while they may be burning money to like, drive growth and build their product, like, the gross margins aren't usually something that like, you're worried about.

06:28
Daniel Faierman
And so, like, my biggest piece of advice and probably the biggest reason, like, why we pass on a lot of early stage deals is just because the gross margins aren't intact from day one. And as someone who has at times flirted with like, launching my own consumer brand, I can say that, like, you know, there's economies of scale to be captured that enhance gross margin over time. But if the fundamental gross margins aren't in place from day one, it's just not something that can easily be fixed over time. And you know, I think strategics in general, like, almost value gross margins more than they even do EBITDA generation. Like, of course they want to buy profitable businesses. But you think about what strategics do, right?

07:10
Daniel Faierman
Like, they acquire businesses, they find efficiencies within the OPEX lines and then they extract more EBITDA as a result. But it's very hard for them to take a product as a bad gross margin and like, improve it without like, deteriorating the product quality. The product experience and so far and so on. And so you know, they want to inherit brands that have the gross margins intact where they can extract synergies below the gross margin line. And so that's why it's just, it's so important to have those intact as like a first step in terms of fundraising advice. And you know, even if you're pre launch, right. Like we have the ability to see the coman contracts and where you're going to price the business in terms of selling to your distributors or direct if it's to retail.

07:50
Daniel Faierman
And yeah, I think having those intact first and foremost is the biggest thing. And then I think the second thing is you can raise a small angel family friend round and really come to institutions for the first time with some kind of traction story either surrounding velocities, online sales, repeat purchase rate with like six months of data. I think like the more traction you have, the more likely you are to actually get an institution to take you seriously. And I think there's only a really a handful of like institutions within the space that will really look at these early stage opportunities seriously. And so if you want to go to a broader group of institutions, you just throw the bar. To have traction is just, it's somewhat high.

08:34
Daniel Faierman
And so I mean we, like I said, we look at pre launch businesses and businesses that are doing 2 million revenue but like I wouldn't say there's many of us. And so you know, to your extent that you grow more slowly but you make every dollar last and you're able to gain more traction metrics, I think it's crucial right now just given like the dearth of capital in the earliest space.

08:54
Daniel Scharff
Yeah, it's interesting to hear how you talk about the strategics and you know, I think you know a lot more about this than I do. But I always thought about it as they are going to know if they acquire you, they're going to take over your manufacturing because they do a lot of their own manufacturing at a fraction of the cost. And so they're going to get your cogs down to like a third or something. But it sounds like for you that's actually really not the case. Maybe just because when you're investing they're going to have to run on their current cogs for a long time. Or maybe that's not really as prevalent as I would have assumed it was. What do you think?

09:29
Daniel Faierman
I think it varies by strategic and by category. Right. Like I think for the most part like you know, if Hershey acquires Lesser Evil and Hershey already has Skinny Pop that they're, they've put tons of capacity into manufacture and it just requires them to use organic ingredients and Himalayan salt. I think they're obviously going to be able to absorb like a brand like that and scale manufacturing in house once Lesser Evils manufacturing facilities reach capacity. But then I think there's also like counter examples where like the product is really difficult to make and the complexity surrounding like vertically integrating the manufacturing process within the house of the strategic is much more difficult.

10:10
Daniel Faierman
And I also just think like what we've seen too is like you've seen these stories of founders buying back brands because after strategic buys that they do such bad merchandising and producing it. Like they try to make all these changes cut corners on cogs. So I think the writing on the wall is like it's very risky to make formulation changes after you acquire business if like ultimately consumers were delighted by the prior formulation. And so that's why I wholeheartedly believe there's not that much room in cogs. Like maybe there is a couple points of margin based off like you know, just like the quality of machinery they have, whatever it is. But I really think where the synergies occur is below that gross profit line. And so that's why I believe getting gross margin intact early is crucial.

10:51
Daniel Scharff
So you mentioned you've done a couple pre launch investments. What does it take to get Daniel and the Habitat team on board for your pre launch journey?

11:00
Daniel Faierman
Yeah, it's funny too because I, I feel like I, you know, I'm very open to saying that we've done pre launch deals and I think as a result now we're just getting beyond bombarded with like opportunities in the pre launch which like is exciting but it's like also a little honestly overwhelming with like being a two person team. But yeah, so for me there has to be some kind of distribution moat where I'm like, wow, they really have some kind of unfair advantage for how they're going to distribute this product in terms of acceleration or there's so much differentiation. This is something the market has never seen and I think it has a ton of potential for product market fit. It usually falls into one of those two buckets and hopefully there's a little bit of both. I think with AO as an example.

11:44
Daniel Faierman
Molly's a very authentic macro influencer that we felt like was an amazing fit for the brand. And obviously that accelerates kind of like online distribution when you go to launch as well as Brand awareness. I think on top of that, like mayonnaise has seen very little innovation, candidly. Sure there was Sir Kensington's and there's New Primal, but like there's very few companies that have built like incredible mayonnaise brands over time. And it just felt like it was a very disruptible space. Obviously Dukes we saw exited over the last year, but like outside of those few brands I just mentioned, it just doesn't seem like a space where like a high quality brand has really been built. And so in terms of like disruption and differentiation potential, we also felt like there was a huge gap on that side of the coin.

12:27
Daniel Faierman
And then if you take those two things and you wholeheartedly believe the founder is n of 1 and incredible, and we believe David is like, he has such a diverse background of experience as a Whole Foods buyer, but then also as a leader at Citi Capital Ops Group. Take those three things together. Like that is kind of the formula that gets us excited about pre launch. But like, if it's just like a typical product going into a category that already has a bunch of competitors that doesn't have like some kind of like really strong angle to distribution, it's. It's really hard to get us over the line. And so that's why I still think we're doing mostly seed deals. But occasionally. Right. Like we'll do a pre launch if we feel those three variables are potentially intact.

13:11
Daniel Scharff
Okay. So that's pretty interesting. Otherwise you're going to want to see a little bit of traction. Probably means that they've gone out and raised a little bit of money at that point.

13:20
Daniel Faierman
Yeah, they've often raised family and friends. Angel round, maybe a small institution. We might be one of the first institutions to invest in the business in the seed round. I think what's cool is I still feel like we're one of the few that's even doing seeds pretty commonly because everyone still feels like they've moved to the Series A plus phase. So I do still feel like we have like a differentiated strategy even being in seed, even if we're not like really commonly doing the pre launch stuff.

13:48
Daniel Scharff
So would you take your own advice if you were launching that product of yours at some point where you would go and really just try to do a kind of angel round, like friends and family, to get to the point where you could approach someone like yourself for a broader investment or, you know, what are you. Yeah. Is that what you would be telling founders now?

14:06
Daniel Faierman
Yeah. I think you've got to feel confident that you can get angel and FNF money in the earliest days. Otherwise it's just almost impossible. And like, I also think, like, and I'll just be totally transparent, like in business school, I was very seriously testing a concept in the dairy space and, you know, I raised a little bit of money for it just to do like the R and D piece. And we came away through the R and D piece with like a great prototype, but also with like a margin structure that wasn't viable. And I immediately shut it down.

14:36
Daniel Faierman
I was just like, if these, if we're only in like the teens on like gross margins and like, there's potential for this to even be worse if, you know, if we don't have like volume scale up over the next year, like, this just doesn't make sense. So, like, I also think there's like a need for a little bit of humility surrounding, like, if you don't have like, even close to good gross margins, when you're like trying to prototype your product, like, you probably shouldn't move forward, it's probably too risky. And then you risk wasting capital from family and friends, which can be a little bit painful. So, yeah, that's again, why I just think gross margin kind of gives you the answer on the wall.

15:10
Daniel Scharff
So it's pretty interesting to hear the things that you care about most. If you're looking at an early stage founder or product. I'm not hearing you talk a lot about their revenue projection, which, like, for me, when I see it from an early brand, I'm like, okay, like, you.

15:22
Daniel Faierman
Don'T, you don't know.

15:23
Daniel Scharff
It's very hard to do that at an early stage. Yeah, it sounds like you're not even probably going to focus too much on what they tell you they're going to make. Year one, two, three. At that stage, you're more just like, okay, how good is this product? What's the moat? What's the margins like? Do you have a shot here?

15:39
Daniel Faierman
Yeah, I mean, in the prelaunch phase for sure. I think there's a wide array of KPIs for the seed phase that I haven't talked about beyond gross margins, which I'm happy to talk through. But yes, in the prelaunch phase, that's definitely right.

15:50
Daniel Scharff
Okay, yeah, let's get into it. So what are some of those KPIs that you're going to look at later on?

15:54
Daniel Faierman
Yeah, yeah. So in the seed phase, like, by then we'd hope that you're in a few legitimate retailers. Obviously we don't expect you to be national at like all the big names, but like in a few regions maybe you're in Whole Foods, maybe you're in Wegmans, maybe you're in agb. And so we do look really closely at Velocities, units per store, per week, per sku. We'll benchmark that against somewhat competitive brands and ideally in the same category just to see how like you're playing against other startups in your category as well as other incumbents that have been there for many years.

16:28
Daniel Faierman
And like the expectation certainly isn't that you'd beating the incumbents, but like the expectation is that like you're one of the superior like new brands in terms of velocity and like you're, you know, you're on your way to hopefully getting to a velocity level that will eventually match an incumbent. I think number two would just be like if you do have a D2C component to your business, how are the retention rates? Over a 12 month period, we're hoping to see at least 30% of buyers repurchasing within those repurchase cohorts.

17:00
Daniel Faierman
We like to also break it down by like who's repurchasing more than once, more than twice, more than three times because we tend to find there's this pattern where a online buyer will repurchase something once because they have it on subscription and often churn after that second purchase because they don't really love it. It's just kind of like they signed up for the subscription, they had it once at it twice. Okay, like now it's time to get rid of this. And so seeing like what we call power buyers as a share of repurchasers is like a big KPI for us. Like we like to see a solid portion of what we call power buyers within the repurchase cohorts.

17:35
Daniel Faierman
I think number three is just like, we'll do analysis on competitive landscape very simply and just like look at like kind of differentiation points and like why this brand is going to like be a superior offering to a consumer compared to the competitive landscape. We talked about gross margins and then I think related to gross margins is just like overall capital efficiency. So like how much capital has been burned compared to how much revenue has been generated. And, and B2B SAS, that's kind of called a burn multiple, you know, and CPG is more just like feeling out if you know the company is burning reasonable amounts of money to generate the revenue that they're Generating. And then I think the last metric that I'm personally obsessed with is called mer.

18:18
Daniel Faierman
It's basically revenue divided by marketing spend and it's basically showing like for every dollar of marketing that you invest, how much revenue are you able to generate? And so brands that are incredibly talented in terms of generating great content and organic virality tend to have really good mers. And brands that like aren't as good as generating organic virality tend to have bad mers. And so I think in the earlier, earliest days we're trying to be as capital efficient as possible. Like being able to generate organic virality is really important. And that metric typically gives a sense as to like the talent surrounding that effort.

18:51
Daniel Scharff
How much, speaking of virality and online presence, how much do you actually care about a growing brand's presence on social, all of that stuff if they aren't primarily a dtc?

19:03
Daniel Faierman
I love this, I love that question. It's honestly a phenomenal question and it's really timely. So like we care because in order to build brand awareness that ultimately is going to like drive velocities, like a lot of it is going to take place on social media. I think there's a huge difference between spending a ton on paid media, especially if you're not a DTC focused brand in terms of your sales channel and like building content for the purpose of like driving velocities on shelf. And so it is important like we like to look at like, you know, like classic social media metrics and we'll audit like the TikTok and like the Instagram. I think it's something though that like over time can improve if the right talent and agency partners are put in place.

19:47
Daniel Faierman
Like in the seed phase, it would be like pretty hard to already have a hundred thousand followers or like all these viral TikTok videos like over like a year's period after launch. And so like we want signs that like the brand can sometimes generate organic virality, that they have a serious focus on social media that they're thinking about like how they want to like build brand awareness in the future and they have a strategy to do so. But like, I wouldn't say that like I need to feel like they're just like the best social media marketers in the world in the seed phase. I just need to feel confident that they know how important it is and like they're going to put kind of a plan in place to eventually grow brand awareness in an effective way.

20:25
Daniel Faierman
I think like what's interesting right now is just talking more about like channel strategy is. We've seen, I don't know, we've seen such an interesting story surrounding dtc. Like you had this like ATT update from Apple that made it extremely hard to like attribute and target accurately. It felt kind of like DTC was going to fall apart a little bit and it was much more difficult. I think what's happened is the pressure on like creative content quality is like all of a sudden very high because obviously like media targeting is much more difficult and as a result CACs are more challenged. And so I think what's cool is there's brands that are still bucking the trend and growing rapidly on D2C.

21:03
Daniel Faierman
Like we've seen two brands raise money at over $500 million valuations that are predominantly D to C and have kind of experienced hyper growth. And so I think honestly what that means, and it's probably not the best thing for entrepreneurs is just that if we're going to bet on a brand that's not omnichannel, which honestly isn't our preference, we like omnichannel brands that have retail distribution because we know in the end strategics are going to want to see retail distribution most of the time. It just means that if you're going to do D2C, your growth and your capital efficiency have to be pretty amazing. Because we've seen now a couple examples of these founders that are hyper growth B2C, not burning insane amounts of cash and are having pretty solid retention in LTVs.

21:49
Daniel Faierman
And so yeah, I mean it's almost like a way the hardest DTC environment ever for founders. Not only because of this ATT update, but also because there are examples of people bucking that trend and doing really well. And so it's like as an investor I'm kind of like huh, like if that brand was able to get to a hundred million dollar run rate in two years, like why should my bar be low for like D2C brands that are coming to me? But yeah, I'm kind of rambling but just like thoughts that I've had lately with the recent developments of some of these crazy rounds for a few D2C native brands.

22:19
Daniel Scharff
Yeah, it's interesting to hear just because I think a lot about also where we're all going to be shopping in 5, 10, 15, 20 years. Yeah, you know, not that necessarily brands need to 100 think about that and where they're investing their resources now and which channels they want to grow in. But I also do think about it because in my journey as like a beverage founder, I feel like we wasted a lot of money, honestly, trying to put together a nice Instagram that never actually probably drove people into a store to buy our product because it wasn't even available a lot of places. And you know, D2C is not really that helpful for a heavy product like that.

22:53
Daniel Faierman
Yeah, I think it's about knowing, right, like where you're going to sell most effectively, where your consumer is and like where your economics work. And like, I mean, just to give an example, in our portfolio, Mezcla, the protein bar, like they're very heavy in retail. They've literally barely ever spent a dollar on paid media, like literally ever. I think they've done a decent job building some brand awareness even though they've never spent a dollar on paid media. They've just invested a huge portion of their opex and ensuring that like velocities are being driven in retail. And that's been the right strategy for them. Do I think over time they need to continue to build like brand awareness as they go into more conventional retailers at scale? Like, absolutely, they know that.

23:33
Daniel Faierman
But for them, as an example, it's made sense for them to like have a very low investment in like traditional paid media online because it's just not a, a huge focus. It's not where they're consumer is. And they built a nice Amazon business but DTC never like made sense for them.

23:49
Daniel Scharff
So we talked a lot about some of the stuff you really like to see what are some huge mistakes that someone could make right now sending you a message on LinkedIn or into your email inbox of just like, oh, that's immediately immediate disqualification.

24:04
Daniel Faierman
It's really funny. I actually sent out a post this morning. I have a newsletter called Term Sheet Pitfalls. It's term sheet pitfalls, beehive.com or you can grab it on my LinkedIn Prof. And I literally wrote a post this morning that I sent out called four Fundraising don'ts. And it was four principles that like, I just would say irk me. Like, it doesn't mean it's a guarantee that I'm going to pass, but like four things that like, I don't really like to see. And so I guess I can just list them off here for those who aren't subscribed to the newsletter.

24:33
Daniel Faierman
But the first thing was like over FOMO ing me, like I have founders who sometimes hop on calls and they're kind of like, yeah, like we just signed this angel yesterday and like we have like a term sheet and like that's how they start the call. And, like, I actually believe, like, it's. It's totally appropriate to update me on your round dynamic at, like, the end of a call. And, like, if you have, like, leads fighting for the round, that's. That's cool. Like, I respect that. That's awesome. But to, like, start a relationship with that as, like, your opening to me feels like you don't really, like, care that much about telling me about your business. You don't really respect my process. And so I really encourage founders to, like, spend the first 20 minutes of a call, no matter what.

25:16
Daniel Faierman
Like, getting to know the investor, sharing your story. Like, really going into, like, why this product and concept needs to exist, like, what the future looks like. And then at the end of the call, it's totally fair game to be like, hey, like, we've only got 500k left. We're, you know, we're moving relatively quickly. We'd love to have you involved, but, like, respect your process and, like, that's all it has to be.

25:33
Daniel Scharff
That's pretty interesting to hear you talk about because, you know, there are some things in this life you just have no idea when you're walking into it as a founder or just, you know, in a conversation. You don't know what their hot buttons are. Like. I could definitely see myself doing that because I had been having a really tough time getting funding, and then all of a sudden, I got angel on board, and then I'm just so excited about it. I'm like, great, let's talk. Oh, my God, this is so good. We've got, like, a great, you know, not realizing how you're going to interpret that. So that's a really good.

26:02
Daniel Faierman
It's way more common on the tech side than it is on the CPG side. Like, the AI tech founders are, like, you know, fomoing the crap out of me all the time, but I'll never FOMO Invest, and I don't think most sophisticated investors will. So while it's nice to hear that, like, you have fundraising traction, I want to, like, get excited about your business first and foremost. I'll go through this a little more quickly. But the second one was, like, talking about who instead of what. And a friend of mine, Brian Sugar, dropped a post on this the other week.

26:29
Daniel Faierman
But it's like, what we found are, like, founders who spend a lot of time talking about, like, who they know that's, like, impressive versus, like, their business and, like, what they're doing as, like, a primary, like, subject is it tends to be like founders who are kind of like in it for the wrong reasons. And so I don't know, it's one thing to be careful of is just like over name dropping people as a means of like trying to prove your credibility. It kind of comes off as like a little bit fake. So that was like number two. Number three. What was number three. Oh, number three. This is like a weird one. So I get asked all the time by founders that I pass on to make other investor intros for them.

27:07
Daniel Faierman
And like, I do it because, like, I want to support every founder as much as possible, even if we pass, because I just love the ecosystem. But the truth is, like, anyone I pass on, if I like enter them to another investor, that investor is going to want to know why I passed. And I'm going to be honest as to why I passed because, like, those relationships with these other investors are important. They go back. And so you're immediately putting yourself at a disadvantage as a founder because all of a sudden you're meeting this new investor that I introduced you to who already knows something that I saw in your business that I didn't like. And so I'm really like, I always push founders.

27:39
Daniel Faierman
I'm like, if you can get interest from people who have already invested in you or have no, like bias into your business, that's positive or negative just because, like, you know, word travels. And if I'm, if I pass on you And I'm telling 10 investors, like here, hey, you want to meet this person? I pass. Because reason X, it's just like not a good way to like set up like a new intro call with an investor, in my opinion.

28:01
Daniel Scharff
And you've usually shared that back with the brand as well, the reason that you didn't invest, right?

28:06
Daniel Faierman
Yeah, I usually try to give feedback. It's not always super detailed feedback, but like, I do try to give at least like one to two, like objective reasons like for why I felt like I didn't invest. And then, you know, someone's probably like, oh, well, then will you intro me to three or four of your Kona? I'm like, I can, but I don't think it's in your best interest to get them that way.

28:25
Daniel Scharff
And I'm who let's just because we're on this topic, can you just name drop a couple funds that you think are also good to be on people's radars, let's say, for the kind of earliest stages, and then maybe that'll save you from doing, having to do the Intros if people just 100.

28:39
Daniel Faierman
So we've co invested recently with Willow Growth Partners. They're extremely dedicated seed investors. They're investors in Googles, they like to invest in food and beverage. They're investors into swa. They're very active. They have a lot of dry powder. They're great. Another fund we really like in New York is called Collaborative Fund. They're investors in One Trick Pony. They're investors in Hot Girl Pickles. They will go very early. They're the earliest investors in Olipop actually the earliest of anyone institutionally. So they're amazing. We love that team. Those are like the two, they're simple Food Ventures who we also have here in New York. We did AO with them. They like to go incredibly early. They're awesome to work with Midnight Venture Partners, another fund that goes quite early.

29:21
Daniel Faierman
And then yeah, I'd say like those are some of the main kind of like institutional subject suspects. And then of course we have the Angel Group who we also have co invested in with twice. They go very early as well. I'd say those are like a few of the main ones that, that are willing to go like quite early.

29:37
Daniel Scharff
So it's a small world of those early stages.

29:40
Daniel Faierman
It is a small world. I mean I was making a slide, kind of mapping the investor landscape the other day of like who really does seed and precede and CPG and it's, it's a small group for sure.

29:51
Daniel Scharff
I want to see that slide.

29:52
Daniel Faierman
Yeah, yeah, I can.

29:54
Daniel Scharff
Yeah. It sounds like a small inner circle. So that puts a lot of context into the thing that you just said about like hey, you know, do you want really for those six people the intro to come from me who just saw something about your business that I didn't like and I'm one of the people who knows the most about investing at this stage. Or maybe do you want to go out and get another founder who knows them who really likes your product to come in hot on the intro, you know, super warm intro.

30:19
Daniel Faierman
Yeah, of course. I mean you definitely want to use your existing investors as much as possible. And then if you can find like neutral third party resource, like maybe you have a fractional CFO who knows some investors. Right. But like yeah, neutral third parties are your own investors are typically I think the best interests for sure.

30:36
Daniel Scharff
I wonder, I wonder if you remember Daniel, like one incredible data point or one slide that you've seen about a brand that really just solidified it in your mind of like yes, this Is one that I absolutely need to invest in. Gave yourself your own FOMO by thinking, like, yeah, if they can actually hit this piece of info, then we just. They really have a shot. We need to get our dollars in there.

31:01
Daniel Faierman
Yeah, one of. Oh, I wanted to share one more thing on the last question very quickly, then I'll answer this one. The fourth fundraising don't. Is don't exaggerate objectively audible data. That was number four. Like, if you're going to tell me that you, like, have this huge launch coming up, but it's like a regional launch in 12 stores, that's going to feel misleading to me. Just be like, extremely honest about objective data points. Because if. If I find that, like, they're being stretched, then I'll like, doubt your integrity. And integrity, to me is like one of the most important qualities in a founder investor relationship. That was.

31:34
Daniel Scharff
Totally agree on that point. I actually, because I'm a very deep data guy, you know, I spent years being the one who pulls the data and tells it strategically. And I see just founders telling a story where I'm like, I don't know if everyone in here knows this, but I can see the data and where you're pulling it from. And that is total bs. What you're.

31:52
Daniel Faierman
Right now we have the best velocities in the entire category, but we're only in Fred Meyer, and we have the best velocities in Fred Meyer. You know, so it's just like, you gotta be careful what you say. And I just.

32:03
Daniel Scharff
There's a fine line. Yeah. Between like, you know, lobbying for yourself and just almost kind of pushing that line of, you know, being ethical or just trying to pull one over on people. And like, you look at the footnote in the very bottom, and it's like, oh, like top two stores in their entire chain. We only use that.

32:22
Daniel Faierman
You always be careful because, like, that just, like, makes me doubt integrity and it's so important. Yeah. So let me go. Let me go to your question, which was like, one slide that, like, really got me over the line.

32:33
Daniel Scharff
I love one slide. One data point, you know, one. One anecdote.

32:37
Daniel Faierman
Yeah, I love, like, I can think of, like, a few things. Like, one, I love slides that show a company that's generated a ton of revenue off very little capital raised. Like that ratio. If you can do that in the early days, to me, that's like, unbelievably impressive. Like, there was a business we saw that had a slide that was like, lifetime. We've generated 22 million in revenue on 4 million in capital raised like that to me it was like, wow. Because that tells me is like you have really great gross margins, you're very capital efficient even below the gross margin line and like you're generating like real revenue. That to me was like a kind of a holy shit moment.

33:15
Daniel Scharff
That's pretty amazing because I remember hearing on Shark Tank once there was a beverage company and Mark Cuban saying, yeah, but to get to 50 in revenue, it's going to take you 50, it's going to take us 50 million into the business. And I'm not down for that journey.

33:28
Daniel Faierman
Yeah.

33:28
Daniel Scharff
What's like a great number? What's like an okay number that you'd be fine with?

33:33
Daniel Faierman
Yeah, I mean 3x is solid, especially in like the early days, like where like, it's just, you're operating at like minimum volume quantities and you're not really like, you know, having economies of scale come to play with your gross margin. Like, you know, the one that I just gave you was like a 6x almost or a 5x. It's very correlated though with gross margins. Right. Like we have supplement brands that we've seen that have 80% gross margins that are like a 10 to 1 that have like barely raised money. So it's like, it's almost very category dependent and gross margin dependent. But yeah, like if you can keep like a three to one, like that's pretty solid. If you're like really early days, like a two to one is like pretty good.

34:15
Daniel Faierman
But like three to one is great in the early days and then anywhere above there is like pretty solid.

34:19
Daniel Scharff
So.

34:20
Daniel Faierman
And.

34:20
Daniel Scharff
Cause we're talking about some different categories a little bit like supplements. You say that. I'm like, oh, okay, cool. Like people should launch a supplement brand because you can have good margins but like you're also talking about okay beverages, you're not investing in as much these days. Is that because you never liked beverages or because it takes so much to raise and the product quality is like it's so heavy to get out there or is it because it is so competitive now because of the very public success of Celsius and Poppy and Olipop that everybody is just coming for that space now with so much competition that there's all this noise?

34:50
Daniel Faierman
Yeah, I, I prefer capital efficient businesses that don't require a ton to raise to get to scale. That's just my preference. If you've seen like the exit sizes for Poppy and Aulani new, like they're massive and Ghosts like so Like, I guess the argument against what I'm saying is even if they burn money along the way and your investment gets diluted, you're going to be rewarded because the average outcome is bigger than like the capital efficient food or supplement business potentially. But I just think fundamentally there's a lot of risk and knowing that in order to scale you're going to have to raise a ton of capital because who knows if that will actually be feasible. Like, you know, certain people are great at fundraising, certain people aren't like certain, you know.

35:34
Daniel Faierman
So I would rather back a business that I know isn't going to be like handcuffed to the fact that they have to raise a ton of money to get to the finish line than invest in a business that while it might have a huge outcome, is going to have to raise like at least $50 million to have like the big outcome. Again, I get punished for that in some regards because like, if I would have seen Poppy, I probably would have passed and like I would have looked dumb. So, you know, but that's just my approach. And other investors are more like, let's invest in Lucky Energy. It could be the biggest energy drink ever. Even though it's going to require $60 million plus to get there, you know?

36:09
Daniel Scharff
Yeah, I think it's going to be an interesting one to watch just because I mean, beverages in general, so hot these days. But also, I don't know, I think we're going to see some interesting stuff happen with sales velocity on things like Celsius and you know what? Yeah, and yeah, all of this.

36:26
Daniel Faierman
Competition and I'm like, I have an unhealthy Celsius addiction. Honestly I don't drink it daily, but like whenever I have to do a long drive, it's like a treat for me because I get to have Celsius and I love it so much. It's a crazy product. I really am sad.

36:42
Daniel Scharff
So Daniel, you're people really want early stage investment. It sounds like there aren't so many places to get it, but you probably would tell founders you should do your due diligence on us too. Right? What are the kind of things that they should ask you before accepting an investment?

36:56
Daniel Faierman
Yeah, I mean, I think a few things. Like one, do you guys intend to follow on if you know, we're achieving solid performance and in line expectation wise with KPIs that we've kind of set for the business? I think certain funds have a very deliberate pro rata strategy where like they'll invest pro rata in like 50% of their businesses that are performing. Others like to place more bets. I'd say honestly we're more in because we go so early and there's so much risk. Like we probably spread our bets and then we're kind of pro ratting like in 25% of companies that we invest in. So that's just something to like consider. It's not necessarily like a great thing or a bad thing. It's just like a certain approach to venture investing.

37:36
Daniel Faierman
I think like, you know, number two is just like what is your kind of expectation surrounding information asymmetry? Obviously in a handful of our deals we have information rights. So there's like standard sets surrounding what the founder needs to share on like a quarterly basis. In certain cases we don't have information rights, but I think like ensuring that there's alignment between how there will be like formal communication between the founder investor is important because as a founder you may want to just be heads down and not like sending investor updates. As an investor, we may want you to send investor updates every quarter so we can have kind of conversations with RLP's surrounding how the business is doing. So setting that, you know, communication standard is number two. I think number three is like asking them where they've helped companies in the past.

38:18
Daniel Faierman
I think it's really hard to like at least on our end, like we help so many companies in such different ways. Like I'm helping one of our portfolio companies fundraise right now. In another case I introduced a portfolio companies to the Wegmans buyer like you know, and in a third case, JB and Emily from Red Antler are helping think through creative positioning for like a retail launch. Like we can help in such a wide variety of ways but I think it's just important as a founder to like ensure that, you know, a fund can kind of like help in ways that are interesting to you.

38:46
Daniel Faierman
I don't think there has to be like one kind of core area of expertise, but I think just like you know, ensuring that they can help checking that is truthful with founders within their portfolio through reference checks is kind of a third thing. And then I think number four, it's like kind of like the dinner date test. Like would we just enjoy like having a coffee together? Like will we enjoy working together? Will we enjoy interacting? Like no one wants to have an investor who they just like don't like and don't want to like have a beer with or coffee with. And so I think number four is just like, trying to feel out if it's someone that you would genuinely like, enjoy being friends with, irrespective if they were an investor in your company.

39:22
Daniel Faierman
Because I think life's too short and you should work with people that you genuinely enjoy being around.

39:27
Daniel Scharff
Oh, Daniel, One question that probably everybody has for you guys is about you and Red Antler. And does working with you mean that they're going to get some kind of attention from them or that even there's like, an expectation maybe at a later stage that they would work with Red Antler, obviously a really storied agency.

39:45
Daniel Faierman
Yeah, it's the golden question. We get it a lot. There's no expectations surrounding working with Red Antler at all. We have expert creatives that are more than happy to advise, have conversations on creative strategy. If you're making a packaging decision or you're working with another agency and you want, like, us to audit their work and give feedback, like, we'll do all of that for free. We were recently advising a company yesterday on, like, their media buying strategy by having them talk to, like, the head of media buying at Fat Earth, which is a company that Red Antler owns free of charge. So, like, we try to be helpful and leverage Red Antler when there's interest. At certain times, founders would come to us and be like, hey, we're doing this formal project. Like, we're briefing agencies. We'd love to potentially work with Red Antler.

40:29
Daniel Faierman
Like, what would a scope of work look like? And like, of course we'll scope it out. You know, in some cases give favorable pricing, and then if they want to work with us, they'll work with Red Antler. And that's awesome. And so that's like, we branded Happy Wolf Snacks pre launch, named it, did all of, like, the creative, and then we ended up investing in the business. So there's examples of that. And then there's other examples where it's like, we have done nothing formally for Mezcla. Like, Mezcla came to us and we love the business and the founder and we invested and we haven't done any formal work throughout Antler besides just, like, giving him advice. So it varies. It's case by case, but. But no formal expectations. We are able to give favorable pricing to our corcos.

41:07
Daniel Faierman
But, like, it's not like people are working for free on our portos or something like that.

41:10
Daniel Scharff
All right, okay, Just a couple last ones here to wrap us up. First one, valuations. Let's talk about it. What are you going to like to see what are you going to get angry if you see give some early brand some tips.

41:24
Daniel Faierman
Yeah, and shameless plug again. But check out the first post that we did in terms of pitfalls on valuation. It definitely is a good one. Yeah. So precede seed phase. So like you know, exit multiples are like a decent proxy for like what we kind of underwrite too. But like within food it's usually like two to three times, three and a half times sales. That's kind of what we're looking for. Within beauty it's more like 3 to like 4 to even 5x sales sometimes just because they tend to be more capital efficient businesses early on the gross margin profile. I mean in pre seed because there's no multiples to apply. Right.

41:57
Daniel Faierman
Like the business is pre revenue like for us like the base valuation is five posts but like often we're looking for like three to four posts and if it's like there's some kind of distribution mode that really gives an unfair advantage like maybe willing to go up to like six to seven to eight posts. But that's kind of the range within pre seed and then seed. Right. These businesses are often somewhere between like I said 2 to 7 million. That's where we feel like applying like a three time sales multiple is reasonably appropriate. You know, if they're doing 3 million revenue, 9 pre, 4 million revenue, 12 pre, something like that.

42:31
Daniel Scharff
All right, great. And last one for you here, Whitespace. What is it that you just have not been able to find out there? All of the pitches you're getting, all of the emails, all of the brands reaching out to you just haven't quite found that one thing that you're looking for. Whether it's because it's an attribute you're really interested in or a trend that you feel like you just haven't quite found the right solution for or an approach to branding design. What's out there? If someone has it, they should hit you up.

42:56
Daniel Faierman
Super healthy frozen meals. That is what I, I want to look we did talk to a company the other day but they're not raising money but just like protein dense, nutrient dense, like kind of like a better version of Kevin's which exited I think to Unilever. We're looking for that. We really think that like consumers like obviously want protein but they want it in a really convenient form factor which is why like protein bars have been so hot lately. But like they want it actually in like real form, real ingredients, nutrient dense. And so yeah like frozen meals that are high in protein, that can serve as a dinner that, like, are delicious. I can just go in the microwave.

43:32
Daniel Faierman
Obviously the meal kit services actually are pretty solid in some cases, but, like, we're looking for one that also just sits in the grocery store and delivers on like the macros and that consumers want and is super clean. So.

43:43
Daniel Scharff
All right, that is a hot tip for cold brands out there in the frozen land.

43:49
Daniel Faierman
It's hard because it's, you know, frozen is very capital intensive at the beginning and the margins are challenged. So it's also like, who can do it in a pretty capital efficient way. It's, it's a huge challenge.

43:58
Daniel Scharff
Awesome. Well, speaking of dinners, also, thank you for joining our recent founder dinner in New York where a lot of brands got to hear a lot of these tips personally. So anyone out there, if you check out our founder dinners, we like to do some surprise and delight guests, like having Daniel there. We also had John Lawson from Whole Foods at that recent one. We like to do that without telling anyone that they're coming. So there's no pressure. We just say bring your products. Definitely bring your products for this one. Got some VIPs coming, so thanks a lot.

44:24
Daniel Faierman
You had a good. It seemed like you had a pretty.

44:25
Daniel Scharff
Good time at that one.

44:26
Daniel Faierman
Yeah, I loved it. It was so fun. I've kept in touch with a few of the founders I met and I'm having copy with John in a couple weeks. So. Yeah, that's great.

44:33
Daniel Scharff
I love it. All right, and just one more time, can you remind everyone the newsletter?

44:38
Daniel Faierman
Yeah, I appreciate that. It's called Term Sheep Pitfalls. If you go to my LinkedIn Daniel Fairman. It's, it's under my bio, but also it's term sheep pitfalls beehive.com beehive spelled weird like the company beehive. But yeah, we've just passed 2,000 subs and we're growing and it's exciting stuff. So appreciate the support.

44:54
Daniel Scharff
Thanks a lot, my friend. Really appreciate your time and all of these insights. And I'm sure you will be getting even more overwhelmed with all of the outreach for that for these pre seed brands after this. So enjoy it. Thanks a lot.

45:07
Daniel Faierman
Thank you so much.

45:10
Daniel Scharff
All right, everybody, thank you so much for listening to our podcast. If you loved it, I would so appreciate it if you could leave us a review. You could do it right now. If you're an Apple podcast, you can scroll to the bottom of our Startup CPG podcast page and click on Write a Review. Leave your company name in there. I will try to read it out. If you're in Spotify, you can click on about and then the Star Rating icon. If you are a service provider that would like to appear on the Startup CPG podcast, you can email us at partnershipsartupcpg.com lastly, if you found yourself grooving along to the Music It Is My Band, you can visit our website and listen to more. It is super fantastic. Thank you everybody. See you next time.