Investor Spotlight: Tyler Morgan, BFG Partners

Tyler Morgan
I think this conversation can be extrapolated to a lot of things. And like, you know, if. If I wanted to go on a date with someone, I think I'd be a lot more inclined to go on a date with someone that my friend said, hey, you should meet this person. I really like them. And I thinking, well, if my friend really likes this person and I like my friend, then chances are I'm going to have a lot better chance of getting along with this than a stranger on the Internet. That can be applied to businesses, right?

00:35
Tyler Morgan
I think if someone I respect sends me a deal or a founder that says, hey, this is too early for us, or this is out of stage or out of scope for us, but I was really impressed with this person and his or her knowledge of their own numbers and their company. A lot of that guesswork that we talked about earlier about whether a founder knows their business is kind of taken out. Right. And so that kind of first stage gate for us is we check the box.

01:02
Hannah Dittman
Hey, everybody. I'm Hannah Dittman, operations and finance correspondent at startup CPG and the founder of Ready Basics. As a former CPG investor, I'm especially excited to host this Investor Spotlight with Tyler Morgan from BFG Partners. If you've ever wondered what investors really look for when evaluating an early stage brand, this episode is for you, where we dig into the real mechanics of building and backing great consumer businesses. Tyler breaks down how founders should model their business, why it's critical to vet VCs just as much as they're vetting you, and the importance of having a clear vision and knowing how to communicate it. We also talk through contribution margin, the shifts happening in how strategics think about acquisitions, and a broader overview of diligence that every founder should understand before raising.

01:43
Hannah Dittman
Whether you're mapping out your financial model, thinking about your next capital raise, or just want a sharper lens on how top investors assess opportunities, Tyler brings an invaluable perspective you won't want to miss. Enjoy. Hey, everybody. Welcome back to the Startup CPG podcast. This is Hannah and today I'm here with Tyler Morgan. Tyler, welcome to the show.

02:07
Tyler Morgan
Thanks, Hannah. It's great to be here.

02:08
Hannah Dittman
Can you share your title, a brief background of your experience prior to BFG, and what led you to investing in the first place?

02:15
Tyler Morgan
Yeah, of course. Happy to tell you a little bit more about myself. My name is Tyler Morgan. I'm a principal at BFG Partners based here in Boulder, Colorado, and actually been with the fund since inception. So creeping up on 11 years now joined late 2014, when my founder, Tom Spear, was starting the fund and have been with the fund ever since, of course. But just to give you a little bit more background on myself, I actually had a very unconventional path to venture capital. We can get into it a little bit more if you want, but not a traditional finance background. My interest has always been in food. Studied urban and environmental policy at Occidental College in LA with a focus on food systems.

02:54
Tyler Morgan
So I wrote my thesis on getting better food into hospitals, did a lot of community justice work in kind of food deserts and things like that. Then after school found myself at a. Actually a bit of a biotech company called Microbiome Therapeutics. We were very early to the prebiotics game, arguably too early because that business is no longer around. But really cut my teeth doing some business development for them, raising some money for the business. So they were making medical foods and supplements for pre diabetic and diabetic patients using all grass ingredients. Polyphenols from blueberries, beta glucans from oats. So all the things that had become really popular ingredients now in prebiotic foods, you know, very kind of ahead of its time. Powdered, powdered drinks. So spent about three years there.

03:40
Tyler Morgan
And then as Tom, my founder, was starting the fund, had the opportunity to join BFG as really the first kind of employee outside the two founders.

03:50
Hannah Dittman
What an interesting background. You really have a very SME lens to investing, which I love and huge fan of your thesis. It is true. Hospital food, I think, still needs an upgrade. My mom has been in and out of the hospital most of my life and I am very familiar with it. I think it's the same as prison food. I feel like it might be the same company as distributing.

04:09
Tyler Morgan
That was almost 15 years ago now and not much has changed.

04:12
Hannah Dittman
Yeah. Oh my gosh. Well, I'm so excited to be chatting with you today and I know we have a lot to get into and I'm sure you'll have a lot of interesting perspectives on the food landscape. It would be great if you could provide an overview of BFG and walk us through some of your firm's investment criteria. I'd love to understand more about your stage focus and how you differentiate as a fund, your mandate, average check size, aum, all the nitty gritty things.

04:37
Tyler Morgan
Yeah, of course. So, as I mentioned, we've been around for a little more than a decade. At this point we're managing about 280 million across three funds, the most recent of which is about $120 million. Fund three spread across those three funds is just under 40 active investments. And our mandate is really across all fast moving consumable goods with a focus on food, beverage and dietary supplements. But we also touch personal care, beauty, pet, home goods and then something that's relatively unique within the consumer investing space is we do tech and enablement investing as well as tech enabled services that touch the consumer ecosystem in some way. So think tech enabled agencies as well as consumer SaaS businesses in the enablement space.

05:25
Tyler Morgan
So we're generally writing checks, I'd say like 3 to 10 million for our core positions and also have the ability to write 500k to million dollar checks into smaller seed stage positions. But generally we're looking at businesses across seed to series B and that translates for the most part for core positions. For businesses doing about 2 million to 50 million in trailing sales, there is leeway on either side of that for the right opportunities. I'd say seven of us on the team, most of us based in Colorado, including myself, one of my managing partners, Dayton is out in la and then Elizabeth Earle on our team is up in the Portland, Oregon area.

06:04
Hannah Dittman
Well, it sounds like you guys have plenty on your plates and I'm sure are very busy with a generalist mandate covering quite a wide stage focus. You know when you're seeking out companies currently, what are some current themes or concepts that are driving thesis in your search or in your initial vet?

06:24
Tyler Morgan
Yeah, you know we tend to think that our focus is fairly limited within the consumer ecosystem. We're fairly early stage. We don't do restaurants or apparel or some of like most hardware businesses. And because of that we truly believe that a good business can kind of come out of every category. So we have general theseses across certain trends or certain categories within the store. But we tend to be more opportunistic investors than thesis driven investors. We don't say we need to go meet every brand in the hydration space and make one or two bets. You know I think we educate ourselves on the hydration space and keep ourselves open to if an opportunity arises or if there is a business that we really love, we go out and seek it.

07:07
Tyler Morgan
But we don't have particular like mandates within a certain category or a certain trend. That said there are evergreen progressions within consumer that are cyclical, non cyclical, but you know, tend to be up and to the right when you think about how the general consumer is behaving and paying with their wallets and that's generally less sugar, more whole foods, a nice balance of meat and plant based. I think that's an interesting conversation given Maha and some of the changes that have gone on in the last kind of 18 months. But I think overall the trends remain the same and have for the last 20 years that better for you, ingredients, better for you, foods, less things you can't pronounce, less sugar, overall, more whole foods are always going to be in trend.

07:56
Tyler Morgan
And that, you know, encompasses things that you put in your body, but also skin care, color, cosmetics, things that you're putting on your body. And yeah, we've seen those trends play out across the categories that we've invested in.

08:07
Hannah Dittman
That's makes tons of sense. And I feel like sticking with consumer behavior as kind of your guiding light never leads you astray, I think. Yeah, there's a lot of interesting external factors going on right now that are playing into both spend in general, but also education from a consumer perspective. And there's just a lot going on per usual. I think it's always interesting being in cpg. I think we get our industry gets overlooked sometimes a little bit. But I feel like we've got the best pulse on everything that's touching anything in humanity because that all ends up trickling down into consumer behavior and how people are spending their money and living their lives.

08:44
Tyler Morgan
That's why I got into consumer investing in the first place. It's so fun to be able touch and feel and taste the things that we're investing in and, you know, speak to founders that are living it every day and get to go, you know, you're on your grocery shop, you see someone putting it in your basket. It's very different than, you know, tech investing where you're building the platform between your bank and your browser. It's just less tangible and things that, you know, I get to experience every day, which. Which is just always exciting.

09:11
Hannah Dittman
Yeah. Having a little bit of psychology lens to things, it makes it a lot of fun for me. How are you guys seeking out or learning about companies? Where are you coming across them organically, or what's your deal sourcing process typically like?

09:23
Tyler Morgan
Yeah, it's a great question. And deal sourcing is our lifeblood. And, you know, we take great pride. You know, we're seeing over 1200 unique deals a year. And that doesn't even count deals that we saw in the past that are kind of coming back to market. And so there's no shortage of interesting opportunities. Right. I think it's finding the right ones that get hard. But in terms of our pipeline and how we generate conversations with new Founders, the warm intros and inbounds is one thing. We can touch on that later. But there's the classic ways. You know, we're at most trade shows. I'm heading to Chicago for NACs in a couple weeks. We were always at Expo west and formerly Expo East. There was no utopia out here in Denver a couple weeks ago.

10:03
Tyler Morgan
So those ways, you know, were out talking to founders there, introductions from other funds. We. I keep a regular cadence of conversations with my peers that, you know, they're. Some of their companies might be coming to market and then, you know, I'm not too proud to say that I follow a lot of brands on Instagram and sometimes I slide into the DMs and often want to chat with founders. And, you know that works a surprising amount of times.

10:27
Hannah Dittman
Yeah, I'm sure. I feel like they're probably more than happy to get a dm. Like that makes their life a lot easier. You kind of looking, I guess, you know, organically on your own, what are some of the quick metrics that you guys are checking on? Like, are you going to the Amazon page and checking reviews? Like, if there was a short little checklist of things that you're looking at to see if it'll pique your interest or worth trying to reach out and get in touch with a company or worth a second look, you know, building a one pager, what are the things that you're really focused on?

10:56
Tyler Morgan
Yeah, I think that there's kind of outward metrics that I can try and understand before even speaking to a brand. And then metrics that we look at kind of once we're under the hood. And you know, I think consumer is so interesting because, you know, when there's genuine pull from the market, you know, we always say your brand or your product should be bought, not sold. And there's so many instances where things just start to work and you kind of can tell whether it's empty shelves at a grocery store or your friends talking about it, or you see countless people talking about it on social media.

11:29
Tyler Morgan
So we do a fair amount of like, social listening, whether it's Amazon reviews or trying to understand what like creators are talking about or just kind of what you see people putting in their carts at the grocery store. So, you know, there's a lot of that social listening that goes into it and, you know, we can get deeper into that. And then kind of once we're under the hood, it's much more about the kind of financial mechanics of the business. Right. You know, unlike tech Companies that are operating at 80 to 95% gross margins, like margin is so important. And you know, I'm not sure that some newer founders understand the importance of starting your brand with a viable gross margin. So I think margin is king for most of where these conversations start.

12:13
Tyler Morgan
And then just financial literacy and understanding how well are they keeping track of their finances. What does that look like? From gross to net, from net to cogs, from cogs to gross margin, from gross margin to contribution margin. And you know, there's benchmarking that we do, but it varies widely from category to category and from channel to channel. The most important thing I'm looking for is that the founder has a deep understanding of what those numbers are, even if they're not necessarily at the scale that we want to see yet, and which is understandable in some instances given how early we're looking at some of these businesses.

12:50
Hannah Dittman
That's really helpful and thank you for breaking it down so crisply and cleanly. When you're thinking about gross margin, and obviously this is so category independent and channel dependent, but when you're broad swath thinking about gross margin, what's kind of the typical ranges that make you comfortable with a business?

13:05
Tyler Morgan
Yeah, like again, these are kind of broad strokes, but you know, we love to see fully loaded gross margins and that's inclusive of logistics and freight out. For those of you wondering above 40% at scale, you know, I think 50% is awesome in some categories. It's really tough. Heavily commoditized categories like dairy ice cream is going to be really hard. It's frozen, it's going to be really hard to get there. But when we tend to think about these things, you know, were thinking, what does an eventual exit look like? And your potential strategic acquirer is going to want these products to be hopefully margin accretive to their existing businesses. And their existing businesses have succeeded on the back of really high gross margins and cheap ingredient costs for a long time. Cheap inputs.

13:51
Tyler Morgan
And so if you can have a brand that has cultural resonance and pull from the market and great margins, then you're just going to be a really attractive target to some of these strategic acquirers. But it's easier said than done.

14:03
Hannah Dittman
Yeah, it makes a lot of sense. I think a harder thing to do as a younger brand. It's definitely a little bit of a.

14:09
Tyler Morgan
Hat trick to add some nuance. You know, we also tend to think about it from a channel perspective. Right. We know we always love once we get involved in a business and kind of start to help shape their financial reporting. You know, we always encourage them to think about it on channel specific P Ls at the contribution margin level. Right. And so you have your kind of gross margin, your product margin, and below that your variable costs. And those are often channel dependent, whether it's your Amazon advertising costs, your direct to consumer direct advertising costs, and what does each channel margin look like on a contribution basis before general brand marketing and your fixed G and A. And we love to see, look, you know, these can balance them out.

14:52
Tyler Morgan
If you're spending heavily on direct to consumer because you're a very habitual product and your cohorts are such that you can get paid back in month two or month three as you're kind of scaling direct to consumer, then we can be okay with a contribution margin in that channel being a little bit lower. But if your Amazon contribution margin is really low, that's tougher for us to get behind because purchase intent is really high on Amazon. So if someone's going to Amazon and buying your product, you shouldn't have to advertise that much to get that person to spend on your product. So in general at scale we tend to see contribution margins on Amazon being a bit higher.

15:31
Tyler Morgan
And then there's channel like contribution margin at club like Costco, for example, your gross margins are going to be lower, but in general you're paying less trade to be at Costco. So from a contribution margin basis and the scale and volume at which you're selling at Costco can add a lot of contribution margin to a business and make it really profitable. And so when you're thinking about the kind of spread of omnichannel businesses, which is something that we love to see, you know, not just a direct consumer business, not just a business that's working at Costco, but something that's working across these channels, they can balance each other out and one channel might be more profitable than another.

16:07
Tyler Morgan
But there should be a reason why you're investing more heavily into one channel to gain customers who might then bleed into being a customer into another channel. There's some great examples within the portfolio of that really working.

16:18
Hannah Dittman
Yeah, I think that's such a great call out and also amazing when investors like fully understand the differences by category, by channel and the nuances that can exist here. I think a lot of the industry has right sized over the last like five years or so. But when there was a lot of tech investors getting into the consumer investing scene, I think a lot of that nuance was lost on certain people especially as were talking by channel. And it definitely makes you like clench your teeth watching it or having some of those conversations. You know, gross to net is going to be just totally different in a retailer than it is going to be on a different channel. You know, your gross margin is going to look amazing on dtc, but your contribution margin might not even be there at all.

17:00
Hannah Dittman
It's just there's a lot more nuance and when you're held to the watermark of a DDC gross margin, but that's not really necessarily how you're operating the rest of your business or the nuances, loss of what happens below gross margin, it's kind of a moot point. So I think that's great that you guys have a strong perspective and understanding of that. And I feel like that's the kind of investor that you want to be doing business with, especially if you're an omnichannel business, because you need someone who's going to understand the nuance of what your financial should look like and why they look the way they look.

17:30
Hannah Dittman
Kind of circling back on the warm intro point before we get too far down into the diligence conversation, you know, I think it's kind of a known thing that it makes a lot of sense for you guys to get warm intros from other founders or that it's a great way to get in touch with people if you network your way into an investment firm. But I think maybe we haven't explained a lot on the why that may be the case. You know, you kind of touched on a little earlier. You're saying 1200 deals a year, maybe how many of them are coming through warm intros and what's the value add that warm intro really provides other than the hurdle and the headache on the founder's barn.

18:03
Tyler Morgan
Yeah, you know, it's interesting. I think this conversation can be extrapolated to a lot of things. And like, you know, if I wanted to go on a date with someone, I think I'd be a lot more inclined to go on a date with someone that my friend said, hey, you should meet this person. I really like them. And I thinking, well, if my friend really likes this person and I like my friend, then chances are I'm going to have a lot better chance of getting along with this person than a stranger on the Internet. And that can be applied to businesses. Right? I think if someone I respect sends me a deal or a founder that says, hey, this is too early for us, or this is out of stage or out of scope, for us.

18:38
Tyler Morgan
But I was really impressed with this person and his or her knowledge of their own numbers in their company. A lot of that guesswork that we talked about earlier about whether a founder knows their business is kind of taken out. Right. And so that kind of first stage gate for us is we check the box. And so that's why these are important. And you know, I think a lot of times what founders don't realize is the importance of the ability to raise money in your journey as a founder, not just run a good company or sell product. If you're a venture backed business, which, if you're talking to me, you want to be. The ability to continue, not just raise money once, but to continue to raise money is a valuable skill set that some of our best founders are very good at.

19:22
Tyler Morgan
If someone comes to me and says, hey, this founder is really sharp and we had a great conversation, they were very articulate, knew their business, it kind of shows me that you have an ability to network, you have an ability to make people think that you're on top of it. And so those are all kind of just factors that come into play.

19:41
Hannah Dittman
It's like the pre interview before the interview.

19:44
Tyler Morgan
Exactly. You know, and we're all busy people, right. We're getting inbounds to our deal team email, you know, several times a day. And so we're kind of, we're screening deals very quickly. There's, you know, we, if we're seeing 1200-1400 deals a year, you know, we're doing, I don't know, three, four new deals a year and you know, taking actual calls and intros with maybe, you know, 25% of those deals that come in. And so it's a tough screening process just by way of the volume of things that we're seeing.

20:15
Hannah Dittman
That makes a lot of sense. You know, you're talking about the need to fundraise multiple times if you're a venture backed business. Could you walk us through maybe a little bit of like a case study example of the journey a company that takes venture funding and why they would need to continue to raise.

20:32
Tyler Morgan
Yeah, it's a great question, you know, and something I grapple with existentially sometimes. You know, I think a great business should theoretically be able to stand on its own and use its own profits to grow. But it's a competitive industry and timelines are accelerated. Oftentimes when you raise venture capital. There are so many great businesses in the world that I have so Much respect for that. Never raise a dollar from anybody and usually it just takes twice as long as most of the time. And so kind of what we do is accelerate that timeline a bit. Right. And so, you know, I think a good example is the team in vacation, the sunscreen business that we sit on the board of. We saw that business pre revenue. It's one of two pre revenue companies that we've ever invested in.

21:16
Tyler Morgan
They get such a unique offering and there's such a unique world building way of looking at the product generation that were entranced by the, even just the pitch deck materials that they sent us and said we have to be a part of this. And then they had the very clear outline in their materials and what they told us about what they wanted to do and how they were going to do it. And then they went out and did it, except they beat it significantly. And so when it was came time to raise more money, which they needed because they're growing really fast and getting new retail accounts and new direct to consumer customers and from a cash conversion cycle. It's just very hard to grow that fast without debt and have the working capital you need to continue to service orders.

21:59
Tyler Morgan
But it was very easy for them to say look, you know, 14 months ago we said were going to do this, we actually did this and it's a lot better than what we said it was going to be. So you know, it was very easy for them to then go out and raise capital and then, you know, just they continue to be planned. So you know, it's, I don't know, it's a tough reality. But the easiest way to continue to be able to raise capital is to say you're going to do something and then do it.

22:23
Hannah Dittman
Yeah, a great problem to have. I hope we all have that problem. You know, we're talking about growth and expansion opportunities. What are healthy growth rates once you make an investment that you're hoping to see and maybe it's helpful context to explain how you guys are reporting this out to your LPs and the performance that you need to show as a fund and why this kind of all ties together.

22:45
Tyler Morgan
Yeah, it's a good question. And like everything there's nuance, you know, rather than saying look, we need to see 100% growth while being profitable, that's really never the case. You know, what we much prefer to see is you have a deep and thorough S and O P process where we as a board get together and put together a budget for the following year that says this is what we're going to do, this is how much we're going to burn or not burn. These are the assumptions that we're using to get to that number. Whether it's velocity and door assumptions, whether it's probability weighting for what retail you're going to achieve, how much you're going to set your CAC ceilings for under your direct to consumer business, are you going to set them higher so that you can focus on acquiring more customers?

23:33
Tyler Morgan
You're going to burn a little bit more money, but it's a competitive category and there are three other businesses trying to copy what you're doing. And so what you want to spend now while you have the market advantage and being authentic and communicative with your board about what those goals are and then holding hands and saying this is what we're going to do. So I think like it's much more nuanced than like just benchmarks. Look, we want to see growth, I think at an at scale business, any growth at kind of 50% or above is phenomenal particular as you're trying to grow profitability. And in many cases it's very hard to do both of those at the same time.

24:11
Tyler Morgan
And so it's more about being a truthful and communicative founder that has a deep and thorough understanding of your business than it is holding your feet to the fire about a particular metric or goal that you didn't hit one month to month or quarter to quarter.

24:27
Hannah Dittman
I love that answer. I think it's very thoughtful and very healthy mindset. I think when you're getting into a partnership with an investor and bringing someone onto your board, you want to make sure you're prioritizing the health of the business and understanding the business well enough that you have the nuance to inform what that would mean. And when you're setting these budgets and you're making these growth plans and you're doing all these things, how does that translate to how you all make money and your experience with your LPs and kind of the other back end of the scope of your job as an investor?

25:01
Tyler Morgan
Yeah, it's a good question. You know, we think about it in terms of portfolio construction and by that I mean category diversification, stage diversification and then just continuing to bet on our winners. Right. And so our goal at the end of the day is we're a fiduciary, we are here to make money for RLP's. And that looks like liquidity events. You Know there's some instances where there's distributions and things like that along the way. But 95% of that value is going to be created from liquidity events. And 98% of the time that's a strategic exit to either a private equity sponsor or a strategic and sometimes these companies ipo, but it's very rare. And so what does that mean? It means setting up these businesses for success along the way.

25:48
Tyler Morgan
Inside baseball, our Fund is a 10 year fund life with a couple year extensions. So in general we're thinking we have 10 years to get in and out of most of these businesses. With the bell curve generally being the expectation is that it's a little bit less time than that. And so the goalposts in terms of the strategic exit have certainly changed since in the decade that I've been doing this, right. I think when we sold Chameleon cold brew to Nestle that would be considered an extremely subscale business particularly in ready to drink beverage compared to what is expected of RTD beverage brands now to get to an exit. Not to mention the fact that I don't think Nestle has any interest in acquiring for RTD beverage businesses right now. Much more focused on nettle health sciences and things like supplements.

26:36
Tyler Morgan
So you know that's the goalposts are always changing the strategic acquirer perspective. Who is just bought major acquisition and is trying to service you know, $10 billion worth of debt. Who is divesting their ice cream businesses and no longer looking at the frozen category. So there's all those things to consider when you're trying to sell a business. But then there's the pure financial metrics of the company which have moved upwards since I've been doing this at least. You know, I think what used to be 50 million in break even to get the attention is now 125 million and 15% EBITDA. And those are just the realities. You know these things are cyclical, sometimes they swing back.

27:16
Tyler Morgan
But I think in general some of these failed acquisitions that were made between 2017 and 2022 for some of these strategics have made them realize that, you know, they don't need to pay $600 million for a company that's losing $40 million a year.

27:32
Hannah Dittman
I think the squeeze on consumer businesses or the expectations have gotten higher across the board. I think even on the retail side I think retailers are realizing just because you got some venture funding doesn't mean you're going to be a knockout brand like it used to be a little bit More of a signal of success that you were going to catch on fire. And now I don't think that's the case. I think proving out that you're going to be a brand that has some longevity is becoming incre important to retailers, to strategics and therefore to investors as well. Whereas I think we saw some crazy wild times for a little bit.

28:05
Hannah Dittman
Yeah, I think keeping a pulse on kind of end to end how every player that's a piece of the industry puzzle is thinking and working is really helpful for founders to understand where their best narrative or goals should kind of align to scale and succeed in their business. Outside of course, focusing on their customer.

28:27
Tyler Morgan
Yeah, exactly.

28:28
Hannah Dittman
Kind of pivoting a little bit to your diligence process. Could you maybe give a brief overview of from your first conversation through to investment. What do you like to see throughout the process that gets you really excited about a brand?

28:40
Tyler Morgan
Yeah, I'm happy to chat about that. Again, like all things, everything's a little bit nuanced and you know, there's some deals that move really quickly that are really hot and everybody wants to be a part of them and we're at the mercy of that brand's timeline and we're okay with that in other times. And how we prefer to work is slowly over sometimes years. You know, I building relationships with founders that are too small for us right now, but in the hopes that I can be helpful. And they call me when they want to raise their series a right, even though their seed was a little bit too early for us. So that process really starts like, hopefully like long before you're ready to raise capital from someone like us.

29:16
Tyler Morgan
And I would encourage folks to always reach out to folks like us to have the conversation. So I know you who you are and you know who I am long before that funding conversation takes place. But you know, as far as the kind of direct process of raising money, you know, if a brand reaches out, I'll have a 30 minute intro call. If there's materials, I'll review those and then, you know, I think it's much more relationship based a lot of the times than it is purely financial metric based. Some of these businesses are really early. They have six to 18 months of operating history. It's not like we're doing advanced DCF modeling here to understand future cash flows. There's usually no future cash flows at the time of investment. So it's a relationship and we place a lot of importance on that.

30:00
Tyler Morgan
I think hopefully we've developed a reputation in the industry of being People that are really easy and good to work with and thoughtful partners. I think that's part of our differentiation. It's a little bit intangible, but I think it's true. And so how does that first conversation go? How well do you know your company? How authentic are you and passionate are you about the business? Which is usually very. Because we're in consumer and most of these companies get started because of some personal issue that they're trying to solve, which is always so fun to talk to founders about. And then from there, review your data room. And, you know, I think that's an important step for us because more so than like, digging into the financial metrics, it's how is that information presented? I think it says a lot about the company.

30:43
Tyler Morgan
And, you know, I would encourage founders to have, again, like I keep saying this, but. But a deep understanding of your financial metrics and why you're making the certain assumptions that you are. If you send me a model that says, you know, your gross margin is going to double over the next 24 months, you know, you better have answer as to why other than we're just going to get bigger, it looks.

31:04
Hannah Dittman
Good on the spreadsheet.

31:07
Tyler Morgan
And so during that process, it can be one or a couple weeks, and then we'll get back on the phone, usually with more of my team. We're a small team and, you know, before we make an investment, you know, there's several conversations where everybody on the team is involved. You know, I'd like to meet more of the founder's team and who are the key players, besides yourself, that are making this thing work. And then, you know, once we get to a term sheet, it can be anywhere from, I don't know, 30 days to 90 days, depending on how complex it is. If you don't have formation documents and you're doing a price trial, we'll need to set up a stock purchase agreement and investor rights agreement. And, you know, that takes lawyers doing lawyer things for lawyer amounts of money.

31:48
Tyler Morgan
Hopefully we can usually keep those to a minimum.

31:50
Hannah Dittman
That's really helpful. And I think you've kind of emphasized throughout your explanation the importance of just being a really controlled, I guess, entrepreneur where you feel really comfortable in the chair. You feel like you have a good understanding of all the different aspects of your business and could communicate it clearly.

32:08
Tyler Morgan
And to be clear, like, we're not expecting you to know all the answers, right? But some of the best founders have a very clear understanding of what they don't know and are authentic and honest about that and the very best founders are great at finding people that can do what they can't to surround themselves with. And so that's something that we certainly look for.

32:26
Hannah Dittman
Yeah, I think that's great advice as well. I think it can be intimidating. Like, especially a lot of founders maybe don't have finance experience, they're working with additional outside help, or they're kind of trying to learn it as they go. How much weight do you put in to forecasted financials versus historical financials when it's coming from a company side? And any advice you can share on when they're trying to think through what to show you. There's.

32:49
Tyler Morgan
Yeah, I mean, the only thing that's ever right about the model is nothing. And so it's more about the process. Right. It's what are the inputs and what are the assumptions. And the more operating history you have, the easier it is to extrapolate those assumptions. Right. If you're in sprouts turning at 5 units per SKU per store per week, it's a lot easier for me to believe the assumption that once you go into Whole Foods, the Whole Foods turns will be 50 to 100% better than sprouts. That's just generally extrapolated across most of the deals we've seen. That is the ratio that we see from sprouts to Whole Foods. So, like, what are your assumptions and how did you go about making them? It's more so than the, like, what's the output of the modeling? Right. It's kind of like, what are the inputs?

33:33
Tyler Morgan
And we generally just like to see that bottoms up build rather than top down. It's not like, okay, we want to grow 200% next year. Let's make these numbers work for that. It's more like, okay, we think we can get into a thousand doors. We've got an 80% probability of making that happen. We assume that we're going to do 5 units per SKU per store per week, but we're haircutting at 4 units per skew per week. And you know, there's digital metrics along the way that kind of mirror some of those. But yeah, it's that process and how thoughtful you are about putting that together. You know, there's, I can count one or two hands the amount of times that, you know, the model has been very accurate as to what actually happens.

34:13
Tyler Morgan
And sometimes if it is, you know, from a top line perspective. Right. The inner workings of what channel made up what and, you know, how fast things grew was very different than what was assumed.

34:25
Hannah Dittman
Investing would be a lot easier if modeling was a crystal ball. And I think even on the investing side, you know, you're obviously that's a core competency of an investor. Especially the later stage you are, the more you probably focus and put weight on it. As you mentioned with the DTFs. But I would say even then, you know, it's educated best guesses with as much rigor and education as you can get. I think it's very intimidating for most founders who maybe haven't ever even seen a model or they hear that you're building a model off of their company to understand what that means.

34:55
Hannah Dittman
But I think as you're describing going through your company from the top of your P and L, starting with retail sales all the way down to the bottom and really focusing on first of all, what are the levers that are currently driving my revenue and how is that going to change with capital or with time or with whatever milestones are coming up? And then how are all the rest of the factors of my P and L influenced and how does that work together and what is that telling me? It's really just trying to understand the future story of your business through financials. And I don't think anyone's trying to trip you up on the investor side or get you caught with your pants down when they're asking you to model your business.

35:32
Hannah Dittman
They're just trying to understand a really nuanced understanding of how your business works and how you're thinking about growing your business from the language that they speak.

35:40
Tyler Morgan
Yeah, and that is definitely right. And you know, a lot of the time there's unknowns. You know, if you're only a direct to consumer business and you're thinking about going into retail, there's a lot of assumptions you have to make. But you know, what is not an assumption is how much it costs to make your product and how much you think you can sell it wholesale to a distributor for. So it's like, you know, you. There's things that you know and what do you have to make work from a retail perspective to be able to sell that product profitably.

36:08
Hannah Dittman
For example, a lot of founders sometimes have questions about when to get an investment banker or a third party involved in trying to get a fundraise process done. Obviously on the later stage that's very typical, but on the earlier stage, I would say much less. So what's your perspective on the inflection point of when that happens and how many deals that you're doing have that kind of intermediary as part of the process.

36:32
Tyler Morgan
Yeah, I'd say we're, you know, generally investing for fairly early, you know, fundraisers, 15 million and below. I'd say it's rare to see a fundraise shopped by a banker at that size. And I think it is, candidly, a bit of a red flag. You know, I think that if you're a company raising 3 to 5 million dollars, there's a network of folks that are writing those kinds of checks. I would question the banker's motives just given their fee structure on doing a deal of that size, just because they're a middleman. And at the end of the day, we want as much of this money to go towards the, running the business as possible. And at that early stage, we don't believe that there's much value in having a banker shop your business.

37:22
Tyler Morgan
And, you know, if I get on the phone and it's a banker telling me about a $5 million company versus a founder, I'm questioning, you know, why isn't the founder here to tell me their own story of a business that's clearly very new because they're only, you know, 5 million in sales.

37:37
Hannah Dittman
Also, another question dovetailing off of this. A lot of times founders are not sure how to approach the founder salary portion of fundraising and hoping to maybe acquire some form of a salary or some different pay structure for themselves as part of the process. Do you have any thoughts on, if you were a founder, how you might think about approaching something like that or just in general through your experiences?

38:02
Tyler Morgan
It's a great question. You know, if they're going out to raise their first institutional round of capital, maybe they've raised friends and family money, or maybe they've bootstrapped it to where they've been. Totally understandable to be to want to pay yourself after you raise some investor capital, and we're certainly okay with that. But we also have an understanding is that you're still going to own 70 to 90% of this company after we're done with this fundraising, and most of your value is going to be derived from that equity.

38:31
Tyler Morgan
So if you want to, you know, if you're a $5 million business and you want to start paying yourself 350 grand a year, that's a bit of a red flag for us, just because we want to understand that you're bought in for the timeline it takes to go and build and sell this company just as we are, because obviously we don't derive any financial value until there's a liquidity event either. So that, you know, it's a great way for us to hold hands as an investor and strategic partner to a founder. That said, you know, if people have different life experiences, you might have a kid, you might be trying to send folks to college.

39:04
Tyler Morgan
We want you to be able to have a comfortable lifestyle where you can live your life and focus on building the company and not have to worry about day to day finances. That number looks different from founder to founder.

39:15
Hannah Dittman
That's really helpful. And I think, you know, a question we often get asked or try to ask is how to evaluate an investment partner. You know, flip the script and understand what makes a right investment partner for you. So I hope some of these questions have highlighted some of your answers the way that investor can really approach partnership. But would love to ask you the question directly. What kind of question specifically? If you were a founder, knowing what you know on the other side, what would you be asking firms as you were going through the process?

39:43
Tyler Morgan
Yeah, I mean, number one, I'd want to speak to our portfolio companies. Right. I mean, I think we asked for references when we're doing diligence on a business and you should too. And there's no better way to understand how we work with founders than speaking to the founders that we're already working with. And you know, hopefully those are our biggest advocates. Right. You know, we get a lot of deal flow sent from our current founders and hopefully that's a testament of the kind of relationship that we've built from them. I think that's my number one is, you know, there's going to be no better or, you know, unbiased there. You know, sometimes it's biased bad, sometimes it's bias, good. But I think it's a very telling look into how we work with founders and young businesses.

40:25
Tyler Morgan
You know, I'd ask what communication structure that, you know, we typically prefer. Are we in your face every day? Are we, you know, trying to take sales calls for you? You know, we're minority investor in every business that we work with. We're betting on founders to continue to lead these companies. We want to be a strategic thought partner along the way, sometimes a board member. You know, we like saying we want to be the first call with good news or bad news. So we want that so that you can call us and tell us something that's going wrong just as easily as you can call us and tell us something that went right, you know, and From a communication standpoint, we typically work on a like a fairly set schedule.

41:02
Tyler Morgan
We're reviewing monthly financials on a monthly call after the company's had time to close that month. Those are all like retroactive looking and you know, what did we say were going to do? What do we do? What was the variance and where did that variance come from? And then quarterly board meetings where those are much more strategic and forward looking. Right. We've done the monthly calls to understand the financial detail and board meetings should be about the future and strategic decisions, innovation, hiring, things like that. And so you know, as I was a founder asking how, what it's like to work with us, I would ask like what's our communication structure, how easy it is to get a hold of you. Who are the people in the organization that I'm going to be working with? Is it one person, is it multiple people?

41:42
Tyler Morgan
Are you going to switch board numbers on me halfway through the investment period, things like that.

41:46
Hannah Dittman
As you know, startup CPG has the largest slack community in the industry with now over 30,000 members. I'd love to pull a question directly from our channel and have you answer it as a case study for any founders that may have a similar question. The recent question was when you're an earlier stage startup, how do you bridge the gap between launch and being able to show traction in fundraising? Essentially, how can you get a deal done when you're pre revenue?

42:09
Tyler Morgan
Yeah, you know it's a good question and like everything, it's a bit of a nuanced answer. As, as a traditional let's choose food and beverage product. It's hard, it's unquestionably hard to raise money as a pre revenue business because you're, you know, you're funding off of an idea. I think it comes back to some of these fundamentals. Right? There are certain categories within consumer that merit venture capital backing more than others and some of that has to do with kegrs and growth within those specific categories. Some of that has to do with the size of the category. We think energy Drinks is a 20 billion category in this country. This is like an astronomical number that building a business in that category is extremely competitive, it's extremely expensive and there's a huge potential outcome.

42:59
Tyler Morgan
That's why you see so many launches in that category and frankly so much success for some of these newer businesses. The idea of having a billion dollar outcome in that category makes a lot more sense than having a, you know, a venture capital type of outcome in a, a whipped honey business. Where you might be have an incredible product. You don't know how many times I've gone to Expo west in my life and thought to myself, I am a consumer of this product, but it should not be raising venture capital money just from the size of the category.

43:30
Tyler Morgan
So I think you need to think for yourself and be able to explain, are you starting a business in a category that merits a venture capitalist getting excited about being involved, and that's the growth of the category or the size of the category, or you're building something novel enough that you're creating a new category and that requires venture capital money because you need to do something that's technically really never been done before. You're building a category or it requires significant money to build IP from a product or manufacturing standpoint, or, you know, you're doing something so novel that it's going to take a little bit of money and a little bit of time for the market to catch up.

44:12
Tyler Morgan
And, you know, some of those times, those are ideas that folks like us get really excited about, but it's also a little bit nebulous and harder to define. You know, I think a good example is, you know, when we funded Olipop, you know, the business had barely any revenue, but the founders had created OBI before, which was cold chain distribution in glass, and they had a clear understanding of what they wanted to do a second time, because that first business didn't work. When we did our modeling and our investment thesis, you know, we had a thesis around fiber. And it was in more interesting way than Metamucil to get young people to drink and have more fiber in their life. We didn't necessarily view it as a replacement for soda.

44:56
Tyler Morgan
And it ended up being a much larger opportunity really than any of us thought it was. And they created an entire category around it that's, you know, now over a billion at retail. And so building in categories or being able to tell a story of what this is now versus what it could become, I think is really interesting. You know, there are so many examples within consumer where there were deals that frankly we missed, which happens a lot because we didn't understand the vision of what the founder saw. And so much kudos to some of these folks. I think simple Mills comes to mind for us when we saw that it was a baking mix company, pancakes, waffles, and we didn't understand her broader vision of what it could turn into and the behemoth that it became.

45:44
Tyler Morgan
And being able to tell that story really early and authentic and not kind of Pieing the sky away can be, you know, a real difference maker when you're a founder that has no hard metrics or historical financials to go and raise against.

45:58
Hannah Dittman
I think those are great examples and I love the anecdotes, I think, to your earlier point, of the importance of betting on strong founders. I think many businesses, and whether they're VC funded or not, change and adapt as they grow and as the market receives them and as they get learnings and feedback. And, you know, you want to make sure that you're rolling with someone who is going to be able to capitalize on that or pivot if needed or, you know, move and groove as they need to. And maybe the vision does change a little bit, but you're kind of betting on that person being able to drive the vision accordingly. So, yeah, I think that's really interesting.

46:34
Tyler Morgan
Yeah, I mean, that's, you know, and that's so interesting. You think of, you know, you. What's been come clear about doing this for 11 years is that like, you know, I really have no idea a lot of the times what's going to end up working. And, you know, some of these concepts that I really didn't see working just out of pure execution and willpower have been able to work incredibly well, whether it's completely novel concepts or concepts that frankly aren't that novel that you were able to just find your niche customer and build an incredible brand with really strong Ugandan economics and just build from there. There's. There's so many examples across consumer of things that work that I didn't necessarily think would work.

47:15
Tyler Morgan
So I guess that's another piece of advice is just because you get a no from someone like us does not mean you don't have a good idea.

47:22
Hannah Dittman
I think that's a great reminder, you know, investors, I hope people realize through these podcasts too, investors are humans. There's human error and everything. And there could be a lot of external factors why something isn't necessarily the right time, right place, right fit. It's just because the first date didn't go well doesn't mean that person doesn't deserve to be in a relationship. So it just isn't always, yeah. The right fit or it wasn't always your best day as a founder. Before we wrap up, I know we're coming up on time. I want to take a second to make sure our audience can have an actionable next step to apply all this amazing knowledge to. For founders that want to get in touch with you, where can they find you or what is the best way for them to get in contact?

47:59
Hannah Dittman
And then for operators or others looking to transition that might be interested in a role working directly with you all or investing in general, what advice would you have for them?

48:09
Tyler Morgan
Yeah, I mean, I guess starting with the first question, we have a email alias that all of my deal team reads. It's deal teamfgpartners.com we review every deal that comes in through there. So always feel free that I'm on LinkedIn. Just search my name. Tyler Morgan. Always look at my LinkedIn DM. So those are definitely the two easiest way to get a hold of us. For someone that wants to transition into investing, you know, it's, I get that question a lot. Recent grads I bankers reaching out. It is the venture teams are inherently small. You know, we're a team of seven that's up from a team of four ten years ago. Right. So it's not like our team is doubling every year.

48:48
Tyler Morgan
Typically when we go to raise a new fund, we might hire one or two more people and that's generally the cycle that most of these funds worked on. So inherently hiring cycles are tough within venture. I'd say that as a kind of a setting the stage. Others, you know, outside of just kind of reaching out and saying, hey, I'd love to learn more about what you do and kind of how this process works. I think having an opinion and informed thesis around things will get you a lot more attention from folks. And again, these processes can take years. You know, I'm in touch with several folks that maybe came out of college or came out of a marketing role at a business and say, instead of saying, hey, I'd love to catch up, I say, hey, you know, I've been watching these three companies.

49:29
Tyler Morgan
Here's why I like them. I'd love to continue just to stay in touch and I'm happy to kind of, you know, provide more updates as I either get in touch with these founders if you want an intro or, you know, I think providing value in some way goes a long way in kind of an industry like this.

49:45
Hannah Dittman
Great pieces of advice. I could talk to you all day, Tyler. I feel like you have a ton of knowledge to share and a lot of interesting, thoughtful takes on things. But I really appreciate you joining us today. I'm sure our audience has really enjoyed the conversation as well and just want to say thank you so much for hopping on the podcast. Thanks so much for tuning in, everyone. If you like this episode, show us some love with a five star review at ratethispodcast.com startup cpg I'm Hannah Ditman, Podcast Host and Correspondent here at Startup cpg. I hope you'll join me again as we dig into more juicy topics like ops, finance, and all the real talk founders actually need. Come say hi on LinkedIn or ping me on Slack. I'm always eager to hear your questions or brainstorm future episode ideas.

50:26
Hannah Dittman
If you're a potential sponsor and want to get in on the fun and appear on the podcast, shoot us an email@partnershipstartupcpg.com and last but not least, if you haven't already, don't miss out on our free Slack community for emerging brands and CPG lovers alike. Join us@startupcpg.com we'd love to have you. See you next time.

Creators and Guests

Hannah Dittman
Host
Hannah Dittman
Operations and Finance Correspondent at Startup CPG
Investor Spotlight: Tyler Morgan, BFG Partners
Broadcast by