The Startup CPG Podcast

Aaron Garcia
We're big believers in measure it, manage it. So that goes back to at least putting in some place of annual planning process. You know, I think having a three year and one year plan can be great. And it's again, not trying to do anything overly complicated there, but creating a roadmap that you're going to go try to execute against. And you can always tweak it and it's always going to change. But I think it's just a great muscle to develop and provides clarity for not just you, but your leadership team to have everyone on the same page. I think you mentioned having a board of directors. You don't even have to have a formal board, but using your hustle and entrepreneurial skills to create a network and a sounding board can be a fantastic opportunity for you.

00:50
Hannah Dittman
Hey everyone, I'm Hannah Dittman, operations and finance correspondent at startup cpg. And today it's a special episode because I'm joined by my good friend and former colle, Aaron Garcia, partner from Mainpost Partners. Aaron has been with Mainpost since its formation, investing in some of the most successful consumer brands of the last decade. He's got a rare blend of analytical rigor and operator empathy that shows up in how he partners with founders today. In this episode, we explore how later stage investing insights can help early stage brands chart a smarter path from day one. Aaron shares what seasoned investors look for when evaluating scaled brands. The operational and financial habits that create long term value and the pillars and commonalities that have laid the foundation for big consumer successes.

01:32
Hannah Dittman
We also talk about what needs to be in place for institutional or strategic exits, how to think about dilution and what readiness really looks like when a brand is ready for growth equity. Whether you're just getting started or have been building for years, this conversation sets you up to be the kind of company that lasts and that later stage investors want to back. Enjoy. Hey everybody. Welcome back to the Startup CPG podcast. This is Hannah and today I am here with Erin Garcia, an investor from Main Post Partners. Today is going to be a really big treat. Aaron's a close friend of mine and also a former colleague. So we've got a lot of awesome lessons to be learned. Aaron, welcome to the show.

02:12
Aaron Garcia
Hey Anna. Hey everyone. Thanks for having me. I am Aaron Garcia. I grew up in San Diego. I live here in the Bay Area. I have three lovely daughters. Excited to be on this podcast. I work in private equity at a group called Main Post Partners. Started my career 15 years ago at a group called Westin Presidio. And we founded Main post back in 2014. We spun out from Weston Presidio to really focus and follow our passion of consumer growth investing. And since that time we've raised three funds, we've now done over 20 partnerships and we pretty much exclusively focus on founder owned businesses.

02:49
Aaron Garcia
We have a passion for working with entrepreneurs, founders and management teams and we consider ourselves kind of specialists in sort of this phase two of the rocket, helping take founder and entrepreneur led businesses into that next phase of growth and really kind of taking what they've made special and unleashing it to the world. So really excited to be here with you guys and talk more about our experiences and what we've Learned over our 15 years of doing this.

03:14
Hannah Dittman
Yeah, so awesome to have you here. And you know, Main Post is. I'm happy to sing all the praises of Main Post, really best in class private equity investors and growth investors and just a really good group of people, very knowledgeable firms. If you could share a little bit more about mainpost in terms of stage that you guys typically focus on and what your typical mandate is, I think that'd be really great context for the rest of the conversation.

03:39
Aaron Garcia
Yeah, for sure. So mainpost is exclusively focused on the consumer sector and high growth companies. We typically are looking for businesses that are profitable. They've been around usually for multiple decades. They're in what we think of as kind of two buckets of business model types. I personally focus mostly on multi site businesses, but we also do about half our investing into brands, product companies, and so those are kind of the two big areas that you find across the Main Post portfolio. We think of our investments not as investments, but as partnerships. And so over the course of the last 11 years at Mainpost, we've done over 20 partnerships. It's been a combination of both minority and control partnerships and we're agnostic to doing either of those. And that's a bit unique in the private equity world.

04:23
Aaron Garcia
We're looking to have high alignment partnerships with our founders and entrepreneurs and what that means is having skin in the game from both sides. That's typically a cap table where you have 60 to 70% rollover equity, minority deal, or vice versa on a control deal. We just want to make sure that we're all fully aligned for that next phase of growth. We typically don't use a lot of leverage in our transactions and we're also looking to kind of set the company and the team up for long term success. And so that means partnering with the existing group, but generally looking to maybe Bring in some outside executives along the way, but not fully coming in and replacing management teams when we're coming to partner with companies.

05:03
Hannah Dittman
Really, really great summary of context and super helpful. I'd love to kind of double click a little bit more. You're touching on some of the company dynamics already, but would love to make it really clear for people what the dynamics of a company look like by the time a private equity firm might be interested in them in terms of revenue scale or company scale, how the leadership team is built out or constructed. You mentioned years in operation, what their distribution looks like, if they're on the product side, things like that.

05:33
Aaron Garcia
Yeah, of course. So for us, we're a later stage investor. As a private equity group, we're typically looking for companies that are doing, you know, call it five to $10 million of EBITDA. That's the size and stage that we're typically getting invested into businesses. You know, consumer itself has a label of, you know, flash in the pan risk or fad risk. And so we generally like to see businesses that have been around for multiple decades. What that allows is investors to be able to see how did this business perform over a cycle. An event like Covid, what kind of attachment rate and history does it have, you know, with its consumers? Is it something that was able to generate a lot of trial, but did it really generate that level of stickiness?

06:13
Aaron Garcia
And not to say that we wouldn't invest or partner with a company that is more nascent and has just a few years of operating history, but the more history that the company has and the more tenure it has, that does become more exciting and interesting for us and in the stage of growth that we're investing in.

06:27
Hannah Dittman
Yeah, you guys are all about the data. Looking at all the numbers and making sure your thesis will be proved out and makes sense in terms of prior fundraising or investment history. You know, you're talking about investing predominantly in founder owned brands. What does their fundraising life cycle typically look like prior to you guys getting involved with them?

06:48
Aaron Garcia
Yeah, many of the companies that we partner with generally have raised capital with friends and family and typically have bootstrapped their businesses. Some have taken on some outside institutional money, but for the most part they've found ways to fund their businesses creatively to get to where they've gotten to. And generally they're coming to the decision that they have a huge opportunity set in front of them. They need some access to capital to really take advantage of the window that they've created. That's why they're seeking A partner. And those are the situations we get most excited about. I'm actually wearing the shirt from our first partnership at Main Post. It's a company called Choose Fitness and that was the exact dynamic that existed there. The family there. There was five family members.

07:28
Aaron Garcia
They founded a fitness business in the depths of the Great Recession in 2008. They had done a great job building and scaling the business across multiple markets. They come up with this new kind of 2.0 value fitness model, proven that it was resonating with consumers. But it's expensive to build these gyms and they really needed access to capital to step on the pedal. And that's what led to our partnership. We were able to put significant capital on the balance sheet and help them really expand the concept beyond just Southern California and Arizona at the time. Today the company has almost 60 locations across seven states. And really pleased to say it's been a fun ride over the last 10 years with the Shoes team.

08:07
Hannah Dittman
Yeah, such a great example of partnership. And I know how hard you work for the companies that you partner with. To think that you've been in the trenches with them in many ways for 10 years is so impressive. And I think sheds a light on the kind of investment partner that a founder wants to choose. You want to make sure that, you know, this is a long haul relationship for the most part. Even on early stage funding, it still can be quite a long relationship. And I think making sure you're in business with the right people who really know their stuff is so important.

08:39
Aaron Garcia
Yeah, it's tough. I mean, it's hard because you do need capital to grow and scale your business. And so it's always a balance of when to take it, how much dilution should you be taking, should you use debt to finance your business? And these are all challenging decisions that founders are often making on an island, you know, and they're using their network as a sounding board. But the best advice I can give and what I've seen along the way is take capital. When things are well, cash is king. You'll never regret the dilution you took. You know, having the cash in your bank account will serve you well. It's very difficult to raise capital when you truly need it and when things aren't going well.

09:14
Aaron Garcia
So it's better to take advantage of those good windows and pockets when you have them and when you have that opportunity to set ahead of you and no one really looks back and says, I wish I wouldn't have taken that extra 5% dilution during that past raise.

09:26
Hannah Dittman
Great Advice. I'd love to kind of dig a little bit more into the life cycle, maybe even post an investment that you all would make, you know, the full journey of coming to fruitful exit, hopefully. So why would a brand, and starting with getting to you all, why would a brand have a sponsor exit versus maybe a strategic exit? And could you explain a little bit about both of those kind of final steps?

09:51
Aaron Garcia
Yeah, most definitely. So I'd just start by saying when we partner with these companies and these teams, we're looking to build sustainable growth companies. We want to build enduring brands and businesses that last. And when you're going in with that mindset, you're going to present yourself with the opportunity to have multiple options, hopefully at exit, and that'll allow you to be able to sell to a financial sponsor like you mentioned, or to a strategic. A financial sponsor is probably the most common exit opportunity that we have. And what we see in our business, that's selling to, you know, another private equity group, a larger financial sponsor with a larger fund out there, that's probably the most common buyer set that exists. You know, in the private equity world. The strategic buyer said certain subsectors have more active buyers and others don't.

10:38
Aaron Garcia
I think, you know, Hannah, you worked a lot in beauty and personal care. That is a very active and, you know, target rich area where there has been a long track record in history of some great strategic buyers. I work a lot with concepts in restaurants and in the fitness space. There, quite frankly, aren't a lot of strategic buyers in those spaces. It's not necessarily a good or a bad thing when there are or aren't. But when there are strategic buyers, it does present an opportunity for some real upside in terms of your exit. Multiple strategics generally are able to pay a higher price and a premium than a financial sponsor. And that's really driven by synergies.

11:14
Aaron Garcia
So when we think about a strategic exit, these strategic buyers can look at product business and say, hey, if I took this, I can really blow out distribution. I have in house manufacturing. I have a lot of cost synergies if I put this through my own plants. And so their ability to pay an auction process when you're selling your business is just so much higher than what a financial sponsor would be. They can pay a price that's well in excess of the market and that's where things can get really exciting. So certain subsectors have strategic exit alternatives to them that are more likely, others don't. It's definitely a consideration we take in consideration when we're looking at different investment opportunities. But it's not a reason to not do a deal or do a deal.

11:54
Aaron Garcia
And it's definitely not a reason that we don't build a business for a strategic exit. We're just trying to work to build a great sustainable growth company and have multiple options for exit, you know, down the road because you never know how it's going to turn out once you get to the finish line.

12:06
Hannah Dittman
Great perspective, kind of double clicking a little bit more and maybe bringing it into a little bit more layman's terms too. If I'm a founder of a business in a category that is very unlikely to have a strategic exit and I'm working with a financial sponsor like you all, what happens to me at my next step when you guys need to go exit the investment eventually? What's my journey going to be like?

12:31
Aaron Garcia
Yeah, you know, most likely the founders that are running their businesses are key drivers of that business and alignment is huge in the initial partnership that we're setting up with those founders. And most likely it's going to be key for the next know financial sponsor that's going to want to be involved. So the mindset and the most likely outcome is going to be that founders going to be rolling equity into that next deal. We want to have open and transparent conversations though with our founders and our management teams during our partnership. And we've had situations where founders have said, hey, I don't want to do this forever, I'm in a different life stage. And so you can plan accordingly. And so as long as you have the proper time to be able to plan for those sort of transitions, you can do that.

13:13
Aaron Garcia
You want to have several years ahead of the next transaction to bring in the next leader who will be there for continuity purposes for the next buyer, because that next buyer is going to want to have a locked and load in team that has the track record that's in the past that they're backing for that next transaction that's going to go with the business that's going to be really important for that next transaction. So it doesn't always have to be the founder who's going with the business, but they have to have continuity with a leadership team that's fully committed usually to go for that next stage.

13:44
Hannah Dittman
Thanks so much for shedding some light on that. I'd love to also kind of touch on maybe the alternative scenario where so many great businesses and awesome founders maybe just don't have a business or a dynamic that's well positioned for Any type of investment or the kind of usual quote unquote path that we're talking about here. So what happens to brands that don't have a sponsor, don't have a strategic exit, and what's kind of the journey of this other segment of the consumer market?

14:13
Aaron Garcia
Yeah, I mean there's definitely different ways that businesses can, you know, generate liquidity events, you know, for themselves. It doesn't always have to be a sponsor exit. So certain businesses have really nice cash flow profiles. They can make distributions, you know, to the shareholders, to themselves as founders. They can take dividends and recap their businesses with debt if they have that kind of profile. There also is ways to create some more scale in more fragmented sectors through mergers with other like businesses. So you could consolidate some of your competitors to try to create some more size and scale and maybe that creates a more interesting dynamic for a business that then becomes interesting for a financial sponsor. So there's definitely different pathways that you can go out there and be thinking about to try to generate a liquidity event, if that's your end goal.

15:01
Aaron Garcia
Acquisitions are definitely bread and butter for sponsor platforms. And so there are sponsor groups out there that are using base platform companies to go out and try to acquire smaller businesses. And so you could be set up in a sector where that you're a target to be acquired by one of these platforms as well.

15:18
Hannah Dittman
Yeah, I think that's where this concept of profitability is power comes in, where if you're really focused on building a profitable business, you have a lot more options than just needing to be reliant on outside capital to fuel a positive destiny and outcome for your own business.

15:37
Aaron Garcia
Yeah, I'd say it up front, cash is king. You know, look, we are growth minded. We're looking for double digit top line growth rate businesses. We get very excited about that, but we really dig into the fundamentals. We benchmark quite a bit on every subsector to look at margin profile. We want to understand, you know, the sustainability of how they're generating their sales growth. You know, looking at key metrics from an ad spend perspective, you know, how are they driving, you know, awareness and trial, how sticky are those customers, how replenishable is the product? So you want to see what is the real kind of sustainability of this business that's going to keep it going forward and then how does that compare against other businesses within the subsector? Is it a top quartile business in terms of its margin profile?

16:21
Aaron Garcia
Is there opportunity to improve it because the margins are inferior to other businesses you've seen. But if you set your business up for success and you're able to generate, you know, positive income, positive cash flow, you're going to have a lot of options and a lot of Runway to be able to pivot and find that right pocket of time to really push the pedal down or have a liquidity event or recapitalization event.

16:43
Hannah Dittman
So intelligent and eloquently said. You're very well versed and I feel like it's a great lesson for people maybe that don't have as much of a business background or maybe kind of finances is their first real obstacle. As a founder, given that you've seen companies that have been around for so long typically and have had such a long career yourself, looking at these brands, I'd love to dig into some lessons learned. Maybe what things have really gone right or wrong that you've discovered in a diligence process or observed in a portfolio company that you think earlier stage brands that are in the earlier years of their journey could be thinking about implementing or watching out for.

17:24
Aaron Garcia
Yeah, look, one of the disciplines that we try to institute after our partnership is really putting in place financial planning and budgeting. It's a process that I think a lot of entrepreneurs and founders maybe are a little intimidated by before taking on a financial partner. I think even starting small, it doesn't have to be overly complicated. But putting together a plan and a roadmap is something that will serve you really well in multiple facets. It provides more focus for the business and for your team to go execute against. And then when you're going into a raise process and trying to go out there and raise capital, you're going to be required to put out a financial forecast for your business and you're going to be held accountable to how well you're performing against that forecast.

18:06
Aaron Garcia
And to your question, Hannah, where do things go wrong in the diligence process? Comparisons to your year over year growth are important, but how is the business performing relative to what the founder or the management team said they were going to do to their near term forecast often is a real kind of important point as well. And so if you develop that muscle at least a little bit earlier on and you have some capabilities of being able to manage and forecast your business, it'll serve you well.

18:30
Aaron Garcia
When you go through a raise process to put something together that's somewhat accurate that you feel confident in, and then when you're going through that process more likely able to deliver against those numbers, which will provide more momentum and more A higher probability of success for you to actually have a successful outcome in that raise process. The other thing I would point to is we actually really work with our teams to make some key hires and invest in G and A and infrastructure right after closing. It's not anything that's rocket science. There's nothing special to it. I think we are able to attract a different level of talent as a private equity group. That being said, there's been a spectrum of companies that have decided to make those investments prior to our partnership and others that haven't.

19:12
Aaron Garcia
And I would encourage founder led businesses to take the leap and try to, you know, bring on that next level talent earlier than you think. It can be a huge unlock for your business. The challenge there is always, you know, the cash we just talked about, cash is king. It costs money to do that and it's tough because that's 100% your pocketbook. You have to make that call of can your business handle that extra expense. But we've seen where some of these businesses could have made those decisions, you know, prior to our partnership. And for whatever reason, it became like the light switch unlock. Once we made the investment, were able to make those investments in the team and you know, the business accelerates dramatically after that point.

19:52
Aaron Garcia
And those are things that maybe the founder could have done, you know, six to 12 months earlier on their own without our investment.

19:58
Hannah Dittman
Great advice. And yeah, I think in terms of forecasting and budgeting and thinking through your numbers, it's not just about evaluating the how sizable of an opportunity it is or purely how much money you can make off a business. I think it's also about building trust and confidence in the executive operations of a business. Feeling like those teams have a really good handle on their own destiny and are influencing it in a way that is in control and not just kind of luck or by chance or out of control.

20:30
Hannah Dittman
And I think when you're getting into a partnership, I can imagine on the investor side that's a really important thing to be able to prove because you're essentially going off of quite a lot of historical data and a lot of trust that a business understands how they got to where they are today and that they'll be able to continue driving where they say they're going to go.

20:50
Aaron Garcia
100%. I think it's less is more figure out for your business what are the key drivers of why it ticks, how you make money. It doesn't have to be overly complicated spreadsheet. There's just a few things that really matter most. But everyone on the leadership team in the organization can rally around those and have fluency in those. If you can develop again that common language, we try to establish, you know, post partnership with our teams, but if you have that before, it's even better. It's going to let you go that much faster in growing and scaling your business.

21:21
Hannah Dittman
When you think about top performers in your portfolio, are there any pillars or dynamics that they have in common that you feel like this shared trait is kind of some of the secret sauce of what makes a business successful?

21:35
Aaron Garcia
Yeah, I think people are the key ingredient. I think we feel like that's the greatest asset that we have and that we're investing into with any of our partnerships. So I would point to that as sort of number one. Your leaders, your key leaders, they're the drivers, the visionaries, they're laying out the strategy. So we're most focused when we're evaluating a partnership is layman's terms. Who are getting married with here? Who are the people around the table that are going to go make this happen? Those are the key assets that are really going to go drive and make the magic happen within the business. You can step back and everyone can have a thesis around a subsector.

22:09
Aaron Garcia
Obviously great to be in a rising tide have in a market where got great tailwinds and advantageous things happening in a marketplace that's fast and competitive dynamics in your favor. And it's great to have a business model that has great margin profile, a huge moat. So there's things that you can evaluate both from a market and business perspective. But I think it's distilled it down. You know, where our biggest successes have come back to is just the talent and having the right people in the right seats driving these businesses forward.

22:38
Hannah Dittman
Encouraging and very helpful. I think especially on the earlier stage side. Sometimes market plays a much bigger role because there's less information within a company to go off of. So you're kind of having to bet a little bit more on external factors influencing an investment. Whereas when you've seen a business for a long time, you're a little bit more focused on that business itself. Obviously, market is still important and dynamics are still important, but there's a lot of diamonds in the rough that I think you can find later stage that have maybe built something just special outside of anything else that's going on and have built it within themselves a little bit more than relying on external factors to help buoy that trend as well.

23:23
Aaron Garcia
A hundred percent. I think one thing that we get really excited about is finding those diamonds in the rough I mentioned up front. We look for brands and businesses that have been around for multiple decades. Generally they have an amazing product, an amazing service that has a high affinity with our customers. And usually it's grown by great word of mouth and there's a high level of stickiness to it. But what we found is a lot of times they're not great marketers. They don't do a great job of actually telling their story. They know who their customer is and their product is differentiated. But there's some unlocked piece missing in terms of their ability to tell that message to the marketplace, have the biggest microphone out there, and really kind of grow the awareness and trial of the product.

24:05
Aaron Garcia
And so that's been one of those value adds that we come in and comes. Part of our growth investment thesis of this situation is we got an amazing consumer product here, but the packaging's just inferior. Their merchandising setup inside the store is not really supporting what the product is able to deliver. It's not catching the consumer's eye. And so those are easy fixes. Those are solvable problems you can't really solve a bad product or a bad service. So you gotta start with having that kind of amazing product service. But you can fix kind of the growing awareness, growing trial part of it. But you gotta have the catch piece to make sure that the customer's coming back. And that's where we get really excited when we see those diamonds in the rough opportunities.

24:45
Hannah Dittman
Thanks for sharing that. I think that's really interesting and helpful and I feel like, you know, every investor thinks differently. Different stage of investors think very differently. I think founders can kind of be spinning sometimes a little bit of who they need to please or what they need to do. And I hope this sheds a little bit of light that there's a million ways to skin a cat. And as long as you focus on your core competencies and the North Star in the right place, which is your consumer, there will be opportunities and avenues available for you to move your business forward in different ways.

25:15
Hannah Dittman
Do you have any hot takes or advice on how founders can be thinking about things maybe a little bit more professionally sophisticated that you see down the stream or you're probably implementing with companies as well, like board meetings, certain business analyses, any operational excellence pillars, things like that maybe, you know, if you were their mentor or giving them some advice, these are some things that you would say a couple tips or tricks that they should think about.

25:42
Aaron Garcia
Yeah, look, it's going to be reinforcing some of themes I've talked about. But we're big believers in measure it, manage it. So that goes back to at least putting in some place of annual planning process. You know, I think having a three year and one year plan can be great. And it's again, not trying to do anything overly complicated there, but creating a roadmap that you're going to go try to execute against. And you can always tweak it and it's always going to change. But I think it's just a great muscle to develop and provides clarity for not just you, but your leadership team to have everyone on the same page. I think you mentioned having a board of directors.

26:16
Aaron Garcia
You don't even have to have a formal board, but using your hustle and entrepreneurial skills to create a network and a sounding board can be a fantastic opportunity for you to again, not just be on an island. And honestly, we use board meetings to create formal touch points. It forces our teams to step back and think about what's happened in the business over the last quarter and really step back and then present that, you know, back up to us as investors. Not that you have to have quarterly board meetings, but if you can create some sort of cadence where you do have to step back and think about your business and talk about it with someone, it's going to cause you to do the same sort of thing.

26:51
Aaron Garcia
So developing a network and potentially even having a biannual or some sort of meeting where you have to step back and talk about your business with them would cause that, cause you to have that same kind of experience without even taking on an investor. And then I do think, you know, the more that you can get into investing into just different systems to have more insights on, again, your business from a measure it, manage it perspective. This is an era where technology, data, insights, you can leverage third parties so much more than you ever could to have real time, you know, data coming back at you. You don't want to get to the analysis paralysis point, but you want to be making the best decisions possible.

27:29
Aaron Garcia
Again, hone in on your core KPIs that matter and have that information flowing throughout your organization real time. You're going to be making better decisions and you have to because the world's moving so much faster.

27:41
Hannah Dittman
You know, speaking about analysis, what does your diligence process look like? Obviously most of these are banked processes also, and if you could explain what that is, that would be helpful. But what are the main areas of focus that you're evaluating? What's the typical, obviously there's many and dependent on businesses, but kind of some core lanes of analysis or check marks that you need to see things that you definitely want to check on that people maybe can be filing away in the back of their mind of things that they should kind of diligence in their own business as they continue along their journey.

28:15
Aaron Garcia
Yeah, no, most definitely. I would say a majority of the transactions that happen do have a banker or intermediary involved. That's not always the case. We do operate and we're able to do partnerships directly with founders and we can work with them to help do the diligence that's needed on their business and figure that all out. But a majority do have a banker involved and they're going to help prep the company during this process. The first stage of it though is really what we call business diligence. It starts pretty simple on just the basic financials and the profile of the company and just start simply with, you know, your P and L, your cash flow. What does that look like historically?

28:51
Aaron Garcia
What are the trends from a top line perspective, a margin perspective and you know, from there it's what's behind that, what is driving, you know, the revenue, what is driving your margins? And so depending on what your business is, let's just go into a product company. We'd really want to understand what's the mix, you know, for example, of the products that are driving, you know, the top line growth. Is it new product launches? Are you opening new distribution doors? Or is this really being driven by velocity gains of existing products? From a margin perspective, is it being driven by gains because you have new pricing, because you're gaining scale with your suppliers? Or is it a mix shift because you launched a whole new product that has a different margin profile?

29:32
Aaron Garcia
So we're going to be trying to unpack the P and L and tie it back to the fundamentals of what's happening on the front end within your business to try to really understand what's going on there. And then we're also going to want to see who is actually buying this product or this service and what are they doing with it. They might be trying it, but are they coming back? And if they're coming back, how often are they coming back? And so we want to in our minds kind of build this, you know, recurring revenue model, frequency, repeat rate, affinity, whatever you want to call it. And there's no, you know, crystal ball that really like predicts the future for this.

30:06
Aaron Garcia
But we'll look at customer reviews, we will look at credit card data, we'll look at, if you're a D2C business, you have great access to the frequency of when your customers are actually repurchasing on your website. So we'll look at all those type of things to try to paint a picture of who's buying your product, when they're buying your product, how often they're buying your product. And again, this is all painting that picture back to what's really kind of the output going into your P and L. So we're doing all that to then assess is this a business that we think has a lot of momentum, sustainable momentum and growth in this marketplace that we're really excited about. We're going to come in and then really spend a lot of time with the team and the people behind it.

30:46
Aaron Garcia
And as I mentioned earlier in the conversation, that's where we're most focused. If we can get past that initial stage of business diligence and feel really good about the opportunity set there, it's really going to come down to how do we feel about the people across the table and can we have an aligned vision for growth on how we want to help scale this business together? And if that's the case and we can check the box there and that's really a two way street. We're not for everyone and we know that we have a different approach to how we like to scale and grow companies.

31:13
Aaron Garcia
But when that clicks, that's where we get really excited and we try to find a way to make the marriage happen and try to put together the right kind of deal and structure that works for everyone, that meets the founder and entrepreneurs needs, but also meets our needs as investors and come to an agreement on a deal. And once you have that's really what kind of turns the switch on our end into what we call confirmatory diligence. And that's where you're really going to get all the third parties that maybe are the less fun part about the diligence, but necessary to kind of get a transaction across the finish line. That's when the lawyers really get involved, accountants, insurance people doing background checks. We call it confirmatory because they're basically going in to validate, you know, everything that was presented from a financial perspective.

31:59
Aaron Garcia
The lawyers are looking for court cases and any lawsuits that might be outstanding just to make sure there is nothing that's within the business that would be of concern for the go forward investors. They're putting together the legal documents to consummate the purchase of the company and the Go forward operating agreement. So all that stuff is happening in what we kind of think of as like this phase two confirmatory diligence and that will then culminate into a closing of the eventual transaction. The only other work stream that can exist out there is sometimes these partnerships have debt involved. You have a lender, they're going to have their own sort of separate diligence that might piggyback on top of the equity investors diligence, but that can be a separate work stream that also is going on during this kind of phase two diligence as well.

32:42
Hannah Dittman
Thank you so much. That was such a great explanation of a very complicated and quite honestly a very long process in later stage investing. This can be like a year of work to really fully wrap your head around and understand a business. And I think that can be intimidating for some people. But the reason it's done is because like we're talking about these relationships are for the long haul. These bets are made with quite a lot of conviction. So it's just really important, I think, to summarize what you're saying in maybe a slightly different way to understand the story of your business and the narrative of what's happening in it. Like why are you growing? Why are things going the way that they're going? If you were to write a chapter book, what would be all the content of what's happening?

33:29
Hannah Dittman
I think that's really the crux of diligence and understanding your business intimately as well.

33:34
Aaron Garcia
Yeah, I think we find a lot of founders and management teams actually get some great nuggets and takeaways during the diligence process. There's things that they're so in the forest and thinking about the day to day of their business. There's a lot of things that we come up with and say that are completely wrong, but there's also things that we come up with that are outside the box, that are good takeaways and help them have some different perspective, you know, on their business and about the opportunity set and can be really helpful to how they maybe adjust or tweak their strategy or think about where they're going. So I've never had anyone really say that they didn't learn something going through the diligence phase. It's a lot of work. It's two jobs at once. You're running the business while you're doing that.

34:13
Aaron Garcia
But there can be some great learnings and takeaways for the teams while they're going through that process.

34:17
Hannah Dittman
Obviously we touched on founder evaluation earlier and how important team is and how important the executive team is outside of just the founder too. Do you have an example of, you know, standout founders from your portfolio? And maybe not just what they did during fundraising, but what they've done during the partnership you've had with them and the hard times that you face together, that makes it really clear to you that you're happy to be in business with this person and that's why things are going the way they're going.

34:44
Aaron Garcia
Yeah, look, I'll stay on the choose theme cause I'm wearing the T shirt. The CEO and co founder of that business is Corey Brightwell. When we partnered with the company, he was the CEO and sort of ascended into that role over the last three years. So he is still a newer CEO. And you know, it was a question mark for everyone of can you continue to ascend and grow with the business. At that time it was 14 locations, but were going to put some real rocket fuel on it. And it was a family led, family run business.

35:13
Aaron Garcia
And so during the next three years we added in outside leadership, we pushed the pedal down on growth and Corey did an amazing job of embracing the change and taking on some new thought partners and building out a real leadership team and accelerating growth and excelling though while accelerating that growth. And it all culminated to a point where were about to have pretty successful outcomes. And then Covid hit and when crisis hits, you really kind of know, you know what your leaders are made of. And having a fitness business during the height of COVID in California was a very challenging time. They shut all their locations down, the employees had to be furloughed. You know, we had zero revenue for three months. But Corey and the leadership team there showed great merit and basically kept everyone's spirits up.

36:02
Aaron Garcia
They opened outdoor gyms, they survived 2020, they actually somehow still made money in 2020 and kept the company going. And since that time have been able to re accelerate growth. And as I mentioned, they're now close to 60 clubs, they're over 40 of EBITDA. It's just been amazing to see him progress and grow as a leader in different phases along this way take on different challenges of taking on a private equity partner, surviving an event like Covid in stepping up as a leader and changing. His leadership has changed as the business needs have changed. And not all leaders I've seen have been able to evolve as the business's needs have evolved.

36:40
Aaron Garcia
So some people tap out at different phases and that's just something that again you continue to evaluate along the way, but that's one that I've been super impressed with, of just being able to watch him grow, you know, and see him change as the businesses continue to change.

36:54
Hannah Dittman
Yeah, it's so true. I think it's such a crazy world, especially in the recent consumer landscape and being adaptable, being tenacious, being resilient. I feel like it's what the most impressive founders are really made of. And I have so much admiration and respect for people that can stay strategic and wicked sharp under conditions like that because, you know, that's their life's work and all the emotions tied up on top of all the problems that they're solving too. So a huge testament to what a success chooses. I'm so happy to see them. They're shining and doing so well. How many businesses that you evaluate or invest in is the initial founder still the CEO of the company?

37:37
Hannah Dittman
I think that's another, you know, thought or fear people have or maybe don't have a good understanding one way or another when they're founding a business, how long they'll be able to stay with their company or when it's the right time to maybe bring someone else in to help out with the day to day.

37:54
Aaron Garcia
I'm the lead partner on four companies that we're currently partnered with. Of those, two of them are still founder led and two of them are not. And of the two that are not, they were both planned transitions. So one of those business called Crispy Crutchy Chicken. Dan Shapiro, amazing founder that at the time we partnered with him in 2021, the youngest 67 year old you'll ever meet. But he was very clear when we did our partnership that he was not going to be the CEO, you know, for the next term. And so that was part of what he was looking for with a partner was someone to come in and help him find his successor and to build out a leadership team.

38:33
Aaron Garcia
And so were very intentional, you know, over our first few years together and we're able to eventually build out a leadership team. And Dan is now ascended to become the chairman of the board over there. But that was a two way collaborative, you know, work stream together. The other one's a business called Precision Garage Door. Kevin Spratt, also an amazing founder who is not quite 60 yet, but approaching 60 and similarly said, hey, I'm good for a bit, but I'm not going to be the person that's going to be the CEO of this business forever. And actually just four months ago, collectively together we found a CEO that we both felt would be the great long term leader for the business.

39:09
Aaron Garcia
Her name's Sherry and she joined the company and has been a fantastic addition and allowed Kevin to transition in a similar way to chairman of the board. So basically I have 50 on my plate today. But the two where they've transitioned out has been again, a collaborative sort of work process together.

39:27
Hannah Dittman
Super helpful and I think paints a really nice picture for people that the road can be a long, arduous journey and it's nice to have partners to help you get through maybe some of those more challenging decisions and a big transition, I'm sure for someone that's been in a business for so long.

39:42
Aaron Garcia
Yeah. To your point though, I think you have to think, do you want to continue on? Because when you take on an institutional investor, you're now on this merry go round of it most likely will go to another financial sponsor. And that continuity point that we talked about earlier is critical. And so if you don't want to continue on and it's not your passion, your vision to stay with the business for the next five, 10, 15 years, you know, proactively planning with your partner to have a transition plan is going to be important and that's okay. And it's just more about being transparent on that front and thinking through how to do it, when to do it again so you can have that continuity for the next buyer.

40:19
Aaron Garcia
Otherwise, the expectation is going to be that you roll, you know, some meaningful equity into the next deal and that you are the leader for the next transaction.

40:27
Hannah Dittman
Well said. I'd love to spend some time reflecting back on some of the companies that you've invested in. Given they've had such a long history of data. I think it's a really helpful learning point for some people to think through where they are now. You know, if they're in the first couple years of their journey, what the future crystal ball might look like for them down the road, or what that might mean if they contextualize where they're at now. So reflecting back on companies you've invested in, what were the really early year metrics of those brands? Like, you know, how much margin improvement can a business get? You know, what was the sales growth like in the early years? Was there kind of an inflection point where they really hit and they kind of had to hustle along until they got there?

41:08
Hannah Dittman
What was kind of the stories or the narratives over time for people before they could really hit their stride?

41:13
Aaron Garcia
I guess, I think with a lot of the product companies, you know, again, staying Focused on your core consumer and then finding up that right window where you knock down the right retailer and you get the right placement and then things start to really go. And when that happens, you might be at that inflection point where it's time to raise capital because you're going to need it to support the inventory growth you're going to need for this big retail rollout story that you have. That's what happened with New Low. Blue Buffalo was leaving, you know, the specialty pet channel and Nulo was going to be given massive amount of shelf space. But to take that shelf space, they need a ton of capital to build their inventory, to be able to take advantage of that opportunity.

41:56
Aaron Garcia
So they've been grinding away for years, building their brand, building their cult like customer base. But when that window popped, that was the time for them to go raise capital to build their inventory, to take advantage of this kind of window in time moment. And that was a huge success. And that's, you know, again, it took that right kind of all those ingredients coming together. So you never know when it's going to happen. But that's generally like the catalyst of some big shift happening with your retail partners or your brand catches heat, your D2C company and now viral. And again you have this moment and that's where you probably want to take advantage. You might have a capital need and.

42:33
Hannah Dittman
In terms of margin profiles and metrics, obviously you see some margin improvement and that's part of your journey with a company once you're involved with them as well. But do you ever see margin structures as like dramatically changing from the inception of a business to kind of the midlife without fully reformulating or reworking their products or their business structure?

42:53
Aaron Garcia
Yeah, no, there is definitely we found great opportunity to do that. I mean there's a lot of growth. Companies are very focused on driving the top line and driving distribution gains, driving, you know, awareness trial. And that's great, that's what they should be focused on. They're less focused on optimization, on the backend, on the supply chain and on the less exciting stuff. We have resources at Main post that specialize in that.

43:19
Aaron Garcia
And so we found there is great opportunity because generally these companies have grown so quickly and they've scaled so much that there is real conversations to be had with suppliers not reformulating the product, but just because the volumes have grown so dramatically to really come back and think about pricing structures, think about maybe rejiggering how you're distributing your product throughout the country because your footprint has gone from regional to national and you maybe now need to move to a hub strategy. So there is a lot more margin to be gained that we found. You know, as you gain scale and as you gain national scale that generally founders are not as focused on. They maybe don't have the expertise in, but financial sponsors typically do have some level of resources to come in and help them go get after that.

44:06
Aaron Garcia
And it's not changing or diluting the core products that they've created. It's really just taking advantage of the size of scale that they have got.

44:13
Hannah Dittman
To get that money. Kazakh King Profitable E Power I would.

44:19
Aaron Garcia
Say, you know, again, tough conversations and don't be afraid to ask your supplier partners, you know, squeaky wheel. So even without, you know, being super sophisticated on this stuff, they're in this with you and you know, again, being able to do it in the right way and talk collaboratively with them, you're not going to get what you don't ask for. So be hungry on that end of things too.

44:39
Hannah Dittman
Yeah, and I think some investors have a very rigid thought process on margin. Sometimes that margin won't change that much. I think everyone kind of has their own experiences and their own heartburn with different things that have happened or whatnot. But yeah, I think as a founder you can proactively tell that story too. If you figure out the nickel and dimes and where you're gonna go find them and you know that they're there. I think it's an ownership mentality as well sometimes on explaining this stuff too, how much emphasis do you all place in the early years? Like let's say, you know, I'm a brand in startup CPG's ecosystem. That's one to three years in market. I'm still kind of figuring things out. Maybe I'm anxious about analyzing my business. You know, does that matter?

45:20
Hannah Dittman
When does a brand really need to start getting it right and are they ever kind of held to the fire for not having it figured out exactly right from day one or year one?

45:28
Aaron Garcia
No. I mean, look, I think again, we're not overly critical about what happened usually in the earlier years. I say we're most focused on what's your last two or three year track record prior to our partnership? We might go back longer in history, if you have it, to understand. How did you perform during the last cycle? How did you perform during COVID Just because the data exists, you might have been a much smaller business in a different profile business during that time and won't count for that. But that's the only reason we're going back that deep into history to look at that stuff. It's not to, you know, really say and analyze your business back then.

46:04
Aaron Garcia
It's really what are you doing now in the more recent history that we're more focused on, at least at main post, in our kind of phase of partnership in private equity, you know, last two or three years are the most.

46:14
Hannah Dittman
Important, really helpful to understand. I'd love to take a second to squeeze in a case study question before we have to wrap up for today. 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 with a similar question. The recent question was how much dilution should I anticipate as a founder? And I think they're referring to over the life cycle of their business pre exit? Probably yeah.

46:45
Aaron Garcia
I mean look, it's going to be dependent on when you raise in your cycle for your business. The longer that you can hold out from taking outside capital, the lower amount of dilution you're going to take on. That being said, my advice from earlier is you're not going to regret taking the dilution on and having access to capital and cash is going to help ensure that you can get to the promised land at the end of the day. So I would just tell you, I would anticipate 20, 30% dilution would be, in my mind, probably the right number. That happens for probably most growth companies during the earlier stages that we're talking about here to kind of really have a meaningful raise during that process.

47:24
Aaron Garcia
If you take on a more meaningful investor, obviously it could be a lot more than that, but as you're raising up, you know, throughout that, it might be smaller chunks over the course of time. So it just depends on how many raises and how much you're doing. But if you can hold off, the longer you can hold off, the bigger your business gets. Obviously the less dilutive that first raise is going to be for you at that period in time.

47:44
Hannah Dittman
Thanks so much. Before we wrap up, I'd love to make sure people have a tangible, actionable way to apply all this amazing knowledge to what's the best way for founders to reach you or to follow along on some of your insights and learnings. And do you have any advice for anyone maybe on the operating side looking to transition or joining main post or investing in general, given you've spent so much time in the space?

48:07
Aaron Garcia
Yeah, I'd say LinkedIn's probably the best way to get in touch with me. I try to be as responsible there. And obviously we have a website Main Post for, you know, inquiries and we're always looking at, you know, for the next great partnership opportunity there. You know, we're always looking to bring on talent at Mainpost as well, internally within our company and also with all of our partner brands. So there's a lot of opportunity to join the broader Main Post family. So if you're interested in any of those opportunities, love to, you know, meet you and see if there's a great fit. Traditionally, private equity has gone after people out of investment banking.

48:40
Aaron Garcia
We wanted to see if we could find a way to bring talent, you know, from other industries and knowing that there's just so much out there in terms of people with different perspectives and they could help make Main Post better. Outside just the core banking industry, we have analyst program that you don't have to be an investment banker to get into and that's a pathway in the Main Post. We actually just completed our hiring cycle for two new team members this past week.

49:05
Hannah Dittman
Well, congratulations. I can't say enough good things about you, Aaron. And I can't say enough good things about Main Post either. It's awesome to see how much you guys have grown, how amazing partners you are and how thoughtful and strategic of investors you are. I think you're a wealth of knowledge. I obviously have learned so much from you and I hope everyone today here has as well. Thanks again for all of your time and awesome insights.

49:28
Aaron Garcia
Thank you. Thanks for having me. Best of luck to everyone out there and entrepreneurs are what makes America such an amazing place and keep driving us forward. So hopefully this was helpful and thank you Hannah.

49:44
Hannah Dittman
Thanks so much for tuning in everyone. If you like this episode, show us some love with a five star review at ratethispodcast.com startupcpg 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. If you're a potential style sponsor and want to get in on the fun and appear on the podcast, shoot us an email@partners startupcpg.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.