Optimize for Getting Investment

Jordan: [00:00:00] It's no secret that getting capital investment as a CPG brand is still very challenging. There's been a continued movement towards becoming profitable, but that's also really hard in running a CPG company, especially when you are starting out. Sometimes you do need some money from somewhere and it needs to come pretty early on.

So if that's the case, We're going to be talking about how to optimize for getting investment. So for this conversation, I've invited on my friend, frequent podcast guest, Yuval Selik, who is the founder of Promomash, and you talk with lots and lots of brands and founders. What is it like out there for the people that you were talking to now? 

Yuval: Well, thank you, Jordan. You are my favorite. Podcast, to join. So I appreciate what you do in the community. That's a great question. I think that speaking with brands, we have to understand a couple of things.

Number one, capital is always out there, but it's not, at least now it's not flowing into [00:01:00] CPG the way that it used to. I think for brands, this means that they have to. Show that they're not just growing, but also operating efficiently. Right. And I think one overlooked area is how brands manage their spending.

Their promotions, their deductions, I think it's part of it because it's really about, once you get on the shelf, how do you sell off the shelf? And as you know, the product doesn't speak for itself a lot of times and you have to help it out. These are often, the biggest line items, in a CPG, budget in the PNL.

If they're mismanaged, they can be a major red flag for investors. But when done right, they can actually be a story of profitability And operational discipline, that attracts capital. It's not that money isn't out there. It's just brands need to be better equipped to provide the, security, reduce the risk for the investor.

Jordan: You know, when I first started my brand TeaSquares in 2016, I was able to raise, a modest 100, 000 investment on 10, 000 in revenue, and it was enough to kind of get started, [00:02:00] jump into the business full time. We raised a little bit more money in the next year after that. I see a lot of that type of investment going away right now, unless it's for a personal relationship that you have the capital that's out there a lot of times I see is geared more towards.

Companies who have proven something right had some success in the market. And I think it came from a lot of CPG brands going out of business, a lot of investors losing, that money. And being very, very cautious about continuing to invest. I think there's a little bit of a thesis that CPG brands could have these massive exits like tech companies and so that wave of investors has kind of cycled through, and so there is money out there, but just like you said, you have to be able to prove that. Your products worth investing in that you'll have a good chance of having that outsized outcome. 

Yuval: Yeah. I mean, I think we got to get something clear.

Number one, if you're a brand founder, stop looking at LinkedIn to project how your brand is going to act in the marketplace. If there's one piece of advice that I can give 100 percent of the brands. What's happening on [00:03:00] LinkedIn, just like what's happening on Instagram with influencers, is reserved for the 0 percent of the population.

What do I mean by 0%? I mean it's 0. 0000001, the brands that are selling to, Siete who sold for 1. 4 billion to Pepsi, they just don't exist for most brands. So you have to look at the horizon and your timeline very differently. And the process and the cycle and the writer of the blog was basically saying most founders give up on outbound sales after six months. So they might get an SDR or in the CPG case, you know, you have a broker that's going out there and fighting for shelf space and it's all about long term networking.

And after a while it does pay off, but in the first six months or a year, it doesn't. So sometimes brands need to understand that raising funds is not the answer. Right. And even though the money is out there and even though it's the end of the year and you might be cash strapped, optimizing on your day to day is way more effective and in many ways, even in acquiring, cash or capital over time, because if you're not [00:04:00] healthy, taking that, medicine might cure a couple of symptoms, but you still have the disease, 

it's like the difference between taking, multivitamins versus, actual medicine, right, pharmaceutical. 

Jordan: Yeah, I think it's interesting you mentioned the LinkedIn comment, I would say a lot of the most successful founders who are running fast growing businesses are not on LinkedIn unless that is part of, their sales process.

If you look at the founders of Siete Foods, they weren't posting on LinkedIn every day. With Peter Rahal, he wasn't posting on, LinkedIn every day. He was heads down kind of in the business. And not to say that you shouldn't be on LinkedIn because there's a lot of value there.

But I think it's an indication of, where you spend your time throughout the day. And it's usually the founders who are heads down building their business because they have so many sales that they have all these struggles to fulfill them. They're planning for promotions and driving, actual velocity are the ones who are attractive to investors right now.

Yuval: Yeah. I think you have to look at it from. A fundraising perspective and a bootstrap perspective. And for the most part, those folks on LinkedIn and other places where they're [00:05:00] shouting, we raised series a 20 million, a hundred million, and now they're operating on a completely different framework because they didn't clean up their house.

So investors, I mean, here's my suggestion, right? To brands, all sizes, investors are cautious. Even in 2021, they were cautious, even though money was flowing. But even more now they're cautious. looking for businesses that demonstrate clarity and control. And unfortunately, a lot of CPG brands struggle with spending efficiency, 

they don't have. The systems, and the process, to track them effectively. It's what I call a, the Swiss cheese CPG world that we're living in. Data is all over the place and it's not easily digestible, right? So when an investor sees excessive trade spend, and it's not even trades, but just spending in general without a clear return on investment.

Right. Or. They have unresolved spending, which in terms of reductions et cetera, eating into the revenue, it raises questions about how well the brand is managed, right? By fixing these gaps and what brands need to do is they need to really focus on where are the gaps in my PNL.

How do I get to understand my [00:06:00] retailer relationship, my product relationship within the retailer with my spending, analysis. So I can go deep into where are opportunities and where can I, pull back, then the brand can turn, what seems to be a weakness into a strength.

Right. Because they need to show the investors that they're prepared to handle growth. I see this all the time, which is why Promomash never raised funds. We didn't want to take good money and throw it in as fuel to learn our mistakes. You see, whether it's some of our competitors or brands, they raise a lot of funds without understanding that they have a lot of learning to go through.

So they spend all of that money on the lesson. And then when they learn, they have no more money because nobody wants to invest in them anymore. So they're behind. And I think that's the problem with brands is that they get on this hamster wheel of investment and so they raise series A and then they got to raise series B and they go over and over and eventually it dries up because they haven't really proven that the money is going to be well utilized.

So that's really the problem. Hopefully folks that are listening, take this to heart because [00:07:00] it really is true. 

Jordan: That's why, I mean, going off of that with TeaSquares, like I mentioned, we basically raised our first round before we had product market fit. We learned and spent that money on learning. And what we found essentially was that the product and value proposition is current form was very expensive to continue growing.

And yes, if we had lots of money, we could have made it work. But it required lots of education and we didn't have the funds or the end goal growth output to really reach that. And so now when talking to other founders. I highly recommend working towards getting break even with your business as soon as possible, finding product market fit as soon as possible, and as scrappy as a way as possible, and then having to make a decision if you want to continue growing Bootstrap, or if you found a formula that works but you still need more cash, at that point take on investment when you have some leverage and you have a proven track record and a growth process.

And both you'll be in a better position and [00:08:00] you'll attract better investors who understand that you have a solid grasp of your business and how you're specifically going to grow it. And I think that there's a lot more opportunity there. And those are the companies that are actually getting that investment.

Yuval: Yeah. I mean, we patented the term CPG. Not consumer packaged goods, but the way we look at how to run a business and it's been out there. We're marketing it the C is for cash flow. The P is for profitability and the G is for growth And if you look at it, unless you understand and are on top of your C and P growth is impossible to manage Because you're either going to grow too slowly or grow too fast, and your business will fail like my business did, right?

So you have to look at, do I have enough cash in the bank? Without raising funds, can I have enough cash in the bank to sustain three to six months plus of operation? And then profitability. If I'm not profitable today, and I can't find a way to get to profitability, then adding a hundred million dollars into my balance sheet, It's only going to exacerbate that fact that we're [00:09:00] never going to be profitable.

So what you're using is you're taking this investment and pretending you have cash. Meanwhile, you don't have cash because that cash is being spent on unprofitable practices. If you're spending 20 percent of your revenue on expenditures, but you don't know if it's driving sales, That's the missed opportunity because you're just spending a whole bunch of money and not really understanding it. Expense management is critical too, because. The spending can pile up, deductions are the big thing right now. Everybody's coming out with a deduction management platform.

Literally every day I see a new deduction management platform that's AI because you know what, everybody's jumping on the bandwagon because it's a big problem. What are they really solving? One AI is not going to fix the world's problems right now. Okay. Deductions are way too complex for AI. They're just managing the transaction. You need folks that help the business operate and become more efficient and to understand what that spend is. Getting on a platform is not enough.

You need a [00:10:00] team. You need folks who are experts in the field to sit down with the brands and explain what the numbers mean. Right. That's why we're putting all our effort now that we have AI, we have algorithms, we have an incredible platform, but we've never helped anyone specifically just with our AI and our platform where we shine is we have experts to sit down and look at a PNL to understand exactly what the spend looks like and what they should do with that spend.

And if they'd have raised funds, how to navigate your relationship with your investor. Because ultimately you have to prove something eventually, they're not going to be sitting there, they have other things to invest in, not just you, you know, eventually they're going to lose interest.

Jordan: Now, let me ask you this, I really see two major problem points that happen. The first are companies who are just starting out and they realize it takes a lot of cash to start and grow a CPG business. And they quickly realize that in the longer term process and they think, okay, how do I actually get started?

Then I see the second [00:11:00] phase of companies who have some initial traction, they're selling maybe a couple hundred stores. But then realize the expenses and the investment requirement are outweighing the actual cash that they're bringing in their business. And so they have something there, but they're realizing that the cash flow isn't lining up.

What would you recommend for people who are just starting out? What are some of the ways that they should think about funding the business? 

Yuval: So I think it's about priorities, right? When you look at. What a company under 10 million, annual revenue go through as an example.

Especially the ones that are under five or under a million, their goal is not to optimize a percent here or a percent there on trade, right? They're not really looking at a high enough recovery rate on deductions because they're not spending a lot, right? If you're taking a million dollars and you're spending 10%, it's a hundred thousand dollars a year in spent.

Maybe 6%, 4 to 6 percent is invalid. We're looking at four to 6, 000 in return. That's not a lot of [00:12:00] money. So what these brands need to do is focus on distribution, focus on building relationships, working in spending time with the buyers, and their customers and the shoppers to really understand where the traction is and then creating a story.

Right. That makes sense with a timeline and horizon of where they're going to go. And that's what they speak to with their investors. Okay. That is the investors don't care about trade or deductions when you first start. They just want to know what's the road like over the next three to five years and how am I going to be positioned for you then once you do get traction to optimize and then scale

Jordan: Yuval. Thanks so much for being kind of a day and talking about these crucial things that brands need to raise investment and grow their CPG brands.