Over the last year, large and small CPG brands have pulled a variety of levers to keep up with rising interest rates, inflationary pressures, and fears of a global recession. And given the cash-intensive nature of the food and beverage industry, many brands are finding it harder to access the necessary capital to maintain and grow.
During a panel discussion at Expo West, Megan Bent, founder and managing partner for Harbinger Ventures; Demir Vangelov, CEO of Soylent; and Simon Bindloss, director of business development at Dwight Funding, shared their perspectives on how brands can address the current moment and how they might look for VC funding and bank investments.
Not all is lost for VC funding
In the near-term, “retailers will really double down behind bigger brands,” and the industry might go through a period of consolidation and lack of innovation, Bent predicted. The latter period provides an opportunity for VCs and smaller companies, so they should prepare for that opportunity.
“If you're ambitious [and] you have a great product, you just have to get prepared for your time and be patient … build the margin structure, engage with the consumer, maybe grow more slowly. But that access to capital, some of that momentum, I think is positioning in your favor over the next 12 to 18 months.”
While the economic picture might look different in 2024, all is not lost for brands looking for VC funding in 2023, Bent explained. VCs will still need to make investments this year, though they will be more selective, Bent added.
“There's a lot of capital that actually needs to be deployed, as VCs are mandated with making investments within a certain period of time. And so, those nerves will settle, [and] people will create a thesis that they can get behind.”
Until then: "Fix your business"
While many early-stage CPG brands will be looking for seed funding from VCs, brands that have been around for a while might need to take another approach and look at how they can leverage debt and their banking relationships.
But before looking for ways to raise capital, brands need to take a hard look at their business model and see if it “is sustainable for the future,” Vaneglov suggested. “First step is to fix your business; don't think that [a] lender or somebody is going to fix your business,” Vangelov added.
After that, brands can explore bank loans to manage short-term challenges. For one, “companies that have assets, whether it's real estate or machinery, there's capital to be had against those assets,” and brands can “borrow against those,” he added.
However, brand operators also need to do their due diligence to understand the financial agreements that they enter into, so they don’t open up the possibility that a bank can take over their business, Vangelov explained.
"What I found in my experience is you don't want a banker telling you what your brand should look like or what products you should cut. The secondary piece, if it's really bad, you need to really do a good job on control issues. There is language in the borrowing documents that allow you to take control of your company."
Borrowing when you don’t need it?
Brands that weathered the recent economic challenges but are worried about what might come next might want to look at their debt and equity options before they need it, especially given the prospect of higher interest rates, Bindloss suggested. “You don't want to be in a situation where you are desperate need to raise capital tomorrow; you got to look further ahead,” he added.
Understanding the various financial options available and their limitations also is important, Bindloss said. “If you need it in a month, there are certain options that will not take a month to get,” he added.
One way brands can better understand their options is by building out their finance department, even if it's just someone that comes in part-time to work with the CEO, Bindloss said. Given the complex nature, finance professionals can also help manage loans and debts, he explained.
"It's not sort of a one-size-fits-all, you probably have three or four things going at the same time, which is difficult for founders to run them, and that's just the nature of the beast."