Maintaining a lucrative business is expensive in any industry, including the CPG space. Let’s suppose your company has successfully developed high-quality products and brought them to market with the help of seed money and series A financing. In order to scale, you need to gear up for another funding round.
What exactly are investors looking for from mid-stage CPG startups? What types of investments are available for your company? Below we’ll address these concerns and others pertaining to CPG companies seeking series B financing.
Considerations For Your Series B Round
By the time your business has reached this point in its growth, investors will want to see that it has gained traction in the marketplace and is scalable. Therefore, your series B fundraising preparation will involve detailing your past accomplishments using concrete evidence. It also means presenting a comprehensive business plan that is based on in-depth market research.
How you tackle this funding round may be altogether different from previous fundraises. You can seek additional capital from your series A investors or choose to forge partnerships with new investors (or perhaps a combination of both). Before moving forward, you first need to look backward at your brand’s successes and shortcomings thus far.
Looking Backwards: What Became of Your Series A Financing?
Series A funding turns a fledgling idea into a full-fledged brand. In this round, you used capital to perfect your products, hire key personnel, and establish a retail presence (whether brick-and-mortar, e-commerce, or both). All of these components will allow your company to qualify for a higher valuation, which is attractive to investors active in the series B stage.
How do you prove to investors that your brand is ready for its next funding series? First, be sure to provide proof that you’ve created a best-in-class product and are selling it to the optimum market. This factor is extremely relevant in the CPG industry, which is saturated with niche interests and ever-evolving customer demands. Customer feedback on previous product iterations can serve as your confirmation. The more affirmation of your product’s value in its most recent form that you’re able to document, the better.
The quality of your leadership team is another area of concern for investors, especially for first-time CEOs. While it’s not expected that your company will have an army of employees to get all the work done, it’s critical to have a solid foundation of talented individuals who are as excited about the brand as you are. Ideally, some or all of them should have experience in the CPG space.
Finally, you’ll need to show that you have a secure revenue stream in place. Series A funding that covered product development and payroll costs should have allowed for this. It’s OK if your business has not yet achieved net profit, but it needs to have reached a break even point. Demonstrating an ability to generate leads and retain customers using your series A financing is also advantageous for successive fundraising.
Looking Forwards: “B” Is For Business Plan
Series B funding rounds are all about growth. Investors want to know what exactly you will be doing with their capital, as well as what your exit strategy is. Therefore, it’s critical to have a detailed business plan in place before you begin pitching for a series B investment.
What elements do you need to include in your business plan? Below is a list of components that will be relevant to CPG startups seeking series B funding:
- Company mission & vision
- Product specifications & any details about upcoming product lines
- Industry outlook & target market
- Expansion opportunities based on market research
- Cost of customer acquisition
- List of competing companies
- Cost of hiring & training additional personnel; name their functions (include an organization chart)
- Current & future marketing initiatives
- Business development strategy
- Production & distribution costs
- Order taking/replenishing system (current and/or future)
- Plans to purchase any software systems (include their purpose & price)
- Key financials: balance sheets (last 3 years) , income statements (last 3 years), cash flow statement (last 12 months), plus projections for next 2-5 years
In the words of LinkedIn founder Reid Hoffman, “Internal data is preferable over anecdotal third party data.” Keep this advice in mind when drawing up your new business plan.
Approaching Series B Investors
After making headway on your pitch preparations, the time comes to begin approaching investors for your series B round. You’ll want to generate a competitive environment in order to secure the best possible investment. In other words, you want to be left with several offers to choose from, rather than one you’re forced to settle with.
Securing a competitive playing field amongst investors requires that you create an “investor pipeline.” Approximately 6 months before you actually seek a series B investment, coordinate meetings with potential investors. Establishing relationships with investors early on helps to ensure that the fundraising process will move more quickly when the time comes, as your company will already be known in the community. Moreover, if you’re able to get several potential investors working within your designated timeline, you’ll be more likely to receive term sheets around the same time, allowing you to gain some negotiating power.
How will you determine which investors are best suited to provide you with series B financing? Through research, of course! Find out what types of businesses your ideal investors are typically looking at. Investigate the criteria they use to ascertain whether or not a company will be successful.
CPG companies in the series B round have several options in regards to how they can obtain funding. You can choose to repeat funding models that were part of your series A financing, which affords the luxury of consistency in investor relations and reporting. Should you want to explore alternatives that fit your updated business needs, Figure 1 below presents the available options for series B financing.
Series B Funding Options
Venture Capital Firms
Venture capital is particularly attractive for startups that typically don’t yet have access to loans or other debt mechanisms. Venture capitalists provide funding in exchange for equity in the company and usually take an active role in their invested business. They might require specific investment constraints that limit the capital amount and percentage of capital allowed from each investor.
Crowdfunding allows businesses to market their company for investment to an unconstrained market of retail, private equity, venture capital, or institutional investors. Businesses may also receive loans from crowdfunded investors. These investing activities are conducted through an internet platform operated by a crowdfunded finance provider that connects companies and investors at a low cost for both parties. Crowdfunded investments also have restrictions on capital amounts and allowances per investor.
Mezzanine debt is specially customized for each issuance, but many issuances have common characteristics. This type of financing is not backed by company assets, has lower priority credit as it’s subordinate to senior debt, and often includes an equity “kicker,” usually in the form of warrants or convertible debt. It is considered risky because of the debt structure and the issuing company’s usual profile. Therefore the required investor return is often much higher than normal debt securities. As such, coupons are normally in the 10-15% range. Mezzanine debt doesn’t have prepayment protection; the high coupons provide the issuer with an incentive to repay the debt as fast as possible.
Other Considerations For This Funding Round
You probably want to have an idea of how much equity your company will be giving up in exchange for additional financing. Series B investors typically look to gain about about 33% ownership, which comes from all existing ownership percentages, according to LawTrades CEO & Founder Raad Ahmed.
CPG company founders and executives should also be aware of the negotiating power that they’ll have over their series B investments. This will be affected by how badly your organization needs the capital, past experience and success, advisor presence, the products themselves, the marketplace and competition, and chiefly, the competition amongst investors to fund your brand. Being presented with several term sheets can augment the quality of terms and even increase your valuation.
Victoria is a Marketing Associate at Repsly, where she leads the company's P.R. and social media efforts. You can also catch her prepping for slew of exciting industry events. A New England native, Victoria has spent time living in Italy and traveling throughout Europe before settling back in Boston. When she's not planning her next trip, V is probably tasting wine or brushing up on her Italian.