About the Author: Zach DeAngelo is the co-founder of Rodeo Ventures, a food, beverage and health and beauty care advisory and investment firm. He is career entrepreneur who first co-founded Cocomama Foods, a gluten-free food company, served as CEO of Kalot Superfood and was the COO of Little Duck Organics, a leader in the competitive organic children’s snack category.
I live in Boulder, Colorado.
I was going to end the article there and let readers form their own conclusions about me, but since I’ve started I may as well keep going.
I led with my place of residence because Boulder is the uncontested food start-up capital of the world. That may be a myopic conclusion to reach, but it’s a wild time here, and a really wild time to be in food here. A simple bounce down Pearl Street will quickly self-validate that reality, because you’ll certainly overhear a conversation like this: “We closed the round in a few weeks and I’m really excited because the lead is a lady who grew a superfood snack company that sold for 4 bazillion dollars, and it’s great because we got a valuation of 100x forward revenue.” Hyperbole? Maybe, but it’s impactful hyperbole. We are now seeing historic valuations and I don’t think that’s good for entrepreneurs or investors.
I take the view that high valuations aren’t good for anyone because they set unrealistic expectations for how we all define success. It’s not uncommon these days for a business that has a trailing 12-month revenue of $250k to set their valuation at $2 million. For smallish food companies, in fact, $2 million seems to be the valuation du jour. The problem with that as the status quo is that a valuation of $2 million only makes sense if you’re damn sure you’re going to grow your business 10-15X before you have to raise your next round of financing. That’s a pretty tough scale point and there’s a long gulf between that kind of trailing 12-month revenue and those expectations.
I’m not picking on entrepreneurs, because they’re faced with a pretty tough Catch-22. If the business economics necessitate that they have to raise a significant amount of money, say $1 million, then they usually have to ask for a higher valuation or they’ll be fully diluted in their seed round. Historically, business builders were FORCED to create economics that minimized the monthly burn rate because the money simply wasn’t available. Nowadays, investors are all too happy to meet these terms and hope for the best – so that freewheeling attitude is also contributing to the valuation surge.
I’m starting to sound much too cynical – especially since, as established, I’m living in Boulder — and I acknowledge that there’s a counter argument to make, which is that, after all, the investors who are making these bets are WAY smarter than I am. Their argument is that many of these investors believe that their involvement in a food or beverage brand will reduce operational risk and increase opportunities for distribution and success.
In many cases, they’re right, but it’s my opinion that the larger valuation trend is eventually going to lead to a big pull-back in CPG investment. I’m not going to use words like “bubble” because I’m not quite there but I do think we may be making a few mistakes that the tech industry made in the late 90’s. In my prior example, a company that does 250k in 2016 that triples their business to 750k in 2017 would be dead in the water with a valuation of $2 million — and there’s something not right if growing 300 percent would be considered a failure.
The reason investors are now willing to pay more for food companies is that M&A activity is also at a historic high and when the multiples increase along the investment life cycle then the return can be worth the risk. My argument is that something greater in our industry is lost when things become too speculative. When people chase multiples and grow their business with the temperamental fuel of equity financing, then people and things get burned.
I really don’t want to come off as holier than thou here, because I’ve been there: I made the mistake of over-valuing my business, relying on outside capital, and losing it all in the process. I’ve seen and lived it first hand. Sometimes it works, and we read about those scenarios all the time, but choosing that path is kind of like saying “Hey I’m pretty certain I’m going to write a hit song,” when very few of us are Drake (dude is fire). Here’s the difference: unlike in the music industry, we can make a damn good living by hunkering down and focusing on the important things: people, placement, pricing, product, velocity, gross margin.
Of course, M&A activity in our industry will continue to be strong, and food companies like General Mills/Campbell’s/Hormel/Hershey/Coke will continue to look for the biggest opportunities in natural food and beverage — and that’s a good thing. My point is that we’ve been in an economic expansion for about 7 years now and we all know that our macro economic environment is cyclical, and when things contract, money won’t be so easy to come by. My hope is that all of us focus on creating strong businesses with solid fundamental economics so that a slight contraction doesn’t sink the ship. We’re all in this together, and unlike a lot of industries, we’re doing something that actually matters. In the end, entrepeneurs and investors are in the same boat, so let’s go ahead and make sure that it’s a sturdy one.