Fundraising: Venture Capital Investment

Collaborative Fund’s Sophie Bakalar talks trends in the CPG sector, marketing costs, and hitting the gas (or not) on your venture.

Venture Capital funding plays a Darwinian role in the food industry. On the entrepreneur’s end, the process of pitching and negotiating with potential investors will put your vision and product through the most arduous of survival tests. On the VC side, deep knowledge of the market, the talent/skill/experience it takes for a business to succeed, and the community within which that business exists — lets call it the ecosystem — are just some of the highly specialized insights required of an enduring VC firm.

That’s a lot of mutual cross-vetting. And for good reason: The margin of error is thin, but the results are worth it. The right combination of timing, product and investment is like the right combination of DNA: not only does it ensure that your business survives, it ensures that the environment in which your business exists also continues to thrive, sustaining other businesses — and the VCs that support them — in the process.

If you feel driven to the top of the canopy in the proverbial Amazon of the food biz, there’s no better way to find out what you’re made of than to take a whack at the VC funding pot. Here to give you a taste of how the venture capitalist thinks about food as an investment is our mentor Sophie Bakalar, a VC who oversees consumer product investments at the renowned venture capital firm Collaborative Fund (Kickstarter, Sweetgreen, Blue Bottle, Impossible Foods etc). From her thoughts on what makes products lucrative, to what makes a company attractive to investors, Sophie’s ideas can be applied to evaluate or enhance any business, regardless of funding model.

In your opinion, what are some of the most lucrative and scalable types of food startups?

Sophie: Anything that replaces previously popular, unhealthy categories that consumers are trying to get away from. For example, sparkling water has exploded as consumers are actively trying to give up soda. Sweetgreen and other healthy [Quick Service Restaurants] have established themselves as alternatives to fast food. Chobani has excelled as a replacement for more sugary yogurt. I think startups that supplant popular categories like sugary cereal, snack foods, condiments, and indulgences (ice cream, candy, etc.) with healthier alternatives have a lot of room to scale.

Can you shed some light on how food trends are impacting Consumer Packaged Goods companies?

Sophie: Traditionally, CPG consumers have been driven by price and convenience, but now they’re increasingly looking for new value-drivers: healthy ingredients, transparency, authenticity, personalization — just to name a few. Smaller CPG companies are inherently better positioned to capitalize on these trends than big brands, which can’t adapt quickly and aren’t trusted by customers. Also, while food is becoming more local and personal, big brands are conditioned to think globally, so startups have a lot of room to compete regionally and in more specialized/niche categories.

What do you find are some of the biggest challenges faced by CPG and retail startups?

Sophie: Even though startups are well positioned to capitalize on evolving consumer trends, it can be challenging to compete against the enormous marketing budgets of big legacy brands. Social media has helped democratize marketing (e.g., Dollar Shave Club’s viral YouTube video), but marketing costs are increasing across the board, even on social media. So brands need to be especially inventive when communicating their story. (here’s an article I wrote on this topic)

At what stage should a food business start looking for VC funding?

Sophie: This is so company/industry/goal specific, it’s hard to give a generic response. Every business will need funding at a different stage. In general, I think when there’s some proof of product/market-fit (organic revenue growth, high customer retention, etc) and you’re ready to hit the gas (if you want to hit the gas), that’s a good time to look for institutional funding.

When choosing companies to invest in, what are some things you look for and conversely, what are some things that turn you off?

Sophie: We’re early-stage investors so products are likely to change and there’s typically not a ton of economic data to analyze. So a significant addressable market and strong team are especially valuable. Industry-specific experience — if not on the management team, then on the advisory board — is really helpful since there are a lot of barriers to entry in CPG & retail that can be tough to navigate (health regulations, finding co-packers, etc.). I try to avoid companies that capitalize on trendy diets (even if that diet has been popular for several years) since they can be extremely fickle.

How do you suggest businesses seeking funding connect with investors?

Sophie: Networking with other food entrepreneurs is a great place to start. There’s a strong community in New York and fellow entrepreneurs can usually put you in touch with investors they’ve spoken to who are already familiar with the food space. Also, there are a lot of great resources out there for fundraising now, so you’re not locked into the traditional funding paths. AngelList and CircleUp are excellent platforms for connecting to individual and/or institutional investors.

Read about other funding options in our series on Fundraising:

Fundraising: Loan Financing

Fundraising: Crowdfunding