Food unicorns

Raising Capital

Dear Founder, Your Business is Not a F*&@#ng Unicorn.

Douglas Raggio | April 10, 2017

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DEAR FOUNDER,

YOUR BUSINESS IS NOT A FUCKING UNICORN.

A unicorn is a mythical animal. You created a real business. Regardless of your company size or promise, you took a significant risk, saw something others didn’t and acted on it. I find it borderline insulting to call your business something that isn’t real (sorry 7-year-olds).

Yet, many founders get caught up in hubris of raising venture capital (VC) money—encouraged by obnoxious valuations and media hype selling the promise of untold riches and accolades. In some cases enticed by this mystical beast, founders pervert their own values and lose sight of why they started their company in the first place.

Some context…

I invest in healthy food & beverage companies —a recovering VC who’s actively distancing myself from running hypothetical models and “allocating risk“ by playing chess with companies. I now choose to put in real work finding long-term partners who want to create long-term success. Profitable success. Which means profitable growth. Not some high-flying, grow-at-all-cost, artificially propped up function of excessive marketing spend.

I’m no Excel jockey. I’m an operator who’s seen behind the curtain.

With that said, let me shed light on something that is common knowledge in investor circles but seems to be lost on many founders—VCs make their returns on very few deals. The majority of their investments shit the bed. Or as the VC will later say, “I took a flyer on it.”

This is where my concern comes specific to food and beverage. If 1 out of 100 VC deals “makes it,” what happens to the 99 others? Why doesn’t that story get out there more? From my research, the thing VCs have done consistently is create cycles of boom-bust. When applied to food and beverages it’s particularly concerning.

What happens if a bust hits our food supply?

Food for thought

A VC needs to show “outsized” returns to their limited partners, which translates to the need to have the biggest possible exit, from their biggest, fastest growing company selling to the highest bidder. What if your company is only showing a 3x return to that investor? Hell, what if it’s “only” doing 6x but they have a “high flyer” in the portfolio that is demanding the remaining capital in their fund? What do they do with your company then?

Silicon Valley passes these companies around like hot potatoes. It’s called a secondary market. Many companies would have done just fine without the added strains of massive expectations, hyper-accelerated timelines for growth and push for outsized exit multiples.

But alas, the mythical beast has reared it ugly head again.

Ultimately, I find many founders speaking in a language they do not fully grasp (or believe) simply because they think that’s what investors need to hear. Some investors do. Most investors do not.

And it turns out the investors that have the most resources to provide are the ones that are being “priced out” due to new investments dollars flooding the food & beverage space.

It’s a shitty contradiction of rational thinking—operating companies who provide the most value cannot participate because financial wizards are willing to overpay. VCs can afford to pay excessive multiples because they are allocating risk by taking “bets” across a broad range of investments—aiming for a 1 in 100 “home-run” while cutting their losses elsewhere.

Founders are doing themselves a disservice by blindly following the herd.  If you’re contemplating taking in VC investment, here are some items you should consider:

  • How do you personally define success?
  • Why did you start your company?
  • Who can realistically acquire your company?
  • Will acquirers be buying in 3-5 years? Or will they have conflicts?
  • Why would someone acquire your company? What do they see as valuable?
  • What is the true intrinsic value of your company? To a potential buyer?
  • Do you fully understand a preferred return? Know what a waterfall is?
  • How well do you understand dilution?
  • Have you seen a capitalization table after 3, 4 or 5 rounds of capital raises?

A big exit is seemingly great. Unfortunately in food & beverage there are only a handful of big ticket buyers,—those who can cut $500 million+ checks consistently. So the buyer pool is limited to roughly a dozen acquirers (maybe two dozen if incredibly generous). This doesn’t bode well for the thousands of VC-backed brands coming into the fold now: $5.9 billion has been invested across 1,300 deals food & beverage deals since 2012, according to CB Insights.

Douglas Raggio left venture capital to start Bias & Blind Spots

Get real with yourself.

The true measure of success is how aligned an exit is with the founders’ original intentions for the business, and many other intangibles. Not simply “the endgame is a pile of cash” as one investor stated recently.

Think about these when you take in growth capital. Consider the costs of each and every type of investor and investment structure. There’s a pro/con to every option. And you get to make that decision at some point in your company’s growth. So choose wisely.   

When you take in VC investment, your business becomes a line item on a spreadsheet. A chess piece. And you will be treated as such. Protections, controls and downside risk mitigation are all fancy ways to say that VCs are going to help themselves first before you get a chance to eat at the table.

There’s a place for venture capital. But like a casino, there are few winners and many, many more losers. Ask around. This side of the fundraising story is out there more frequently than many would like to admit.

So founders, when contemplating early-growth capital, please take the following advice:

  1. Stop.
  2. Think.
  3. Don’t believe the hype.

Act.

Related: What’s a Successful Crowdfunding Exit, Anyway? 

New Funding Options Take Root for Food & Ag Ventures

Douglas Raggio is a reformed venture capitalist. His new venture, called Bias & Blind Spots, seeks to nurture profitable growth through infusions of capital, resources, and leverage in an effort to create dominant independent food & beverage brands. Flipping the venture capital model on its head, Bias & Blind Spots’ equity line sponsorship allows founders to earn out investors as the investment risk decreases and capital is returned over an unrestricted time horizon. The firm is currently identifying like-minded, ambitious companies to challenge the current consolidation of power in food & beverage. 

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Comments

  1. Thank you for voicing this reality that typically escapes any converstation on angel or VC funding.

    Statistically, very, very, very few businesses can attain extremely high returns on investment for all of the reasons stated in this article plus the primary challenges of the market and of management. Yet, this is all everyone talks about resulting in a distortion of understanding and expectations when raising capital.

    This same issue is distorting the conversation on investment crowdfunding where the common expectation is that a Main Street business must meet ‘unicorn’ expectations or it is not worth consideration.

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