Originally published by Locavesting.com
Mention the word ‘startup’ and it’s sure to conjure images of young engineers hunched over laptops, feverishly coding the next Facebook or Twitter. While tech startups tend to get all of the glory, not to mention the lion’s share of venture funding, consumer products companies are establishing a solid track record of returns—and gaining new interest from investors.
My company, P2Binvestor, is based in Denver, Colorado—a mecca for healthy-eco-friendly new brands, such as Noosa Yoghurt and Boulder Chip Company (now Boulder Canyon), that have grown from stands at the local farmer’s market to multi-million dollar companies with nationwide distribution. We provide revolving lines of credit to growing startups and other small businesses, funded by a “crowd” of accredited investors (and today, we are announcing our own Series A1 funding of $7.7 million, led by Rockies Venture Club, the largest angel investor network in Colorado and Future Venture Capital Co, Ltd., a Japanese venture capital firm).
One lesson is clear: investors like innovative product companies, especially those located in their communities.
Over the years we’ve learned a thing or two about investor appetites. And one lesson is clear: investors like innovative product companies, especially those located in their communities that have a good story to tell.
Why? These investors know that while they may not see the 10x returns they could get from a high-growth, successful tech company, they can hit a lot of doubles and triples by investing in companies that manufacture and sell goods. Unicorns are extremely rare, and investors know that. They are looking for good quarter horses to round out their portfolio. And the proximity of local companies gives them an opportunity to really get to know the products and people they’re investing in.
In 2015, venture capitalists spent $2.3 billion backing consumer packaged goods (CPG) businesses, six times the amount invested five years ago. And many angel investors and VCs, like those at Maveron and Circle Up, choose to invest in the consumer and retail industry over the tech industry for the unique benefits they provide.
Ryan Caldbeck, CEO of Circle Up, says many investors swoon over the promise of overvalued tech companies and miss valuable, data-supported opportunities in the consumer product arena, where he says returns are often higher than in tech. “Less sophisticated investors, who often don’t understand how to evaluate a tech business, get enchanted at the possibility of investing into the next Facebook,” he told Entrepreneur magazine.
Product companies—especially those that make natural, organic or eco-friendly products—are riding a wave of consumer demand. The organic food market, for example, grew to $39 billion in U.S. sales in 2015, and major corporations like Unilever and Danone have been buying up emerging natural brands.
For investors, a tangible product offers a level of comfort and understanding they can relate to as consumers.
Of course, investing in startups and small growing businesses is inherently risky— no matter what industry they’re in. Product company founders, however, have some advantages over their tech peers when it comes to raising funds. For example, by the time a product company is ready to expand to a more mass market, it has typically already gone through the growing pains of testing and refining its product and developing its brand, and has sales data and a customer base that demonstrate traction.
Tech startups, on the other hand, are often fundraising large amounts of capital in order to test ideas and pay staff. From the investor standpoint, the product company’s more stable margins and financial projections can be very attractive.
Product companies that are vertically integrated can produce higher margins and have more control over the quality of their products, which can lead to bigger profits and more product diversification. Noosa Yoghurt, for example, partnered early on with a local dairy farm in Boulder and was able to manage every step in the product lifecycle—from cow to consumer.
Companies that are not vertically integrated can still engineer higher margins in a number of ways, by continually refining and finding cheaper ways to make their products. Higher sales margins mean better returns to investors and more free cash to invest back into growing the business and increasing profits. Being able to demonstrate a path to profitability in a way that is easily understandable is a huge advantage in appealing to investors, who are often fielding pitches from tech companies where valuations and the path to cash flow break even are much more subjective and vague.
Consumer product companies also appeal to investors who care about supporting business growth in their home communities.
In our hometown communities of Denver and Boulder, the “Buy Local” mantra isn’t just a bumper sticker, it’s built into our DNA as a state of Colorado-proud locavores. And we aren’t alone in this growing, nationwide trend.
That’s not to say that starting, financing, and running a product company is all sunshine and roses. It’s not. There are steep costs involved in developing and marketing consumer products, especially those subject to government regulations, like natural food. (We recently hosted a webinar addressing the challenges, as well as the sales and marketing strategies, unique to the natural and organic foods sector.)
It’s also very difficult to take a product from inception to mass distribution, and very few product-based companies go it alone. That said, there are well-established ecosystems to help business owners get their products into more hands, from brokers and distributors to co-packers. That costs money, too, but it’s a big plus to be able to show investors that you have developed a solid channel strategy.
Many savvy investors have made their way back home after chasing tech unicorns around the world, and, really, some of the smartest never left. More than ever, investors want to be able to connect with the people and products in which they are investing and understand the deals they’re making at a fundamental level.
What better place to begin than with products they love that are made right in their own backyard?