Products Are Like Children
The Business of Food
by Jennifer Barney
Products Are Like Children
3-min read
In a previous post I described a startup pitch to a value-added ag producer. The founder had a number of innovative product prototypes across various food categories (center of the store, dairy case, deli), all of which the key protein ingredient would be potentially supplied by the ag entity.
The pitch went like this
The founder explained that some of the brand’s products had launched into grocery in the recent past but failed due to lack of ability to fulfill orders. (It was unclear if the products ever actually hit shelves and no data to support sell-through was provided.) The ask was for investment to get the products produced.
The ag producer was seriously considering this investment as an opportunity to generate higher value for an input they already make. In this case they’d be the exclusive supplier and a stakeholder with a capital contribution based on a valuation tied to forward revenues. It's not hard to see why this would be a compelling proposition.
However, successful investors must consider these three things when looking at startups:
Founder ability
Market need
Unit economics
Ag producers contribute to unit economics through supply chain. Ag’s competitive advantage lies in COGS: raw materials, manufacturing, warehousing, and even distribution logistics. These can be quantified in the pro-forma to show their value flowing through to the contribution margin.
What isn’t given nearly enough consideration are founder ability and market need. Market need at the startup stage is proven out by a small in-market test that can be measured. An example of this at a basic level is a startup that rents space at a commercial kitchen, gets into a few stores (or launches in ecommerce), and has data to show repeat sales (retention of customers) over a trended period.
Assessing founder ability is more nuanced.
Let’s look at what this founder was proposing
The premise was that getting into grocery stores is a numbers game, because buyers only consider new products once a year in their categories, so increasing the chances of getting in requires having a bunch of different offerings in multiple categories. The goal would be to get as many products across the store as possible.
This represents a total lack of understanding on how to run a brand.
Products are like children
Products do not take care of themselves once they leave the warehouse. Especially not new products. You have to know where they are all the time, check that they are where they’re supposed to be, advocate for them when they are amongst their peers, and you know they’ll do better out in the world if you are there to represent them and not the babysitter (i.e. broker).
All of this caretaking is called brand management and startups running lean don’t have internal teams to handle the complexity of launching more than one product line at a time. (Not to mention brands take years – if not decades – to build enough awareness to be believable in multiple categories.) Ag cannot help with this, as this is not their area of expertise.
Capturing more value by investing in innovative new products requires thinking like an investor and remembering that products are like children.
All my best,
Jennifer
News
INC funded study (you can't make this stuff up)
Subdued valuations for Big Food in 2021 says Credit Suisse
I'd love to hear from you - get in touch at jennifer@3rdandbroadway.com