The chief executive of business accelerator Branchfood discusses the pathway for start-ups to grow as a CPG food brand, valuation multiples in the sector, addressing the funding gap, and investment opportunities on the horizon
By Murielle Gonzalez
Brown Brothers Harriman, the oldest and one of the largest private banks in the US, named Lauren Abda as one of the 20 women to watch – and when I met her, I immediately knew why. Abda has built a career championing food innovation and steering investors into backing CPG food and drink brands through three distinct but synergistic organisations – Branchfood, Food Edge, and Branch Venture Group.
Branchfood provides best-in-class-resources, connections, education and workspace for the food community to convene and collaborate. Branch Venture Group is an angel investment network for food-related start-ups seeking early-stage funding from leaders in the industry. And Food Edge is New England’s food summit that brings together the industry’s largest brands, disruptive start-ups, and top researchers to discuss the future of food. Food Edge is held online on 4 and 6 May.
“I launched each of these companies at a point in time when the need was evident and in collaboration with the right people to ensure success,” she tells me. But there’s a deeper motivation for all that Abda has done to date. Abda was 16 when her grandmother was diagnosed with leukaemia, which led her family to change their lifestyle radically. She experienced and discovered food’s potential in supporting health, combating disease, and addressing nutrition shortcomings.
Her interest in these topics steered her formal education, and Abda completed a master of science in food policy, nutrition, and entrepreneurship at Tufts University.
With this background, it’s unsurprising to see Abda’s trio of organisations helping to advance food innovation, leveraging connections with entrepreneurs and investors. The ultimate goal, she tells me, is to help transform the food system into a more sustainable and resilient one.
Roadmap to CPG food business
Abda argues that contrary to what many people think, making a great tasting product doesn’t guarantee business success, but is rather table stakes for investments.
For example, Branch Venture Group’s team screens for specific criteria when considering food-related investments, including competitive advantage and the characteristics of the founders in terms of passion, vision, and whether they can manage capital efficiently.
Abda tells me the firm also screens founders to determine whether they understand the economics of their business and the deal, and the path to exit.
“There are many entrepreneurs who want to start food businesses, but fewer aspire to build a business that creates shareholder value – even fewer that have the qualities mentioned above,” says Abda. She notes that ultimately, Branch Venture Group selects the opportunities that can go the distance.
Abda recognises that trends in the market attract investors to this space but argues much of the success specific to trend spotting is time-related.
“Food is a $3 trillion market, and if you can find a trend and believe in it, those are tempting areas for investors to get involved,” she says.
To the point
What are the top-three particularly strong consumer trends that you see in the US?
Plant-based, direct-to-consumer, and in-tune with immune.
Are these trends being picked up by start-ups, or do you see a misalignment?
Start-ups are absolutely capitalising on these trends. Over 50% of the start-ups we see have plant-based alternatives in their categories.
Direct-to-consumer is the primary path to new consumers for emerging brands, and entrepreneurs are becoming highly educated on this strategy.
Also, due to the Covid-19 pandemic, consumers are increasingly aware of their own immunity and health, wanting to purchase products that support those ideals.
What dynamics have you seen among strategic and corporate investors looking at CPG food brands?
Over the past five years, we’ve seen many large CPG companies launch venture investing initiatives funded by internal resources. What most discovered was that start-ups were too early on in their business development for corporations to get involved.
To develop a company from an idea to a commercially viable business is a five-to-seven-year time horizon, which is typically longer than senior leadership overseeing this activity spends at any given company. So, there wasn’t alignment here to see opportunities through.
As food businesses grow and scale – reaching $50 million-plus in revenue, becoming profitable, and having $10 million in EBITDA – they are identified as leaders in an emerging market, then more M&A becomes possible.
What’s your take on today’s valuation multiples, and what is the investors’ sentiment on this front?
For CPG start-up companies, valuations are conservative because the risk of failure is so high. We see many companies with valuations that are 2x to 3x revenue.
As a company grows, achieves key milestones and shows a persistent, valuable business model, its revenues will expand, and its valuation starts to increase.
The two major contributors to establishing valuation are how fast a company is growing and how profitable it is. Corporates want to buy highly profitable businesses, and high-growth consumer brand businesses typically sell for 5x their revenue.
The discussion about the ‘funding gap’ in the Series B and C stages started to emerge last year – what are your thoughts on this issue?
Funding gaps usually open up due to unrealistic valuation expectations. CPG start-ups can generate profits relatively quickly, unlike more traditional biotech companies that may go through four or five rounds of funding and may not even have completed their regulatory approvals.
As CPG businesses continue to grow – gaining traction in a particular region, expanding nationally, launching different product lines, and so on – you will be more likely to find an investor willing to invest at an appropriate valuation or a buyer for the business.
Furthermore, there have always been plenty of private equity firms interested in CPG companies that are profitable and fit the buyout model.
Only in the past five years have we seen dedicated funds focused on early-stage investments in this industry emerge.
What white space opportunities do you see for start-ups to tap into and for funds to invest in?
Precision nutrition is a familiar concept, but the research is still under way, proving its validity. I think we will eventually get there, and when we do, there will be a whole new wave of products launching to meet consumer demand for individual nutritional needs.
It will be a challenge for companies on the health claims and regulatory front because of restrictions on packaging language. Still, I think the consumer interest in understanding their health profile better and choosing highly nutritious foods for optimal health will prevail.
What have brands been doing to cope with Covid-19 restrictions and still get listings or boost sales rotation in stores?
It’s been an incredibly challenging year for emerging brands in retail stores. New brands and field marketing teams haven’t been able to connect with customers to get product trials and shift consumer purchasing as they used to.
Nearly all brands had to shift to an omnichannel approach, connecting with customers on many platforms for product discovery and sale. Some brands have implemented discovery and subscription boxes, influencer marketing, and sampling boxes to get user-generated content. This approach helps them refine their offering, brand collaborations and partnerships.
In the long run, it will be to their benefit to have this omnichannel approach. Some of our entrepreneurs had breakout revenues in 2020 because they adapted quickly.
What are the marketing strategies you encourage brands to adopt?
Talking to target customers and spending time understanding their wants and needs is the first step to building a successful marketing strategy.
For many entrepreneurs we work with, they may not even have a product in the market yet, but we still encourage them to have customer conversations – get curious, build that email list, and start shaping a strategy. This mindset is crucial because when they do launch, they have a whole community of people, their target customers, to begin selling to.
Abda recognises that alternative protein is a category with a buzz and everyone’s eyes upon it – but she believes there is endless opportunity for innovation in any food category. “High-protein ketchup, caffeinated cereal, vitamin-fortified chewing gum – I could go on,” she says, noting ideas are a dime a dozen. Abda argues the execution of the idea makes all the difference.
“Finding the right team, making a category-disrupting product with unique attributes that fit consumer interests, and bringing it to market at the right price and time is where the magic happens,” says Abda.
The food industry is continuously changing, and Abda tells me that every new lesson learnt by every day at work has been a major contributor to her passion for the industry, supporting change-makers who believe in a better food system for all. “I feel humbled by the opportunity to work with them and support their efforts on their path to success,” she concludes.
Date published: 23 March 2021