The state of venture capital
Against the backdrop of continued economic turbulence and VCs becoming more methodical about the businesses they invest in, founders and operators are looking to stand out against the crowd to secure venture capital.
According to VentureBeat, deal counts in Q2 2022 were down close to 25% from Q1. And while it’s no doubt more difficult than it’s been in recent years to raise capital, many high performing consumer brands with strong business fundamentals are gaining the attention of some highly sought-after investors.
At Ampla, we maintain close relationships with our customers who are actively fundraising and the broader venture capital community and have compiled some thoughts and perspectives to consider as you prepare for your next raise.
Be realistic about your growth stage and expected valuation
In today’s fundraising climate, founders raising their series A and B rounds will have an easier time than unproven or pre-seed founders.
In a more risk-averse climate, VCs who are already bombarded with deal flow are more apt to double down on existing investments with a proven track record than seed an unproven business or executive. For folks at the seed stage, the focus should be on proving demand, generating revenue, and planning an omnichannel distribution strategy until your business is ready for venture capital.
Regardless of what stage you’re in, we’ve also seen those sky-high valuations of old come way down. Sandro Roco, founder and CEO of Sanzo and a current Ampla customer noted: “If it's your 2nd/3rd fundraise and you're looking for $10mm+ pre-money, founders have to start raising the bar in telling the numbers story, specifically revenue forecasting.”
He added, “If you want a multiple on forward rev (higher val), you need to show - and should want for your team - a good bottom up forecast, with accounts and distributors, ideally where revenue is "locked in." Obviously, not everything will be firmed up, but the structured framework is critical.”
Balanced revenue mix over rapid DTC growth
The old adage of “what’s old is new again” feels more relevant than ever when applied to the consumer products space. The “old” way of driving sales (e.g., large wholesale/retail relationships) has turned out to be the go-to play for DTC brands looking to fight rising acquisition costs and drive profitability. VCs have taken notice, and in 2022 and beyond, having a clear path to scale at wholesale/retail will be a must to secure financing. That’s not to say DTC is dead; it’s simply become a tactic rather than an entire business model.
Wayne Wu, General Partner at VMG, shared his perspective on revenue mix and its impact on his company’s investment thesis, stating, "We've always believed strongly in omnichannel brands and that direct-to-consumer is one of many channels needed to scale.
Our philosophy is for our brands to be wherever the consumer wants to buy products and it's up to the consumer to decide where to buy it.
The question isn't if a brand should be omnichannel, it's when they should make the move. For some, that's right off the bat, and for others, it's after other channels have already been proven. What we're looking for at VMG is brands with the potential to scale to true omnichannel businesses and once they're in our portfolio, we work with them on when and how to do this successfully."
Highlight your resilience
Going into 2023, investors are looking for seasoned operators who either have past experience or potential to withstand extreme business challenges. In your conversations with investors and in your pitch deck, highlight how you’ve overcome obstacles during the pandemic related to increased costs, demand spikes, ingredient shortages, strategic product pivots, or tough team decisions.
Beyond discussing how you’ve navigated challenges in the past, it’ll also be helpful to lay out issues you foresee on the horizon. Don’t be afraid to talk about areas of your business that could use improvement in pursuit of scaling, especially if it’s an area the investor you’re pitching has expertise in.
Amrit Richmond at Indie CPG, a community of emerging consumer packaged goods brands, shared, “in addition to your product roadmap, find ways to discuss your potential challenges in the 1 to 2 years ahead and how you’d solve them. This will show investors your resourcefulness and resilience, and should hint at your leadership style and how responsible you will be with their capital. It’s also the perfect time to see if their value-adds align with where you need support beyond a check.”
Could debt financing be your answer?
While not a replacement for a proper fundraise, given the current environment, you may want to ask yourself if you really need equity financing, or if a debt solution could be right for you. This is highly dependent on what you need the money for.
Mike Grillo, co-founder of Gravity Products and current VP of Marketing at Ampla said, “Usually, debt financing sits right alongside equity capital to build a full capital stack. That said, if you’re primarily looking to finance ongoing inventory buys, fulfill purchase orders, or even fuel growth marketing, there are debt solutions that are sufficient.”
The beauty of debt financing is that it’s non-dilutive; you don’t want to be forced into giving up more control than you typically would simply because fundraising is challenging right now. That said, if your capital needs involve adding headcount or building out any custom manufacturing processes, these types of expenses may not be approved use-cases for most debt solutions.
Debt is also no solution for poor business fundamentals. Keeping cost per acquisition (CPA) in check and maintaining healthy gross margins can set you up for success in accessing debt.
Strong runway and access to flexible working capital can arm your brand in the second half of 2022 and beyond. Learn more about how Ampla customers have used their credit lines for purchasing ingredients and inventory.