Running a natural products startup is lot like constantly pushing a camel through the eye of a needle. It amazes me that entrepreneurs can stand it. To balance all the operations, financing rounds, deductions, promotional spending, broker commissions, cash flow, sales management, shipping, shucking and jiving required to a get, say, an 8-ounce bag of organic kale chips onto the shelves of Whole Foods—and somehow maintain a sizable gross margin—seems a task best left to the camel-pushers. At least, so it seems from my ivory tower.
Last week I got schooled in the art of entrepreneurship at the Natural Products Consulting Institute’s biannual sales seminar and networking event. Led by natural products consultant Bob Burke, along with broker John Maggiore and Silverwood Partners managing director Michael Burgmaier, the seminar was situated in a veritable ivory tower—a law office on the eighteenth floor of One Embarcadero Center with the most stunning view of San Francisco Bay I’ve ever seen.
I attended the seminar in preparation for New Hope’s summer launch of the NEXT Accelerator, a web portal for entrepreneurs in the natural products space which offers education and resources for startup brands. [This content has since been incorporated into the NewHope.com website.]
And when I wasn’t gawking out the window at the stellar view I was being inundated with a sales and financing curriculum so dense that light itself could not escape its surface. But I managed to escape with these three useful tidbits that every natural products entrepreneur should know...
1. Manage your trade spending carefully
Any money you spend with retailers or distributors on promotions, flyers, allowances, slotting fees, display programs, etc. must be managed carefully lest it begin to eat into your margins. Promotions, displays and specials keep natural retail thriving, but an entrepreneur who fails to account for this trade spending carefully can run out of cash fast. Burke repeatedly referred to trade spending as “deadly, dull and depressing,” but reiterated that it is one of the most important expense lines for natural products businesses to keep in check.
2. Gross margin, gross margin, gross margin
A healthy gross margin is the most important tool for growing a consumer packaged goods business. It’s only with the money left over after costs are subtracted from net sales that you can buy that new mixer, hire that PR firm or update your packaging. And when you set out with a slim margin, it’s hard to ramp that to a sustainable one without making some tough concessions to your brand. Don’t sit at 20 percent margin and expect to improve to 45 percent next year just on volume increases and economies of scale. Set out with a strong margin in mind, then scrimp, bootstrap and hustle your way to percent increases year over year—that’ll get the institutional investors interested.
3. Never mention Vitamin Water when pitching to a VC
And when you finally get that pitch meeting with an institutional investor, set a realistic valuation for your company. Yes, Vitamin Water was sold to Coke in 2007 for $4.2 billion, a stunning 12x multiple on trailing revenue. No, your brand cannot expect a similar valuation. Gunning for a pie-in-the-sky buyout suggests to venture capitalists and (maybe down the road) private equity companies that you aren’t serious—or sober. Set your expectations closer to 1x (or possibly even lower) and sell investors on the strength of your business, not historical anomalies. And please drink responsibly.
Those are the three entrepreneur tips I can come up with today. But there are a million-and-a-half more worth remembering—and a million-and-a-half mistakes it’ll take to learn them all. Check out nextknows.com for more info on the NEXT Accelerator and visit the Natural Products Consulting website to learn more about their next seminar. Maybe together we can knock out a half-million of those mistakes.