The Litchfield Fund's recent beverage investments (in B'More Organic, maker of organic Icelandic skyr smoothies, and organic chewable juice company Harvest Soul) got us thinking about legendary football coach Hank Stram. No, not that he was the winningest coach in AFL history, with three AFL championships and a Super Bowl ring, or his 20-year CBS TV and Monday Night Football radio broadcasting career. It was that Coach Stram, working with the University of Florida, brought Gatorade to the NFL! The coach had a great view on life that can also apply to investing—Yesterday is a canceled check. Today is cash on the line. Tomorrow is a promissory note. Let's humbly add, an unguaranteed promissory note!
There certainly are no guarantees in the investment cycle. At the Litchfield Fund we have had the opportunity to get to know a good many enthusiastic entrepreneurs with exciting and innovative products. While there are many aspects to an investment process, including developing trust and a solid working rapport, investors and entrepreneurs should consider the following:
No Fuzzy Concepts! Ansel Adams, the foremost photographer of America's beautiful west, spoke of concepts: "There is nothing worse than a sharp image of a fuzzy concept." Investors and entrepreneurs need to be clear on the concept for a product and company. What defines and differentiates the product? Why will it be successful? How will it garner that so precious shelf and cold case space? What consumer need does it fill besides tasting good?
Facts are stubborn things! John Adams said this and Mark Twain added, "but statistics are pliable," but it remains that both investor and entrepreneur must stick to the facts and recognize that the facts may be meager for a young company. Discuss actual sales revenue and cost of goods sold! How many stores carry the product? Which stores matter most, fit the right demographic, have good turnover and reorders? What is the cost of acquiring customers, shelf space, doing demos? Who is the distributor, broker, sales representative? Is there a positive return for these activities?
The future is not ours to see! Too Que Sera Sera perhaps—maybe Winston Churchill said it better: "It is always wise to look ahead, but difficult to look further than you can see." Use the facts available to set a valuation, not a hypothetical percent of the overall market. Look at volume requirements that begin to lower costs to break even and begin positive cash flow. Be specific about where sales are happening and the potential for acquiring similar locations. Remember that time itself is a completely unknown variable. No one should be upset that valuations are questioned!
Certainly there are many, many factors in the investment process. But following these few thoughts can keep the investor and entrepreneur working together toward mutual success!
What piece of advice would you give to natural product entrepreneurs pitching to investors?