VMG Fund Update and Brand Readiness in the Current Climate

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Welcome to the Community Call Podcast.

I am Melissa Travers, Director of Community here at BevNET & NOSH, here with my co-hosts, Monica Watress and Mike Schneider.

If you're enjoying the show, please follow and review us on Apple Podcasts or your listening platform of choice.

Well, hello, Monica and Mike.

Great to see you here today.

How you guys doing?

Great, we're both repping our favorite sports ball teams today, if you haven't noticed.

Monica with the Kansas City Chiefs.

And me with the Arsenal.

Isn't, I'm not a huge, isn't Arsenal doing big stuff?

Yeah, they're doing the big stuff.

Yeah.

They're doing big stuff, just like the Chiefs doing the big stuff.

You know, I have to say, when I'm talking to other people and soccer comes up, but now I can say, oh, the people I work with are really into Arsenal and everyone's like, oh yeah, everyone likes Arsenal.

I love that you think everyone's into Arsenal.

Just keep thinking that.

Okay, okay.

I like it, and tell Ray that he's into Arsenal.

That'll be great.

Okay.

Save that for later.

And then Monica, is your team doing big stuff or did they do big stuff already and the stuff is over?

Oh, they did the sports.

They won the Super Bowl, you might recall, a couple of months ago.

They've got something bigger too.

They've acquired Taylor Swift.

Oh, right, right, right, right, right.

Through.

Right.

Yeah, you know, I feel like I can't keep it in that I didn't even know who won the Super Bowl, right?

Can I really keep that in?

It's okay.

The reason I know who won the Super Bowl was because it was my hometown team.

I know who won the new Beverage Showdown.

Yeah, that, I mean, that's what you need to know.

Right, that's the important stuff, right?

That's the important stuff, right.

I also know.

By the way, who was it?

Plink.

They did win once, yes.

Wait, Calexo, right?

Yes, Calexo won the most recent one.

Yeah, for some reason I was thinking about the summer, because we're heading up on some, we're coming up on summer.

Now we got to go plink ourselves.

Well, I also know who won.

Plink on everyone.

I've got to plink to plink.

I do know who won the Naturally New England's first ever pitch slam as well, which we hosted here in the BevNET offices last week.

The contenders were Waku, True Moringa, Shire's Naturals, Gria, Tootie's Tempeh, and Ahana's, and True Moringa was the big pitch slam winner with Waku taking home the People's Choice Award, which was so exciting on both counts.

True Moringa, a beauty product, which was phenomenal, by the way.

I mean, that stuff, it made your skin feel like slippery lightning.

Slippery light.

All the judges said they could feel on their hands hours later how delightful it was.

I was talking to the founder, and I was like, this would be good for shaving.

She's like, it is.

I think you just put that on pre-shave.

I'm going to try that pre-shave.

I will report back.

Yeah, please do.

And I bet if you shave it in, the Moringa seeps into your pores even better.

It just makes your skin feel really cool.

Like not cool to the touch, but just like cool, like sunglasses cool.

And Waku's new cans look so, so terrific.

They completely redid their packaging design.

Didn't they move from glass to plastic to the cans?

They've moved around a bunch.

They were in glass at one point.

And I do.

Yes, I think that is their path.

That was their path.

Yeah, their cans are.

Somebody remarked that they're a little similar to Perfie cans, which I think you mentioned it because I actually have a Perfie can right in front of me.

How do you like?

They're not dissimilar.

I mean, you got my favorite, the Docta.

Oh, I drink at least two of these every day.

Dr.

Perfie, so good.

It's the Perfie soda.

Melissa.

Yes.

I brought you a present.

Oh, great.

I love presents.

Where's my present, Mike?

It's here.

I just can't upload it because you're in Kansas City.

Amy Bett.

Mellow, drink Mellow.

Drink Mellow.

I have drink Mellow for you, Melissa.

The Hideaway Island Sparkling Cava, which is passion fruit, orange, and guava.

And then Banana Bay, which is banana cream cava.

I think those are going to be right up your alley.

Man, these are definitely right up my alley.

And also these cans are absolutely gorgeous.

They're beautiful.

I feel like they're kind of doing, they're trying to do with cava what Tripp did with CBD.

They're trying to make it just cool looking and simple and say, all right, here it is.

It's here for you.

And Amy also is just one of the nicest people.

She's so kind and cool.

And she was, when she came to BevNET Live, she just was like, okay, how do I get the most out of BevNET Live?

I'm like, three hardest questions, ask everyone.

And she was just asking everyone, oh my gosh.

She did a great job at BevNET Live, made a lot of great contacts, and I think they're gonna come back.

Oh, that's exciting.

I love that there's no sugar in here.

So would you consume a Cava beverage, Mike?

I haven't tried that yet.

I'm scared, just because I'm sensitive.

Have you tried it yet, Monica?

I haven't tried that brand, although I do like the combination of Guava and Cava.

But I have tried a different brand.

And the flavor profile was ginger, which I think probably plays well with the hero ingredient there.

And I will say it, it really did have a relaxing effect on me.

Here's the question everyone wants to know.

Will it waffle?

Will Cava waffle?

I have waffled under the influence of Cava.

Well, I'm excited to try these.

If I wasn't going to be driving in a little bit, I'd pop it open right now.

But I'm very excited.

Can I actually keep those?

You can keep those.

And we would love you to report back.

Well, that's very exciting.

I also wanted to give a shout out to Maura Duggan of Fancy Pants, who also came out to the pitch slam.

I have her mint chocolate chip cookies and crispy oatmeal raisin cookies here.

I've known Maura for such a long time.

She's so lovely.

And I think they do such an interesting job transitioning from, they started off with their decorated cookies.

They did a keto friendly cookie.

Now they have upcycled cookies.

So they're using coffee cherry flour, upcycled oat milk.

You like cookies, right?

I do.

Do you like crunchy cookies?

Well, I was wondering, are they the kind of cookies that will waffle?

Oh no, but you should try.

You should definitely try.

You should still try.

You know what?

What if you dunked one in milk and then tried to waffle it to give it a little give?

I mean, you could definitely put it in into waffle batter and it would waffle, but it would taste really good.

Is that cheating though?

It is, but it would be awesome.

You know what I wish we had?

Remember at banks in the old days when they had that tube and you'd put your money in the tube and then it would get sucked over to the bank?

I wish we had one of those for Monica's house so I could tube express some of these cookies to you.

And some of these cookies.

Oh, you're like Brazil.

I actually don't care if things will waffle or not.

I just want to see what she's gonna waffle next.

It's like my favorite show.

Do you have any plans for what you're gonna waffle next, Monica?

You know, I haven't waffled in a couple of months, actually.

I'm a little out of practice, but I've got some things around the house that I'm thinking about putting in the waffle maker soon.

So stay tuned.

Maybe you just haven't been in the mood to waffle lately and I don't know, maybe waffling will make you feel good, you know?

It makes us feel awesome.

Yeah.

We love it when you waffle.

Yeah, it might feel good to get back on the waffle machine.

There's a burger that I really like at this local, my favorite bar.

They have like a little burger window.

And I thought about waffling one of those burgers.

That might be my comeback.

Wow, really fantastic.

Naturally New England Pitch Slam at BevNET.

It was fun for all.

I would also like to give a shout out to all of the folks who participated in our RangeMe giveaway this past week in our Slack community.

You can all join us in our Slack community.

It's slack.bevnet.com.

We will be doing more of these giveaways.

We've got folks from our community posting their best tips for things like packaging design, labeling claims.

We're gonna do one on trademarks.

So definitely join us there.

I saw Leila Kearns from Healty.

The question that we had in our RangeMe giveaway was, who's your dream retailer can be existing or intended?

And Leila Kearns from Healty gave an answer that was very commonly echoed throughout the community, which was sprouts.

Willy Wonka's Chocolate Factory.

Everybody wants to be carried at Willy Wonka's Chocolate Factory.

Children die there.

Yeah, Violet, she almost exploded.

Violet Beauregard, she turned into a blueberry.

Augustus Gloop, we lost him in the Chocolate River.

Mike TV got shrunk.

It was just Charlie.

So as it turns out, that was not one of Leila's picks.

Leila from Healty picked sprouts, Whole Foods and Costco, which was pretty commonly echoed along with Kroger.

Much better choices.

So I just thought it was really interesting too, to see where people were most focused on being carried.

Well, Monica, I see over there that you've got a package of delicious snacks, and that's from Sprouts, did you say?

Yeah, so I picked this up in the Innovation Table area at Sprouts this weekend.

It's from Philosopher Foods, and it's called Gut Nuts.

They offer a line of fermented almonds and fermented cashews, which are meant to be aiding with digestion, like postbiotics or something.

I'm not exactly sure how they work, but when you sprout nuts, nutrition becomes more bioavailable.

Lower in phytic acid, I believe.

That's exactly what it says on the back of the package.

Less phytic acid means increased digestibility and decreased bloating.

I like those things.

Wow, I mean, when I pick up a package, that's the call that I'm looking for.

Well, but I mean, those are call outs that people who follow sort of like a traditional diet are really focused on.

How do you think they taste, Monica?

You know, I've had a lot of opportunities to sample these before, because I've seen them at Expo West the last couple of years, and I believe at Expo East.

I haven't actually tried them.

I think they just taste like traditional nuts with salt.

It's actually made with, get this, ancient seabed salt.

Why don't you go ahead and open that package?

I'd love to, I'd love you to test that theory.

I was gonna bring this as a snack to eat on the way to BevNET Live, but I guess I'll go ahead and open it now.

Give it a try.

Wait for it.

A little tangy, a little salty.

Almost like they were soaked in like a pickle juice or like a brine.

Yep, they sure were.

Have you had it?

Did you know that?

I have, I have, you have.

We've had them.

You know, I think they-

I like it.

For me, they taste very, like very unlike any other obviously nut that you can buy.

And when I first taste them, I think it's very unusual.

But then the more I eat them, I feel like you kind of get accustomed to it, but I'd be interested to see how they do out in the wild.

You know, I think that they should market the flavor profile as like a salt and vinegar type of profile, because that's a really popular chip flavor.

And that's exactly the notes that I'm getting with this.

It's a lot more potent though for me than vinegar.

Like the fermented twist is like, I understand the vinegar twist, and I wasn't expecting the punch that I got when I tried gut nuts.

Yeah.

I would say the gut.

Right in the gut.

Thank goodness.

The packaging is really eye catching, but I don't think fermented cashews is something that consumers are going to understand.

So I think it would be helpful to have a little bit more of a call out on what the flavor, what to expect from the flavor of this.

But I think I might be more inclined to buy more of these versus traditional cashews.

I really do like the flavor of them.

And the reason that you're talking about call outs is that one thing we found is that you don't want to surprise somebody.

You want them to pick up your package, take a look at it, and have a sense of what's gonna happen when they consume it.

Do they say yeasty bread on the back somewhere?

I feel like if they called up, made sort of flavor call outs, like to your point, Mike, on the front, if you put yeasty bread, tangy.

Yeah, something like that.

So it does have that description on the back of the package.

It says it has a sourdough aroma and a savory, tangy, and umami flavor profile.

I'd move that stuff to the front.

I agree.

Well, Monica, thanks for sharing.

I'm sorry we ruined your BevNET plans.

I hope you, it sounds like you will buy another bag to eat on the way out.

Yep, I will.

Yeah, because BevNET Live is right around the corner.

It's like basically tomorrow.

Yeah, it's like, as of this recording, like two weeks away.

So head to bevnetlive.com.

We've got a great agenda.

We've got retail one-to-ones.

We've got beverage school.

We've got just a phenomenal list of speakers.

Great networking, our happy hour.

It's just gonna be a blast.

Like I always say, bring your three hardest questions, ask them, and you'll move your company a milestone because people in the room either know the answer or they know the person you need to talk to and they'll introduce you.

So it's just, it's like a business building machine.

It's really cool to see it happen.

So don't miss out this June 12th and 13th in New York City, bevnetlive.com to register.

Hope to see you there.

Well, there will be plenty of pitching at BevNET Live.

And in this episode of Community Call, I talked to someone who gets pitched to all the time, and that is Kathy Yuh, VP at VMG Partners.

Kathy Yuh will discuss the Venture Fund's current investment strategies, how to get in touch with somebody over there, valuation trends, and the red lights and green lights that come up during the due diligence process.

Please enjoy.

On June 12th and 13th in New York City, hear from Aura Bora, Haywell, Tip Top, Mom Water, Full Frame, Diageo Ventures, Spins and more during the leading event for the beverage industry.

Learn more at bevnetlive.com.

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Let us know.

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Just head to submit.bevnet.com to get started.

Today on Community Call, we welcome Kathy Yuh, Vice President at VMG Partners, a private equity firm specializing in building iconic consumer brands.

VMG has been at the forefront of CPG investing since 2005 and is known for partnering with entrepreneurial companies, founders, and co-investors to help grow, scale, and prepare companies for exit.

Kathy, thank you so much for joining us today.

It's great to have you here.

Thank you, Melissa.

Great to be here.

These Community Calls have been such a joy to listen in and tune in to, so it's an honor to actually be able to speak on this one.

Well, thank you so much.

It really is great to have you here.

I know that I don't know anybody in the CPG industry that doesn't know VMG, so it truly is such a pleasure and an honor to have you on this Community Call.

Why don't we start off with an introduction?

I know that you have great expertise in CPG and in finance.

Could you tell us a little bit about what you do at VMG and what your background is?

Sure.

My quick background is I started my career in finance, started in investment banking, covering consumer retail companies.

And from there, I moved on to the private equity world, for covering larger LBO type investing.

And after that, I wanted to really focus on the consumer sector and wanted to find a firm that only to consumer and specifically in consumer branded companies.

So extremely thankful to be at VMG and have been covering both portfolio company supports, specifically in products.

So I cover a few food companies, supplements, and beauty.

Also spent a good chunk of my time covering food and beverage, new investment opportunities.

And actually a quick question for you on the crossover between supplements and CPG.

I've heard that trends oftentimes start in supplements and then move their way over to food and beverage.

Is that something that you see a lot of?

Oh, absolutely.

And honestly, even when I think about beauty and wellness, I think there are recurring themes throughout all products.

So for one example, I think we all know everyone is really into skincare benefits.

You can see collagen in skincare.

You can see collagen in supplements.

You can see collagen now in snack bars.

I think it's all hitting the same consumer desire to look good or to feel younger or to feel healthier.

And so I think it's really, really interesting to see all the different kind of ingredients or claims show up on different packages across sectors.

It's a good reminder.

It shows like Expo West, which are so big, you sort of feel like you have to focus, but it's definitely worth taking a spin through the health and wellness body care section just to see what you might see in the next few years.

Well, we will get to trends a little bit later on in the conversation.

For now, could you tell us a little bit about what you're seeing in current market conditions?

Certainly, we're hearing that there are things to be optimistic and hopeful for, that capital is freeing up a little bit, but that those opportunities might be slightly different now than they have in the past.

What are you seeing?

For sure.

Well, I'll first like to say the short answer is that market conditions are improving for investing and M&A for emerging brands.

Taking a step back, big picture, I think everyone in the ecosystem, from suppliers to retailers, investors, large CPG companies, they're all looking for signs of volume growth in food and beverage.

In the last couple of years, we saw a lot of growth through pricing action, but that is no longer a lever for growth for anybody.

And so even if you look at some of the Cagney notes of CPG companies back in January, February, almost everyone is talking about the need to drive growth through volume.

And our perspective is that the company that's best suited to provide that outlier high growth volume and incrementality to shopping basket are the emerging brands.

So we're very confident about the market for emerging founders.

Now, how is this different from post-pandemic?

I will first acknowledge that fundraising is hard at any stage and at any time, especially very hard to compare it to the 2020, 2022 era.

But I would say that that was a very unusual time in macroeconomic history, and we should not accidentally label that anomaly as a benchmark for what fundraising should look like.

So, with that said, I would say that there's still a lot of capital to be deployed, especially in the growth stage.

And I think investors have gotten less speculative and more prudent about backing efficient businesses, the credible plan and sound margins.

And when I say sound margins or prudent efficient businesses, what I really mean is that for food and beverage, we look for fully loaded gross margins of at least 30%, if you're emerging, I know that at subscale, it's really hard to get a great gross margin off the bat.

And you should probably be able to outline a plan to get to an industry level gross margins of 40% plus.

Try to look at large companies and their earnings report and what their fully loaded gross margins look like.

And that's kind of like your north point of what you want your business to look like at maturity.

And then in terms of cash efficiency, we look for businesses that can generate somewhere around three times the sales for every dollar of capital that you raise.

So, if you're one to one in terms of, if you raise a dollar and you generate just $1 of sales, that's not the best ratio.

Two is good, three is great.

That's kind of what we look for as a quick benchmark.

Very specific information and very helpful.

Can you talk about what you just described in terms of cash efficiency, in terms of burn rate?

Well, I'll first acknowledge that in the early days, you are going to burn cash.

Like, you're building a business and you're probably trying to load up inventory, you're trying to get your name out there.

I'd say we look more towards gross margin and variable costs, more so than overall cash burn.

We believe that if you have sound gross margin sound, you did economics, then as you scale your business, you will become profitable.

And so I think we try to focus more so on overall unit economics, or rather than just how much you burn total.

Obviously that does matter too.

That matters, if you're spending a ton of marketing, I think that will raise some questions that we can get and we'll try to understand exactly where you're spending.

But overall, we try to see if founders are building a great business for their products in terms of pricing and costing.

Well, all of that information leads us to our next question, which is, when does VMG typically get involved?

When do you usually invest?

And what are the amounts that you're typically looking at?

I can probably answer how much first, which is that we have a very wide range.

Our check size is on the low end, 25 million, and then on the high end, it can get up to 200 million.

So I'd say in terms of our mandate and check size, we're very flexible.

In terms of when we invest, I can't make a definitive statement because it really depends by company.

But typically from my experience, we come in when a company is at a really exciting inflection point on growth, regardless of what your scale is today.

Maybe you have a proven concept of a few key retailers and there's real consumer affinity for your brand.

There's a path to the same profitability and your business needs some capital to accelerate distribution growth.

Or it can be a brand that's been around for a number of years, and you've been chugging along nicely and growing nicely, but then you identify a big opportunity for your brand to extend to a new category.

Or maybe your desires for your growth rate has changed and you really think that your brand can become a really dominant player in a category.

Whenever that inflection point occurs, that's really when we get excited and when we want to be that partner for your next phase of high growth.

I know that there are so many emerging brands that we have in our audience.

And when I hear inflection point, I certainly hear opportunity.

Are there parameters around inflection point?

Like if I have a viral social media post and my DTC business skyrockets, like is that an inflection point?

Or if I get into global Whole Foods market, but perhaps they're my big retailer, what are some of the parameters around the inflection points that you're looking for?

We look for inflection points of like sustained high growth.

And from our perspective, I think that is for food and beverage, we really rely on retail distribution as a great proxy for that.

And so if it's a brand that's ready to get into national key retailers, and you know that you're operationally ready, and you know that your team is ready, and you know that you also have enough consumer affinity and consumer loyalty so that people know to find you in those stores, I think that is a great inflection point.

I'd say for, or I guess, larger brands, who you kind of have those retail distribution covered with your first pure product, but you have developed a new innovation and you have a strong belief that you can double your business or make this a new hero platform and you need some capital to chase that new innovation.

I think seeing some early signs of traction with your innovation, seeing high velocities in a couple of retailers with the innovation, I think that's also really extending inflection points.

Certainly what I've been hearing and so many other folks have been hearing is that there's a trend for investment firms to invest in more established and later stage businesses.

Is that also the case?

I mean, it sounds like there's a little bit more of like a blurred opportunity, depending again on what the inflection point is.

I wouldn't say that investors are looking for more mature businesses.

I think that is actually an output of the input, which is that investors have become less risk on the last couple of years.

And so they're just looking for businesses with staying power or a brand where they have, where they know that the product is working in stores.

And sometimes the number of years the brand has been around can be a good proxy for that.

We actually try to not put that kind of restrictions on ourselves because I think innovation right now is such a hot topic among food and beverage companies and investors.

I think we really try to look for, first of all, is the overall category really exciting, especially if you're a young brand?

Are you going after a really exciting category that's big enough?

And do you have a really differentiated product that can become mass?

And by mass, I mean, can people from different parts of the US immediately look at your product and know exactly when to consume it, what the product is going to be when they open the packaging?

Is that super clear to someone who can just discover your product on shelf?

How does VMG typically get introduced to potential investment partners?

Is there sort of a funnel or a path to being introduced that you typically see?

You know, we get introduced from all angles.

Trade shows is a huge one.

We try to go to actually like almost every single one throughout the year.

So next up is Sweets and Snacks in May.

We also get introduced through mutual connections and founder inbounds.

I think each of our investors have our email on our LinkedIn in our description, and so a lot of people get inbounds that way, and that's always very welcome.

We also make a lot of outbounds too as we discover brands on our own.

What I would just say that is at VMGR philosophy is to always take a call with a founder.

We have an extreme amount of respect for people building businesses from the ground up.

My advice on approaching us is to approach it long before you think about about raising.

And even if you think you're not at the scale where we might invest, as I mentioned earlier, our minimum check size in the 25 million zip code, try to build a relationship with us anyways.

We really strive to have built a great relationship with a founder long before we start engaging in any investment conversation.

And our team really values that level of trust with a founder going into an investment.

I hear that so often, that building trust with a founder is so important.

What does that mean?

I can give a couple quick examples, names redacted obviously.

One is, I made an outbound to a company because I had discovered the brand at a Whole Foods, thought it was so delicious, thought the branding was so authentic, got to meet the founder and CEO.

And the person was just so forthcoming and open with everything about the business, both the good and bad.

And was able to explain actually every single part of their P&L and their supply chain.

And I think the level of openness and also just being able to share both the highs and the lows of the business, I think that was a great show of trust.

And I think the brand is definitely early, but I think we've been able to develop a great friendly relationship where we check in every six months or so, talk about what we're seeing in the market, talk about the business, where we can be helpful from the outside.

And it's been a great relationship of development ever since then.

Another example is a business based in Canada that's launching the US.

It was an inbound from a mutual connection, and it was also too early for us at the stage, but we thought they were going after a really unique angle for our category, and we thought their launches in the US was really exciting.

And they just kept us in extremely good touch about just exactly how their US launches was going.

They were really open to share their data, even if their initial policies didn't look good, they would be very forthcoming and ask us for advice, or just keep us up to date, and just that openness to just share how things are going, even if it's not like the most screamingly good data, I think that also builds great trust.

Openness seems like something that VMG values on both sides.

So for everyone on this call, and everyone who's listening after the fact, you mentioned that all of you have your email addresses right on your LinkedIn profiles.

So there's no reason why you can't shoot the VMG team in email.

When somebody does decide to do that, what should they include?

Do you always want to see a pitch deck, for example?

I think if it's a very cold intro email, like a pitch deck is always very helpful.

A link to a website is helpful, or product pictures as well.

But honestly, for the very first call, we're just trying to get to know each other and just get to know the brand.

And so it's totally fine to just say, hey, I just want to tell you about my story.

There's no action needed, no fundraising conversation.

Just want to establish a conversation.

That's honestly perfectly fine.

And at the end of the call, I always try to ask how we can be helpful, and that's a great way for us to follow up with the founder and keep the conversation going.

But I think for that very first call, just trying to get to know your founding story, I think that's always very inspirational and helps us get into the DNA of the brand, and if you can also explain to us where the brand is at today in terms of your scale or maybe your distribution footprint, and then any traction that you're building so far with the retailers, and then also what you're trying to do with the brand for, say, the next 12 months, and what success looks like for you for the end of this year or the next 12 months.

I think that's always very helpful.

And it sounds like that would be information that might be helpful to put in a pitch deck.

Are there any tips you have for pitch decks?

Is there a certain number of slides?

Is there certain information that you want to see in there?

A great pitch deck, and what goes into a great pitch deck.

I think there are probably three things that I'm looking for.

The first is, at the beginning, try to tell us why consumers need your brand.

Obviously, the founding story is extremely important, but we want to know what you're trying to deliver to the consumer and why that's not being met today.

And then try to back that up with data.

If you can get any hands-on incrementality data or try to understand your demographic data, I think that's always really helpful.

And then other data to back that up is maybe if you're in a few stores already, try to show some velocity data in stores that you're selling in, because that's clearly a very objective data that your brand matters in that store.

Or say you're not in the stores and you're on Amazon or on DTC, showing repeat data, I think is always very helpful.

Second is more on financials, so we kind of touched on this already, but show us that you can generate sales and velocity cash efficiently, that you can do that without breaking the bank on aggressive trade spend or kind of marketing spend to capture those consumers.

And then the third would be to show us that you know everything about your costs.

There's always a slide on a P&L in the pitch deck, but that's helpful, that's on review, but if you can go one level deeper and actually explain line by line, like what goes into each line item, being able to explain things like what your distributor margins are or how much you're spending on marketing team versus marketing OPEX, how much you're spending on Salesforce versus demos, versus like sponsorships or other parts of the cost.

I think that shows us that you're really tracking your business and that you have your hand on exactly how the cash is coming in and cash is going out.

And to us, that also shows that you're a scrappy and a very prudent founder.

And that sounds like another way to build trust.

Yeah, exactly.

So we've talked a little bit about how the introduction is made, what goes into a good pitch deck.

Let's say all goes well and the conversation turns into something a little bit more serious.

What does due diligence look like for VMG and how can brands be prepared to be successful in that process?

You know, due diligence definitely depends on each company, but say the initial due diligence, like business due diligence, I think there are some common themes.

You know, we try to validate all parts of the P&L.

We try to validate the retail sales performance that you've told us that you do.

We do that by looking at syndicated data.

We also look at your transaction level sales data to actually true up your sale that you have provided us so far.

We also review co-manufacturer agreements, any three-PL agreements to verify your margins.

We look at general level details of all company spending to verify your anything operational spending.

So definitely try to make sure that the P&L that you've delivered us is truly the P&L that we think the company is generating.

And we can do that through a combination of our own analysis.

We'll also bring in some third parties to specialize in a certain type of accounting or supply chain diligence.

So I'd say that's kind of like our first order business diligence.

The second is actually team.

We try to evaluate any gaps in your organization.

Obviously as a business is scaling really fast, you're going to need different people to cover marketing, operations, sales, et cetera.

We actually have a really phenomenal talent team who have spent their careers understanding what makes a successful organization.

So we'll introduce the founder or CEO to our talent team to help assess those gaps and identify which are the most urgent hires for the next 12 months and which are more longer term needs.

I'd say our diligence process is relatively heavy and to be prepared for this, I think first understand that diligence takes a really long time.

And so it's really helpful to have one person in your organization who is the lead on preparing your internal data and communicating with investors that are requested.

And so the more you can prepare upfront, probably the easier it is on you so that you kind of limit all of the follow-up questions that we might ask.

So I'll leave it at that.

In the interest of helping brands maybe understand whether they are prepared or not, are there any examples of things that come up in due diligence that will sort of unfortunately pause discussions?

Are there any certain areas you see sort of come up again and again?

Probably most around margins and looking at margins by retailer or by channel, and just trying to understand like your pricing architecture, does that really make sense?

It might make sense to the retailers, but doesn't make sense for your business.

I think that's probably one really common theme.

Another is actually, now that you ask, especially since the rise of DTC in the last couple of years, we see a diligent lot of businesses that have grown to some level of scale through online, whether that's at their own.com or on Amazon.

And now they're getting, and now their inflection point is their first big retail launch at a retailer.

And we're not clear yet if your pricing on DTC or Amazon is really going to resonate in-store, and is your margin still going to work in-store with a different pricing, should you have to change pricing in-store?

And then if you change pricing in-store, is that going to negatively impact your pricing on your online?

And so I think that's one area that has come up sometimes, actually more than a handful of times, especially post-pandemic, and as brands look to growth in retail stores.

Yeah, so that's definitely a tricky, tricky area.

Is it a good practice to have a separate P&L for each channel and retailer?

Is that the kind of thing you look for?

That's something we try to do during our diligence, and I think if a brand has substantial sales in online versus in wholesale, it'd be really helpful for the founder, actually, in terms of their own business management to have separate channels and to allocate all your spending for the different channel.

What are some of the green lights and red lights that come up?

I know that we talked about a few, but you had mentioned that the question, like are you in a big enough market comes up?

Could you talk a little bit more about that?

Sure, yeah, in terms of like kind of like green lights or things that makes me excited about a potential investment.

So first is like, I try to look from like, big picture down market and then down to like the specifics of the brand.

So yeah, first is like, are you in a big enough market?

You know, if you're taking VC funding or gross equity funding, then you're promising some sort of growth expectations to your investors.

And you need to be able to fulfill that by obviously growth.

And that growth, you know, by large numbers, you need to understand, is your category big enough to support the growth plan that you're promising?

You know, if you're promising you're going to do 3X your sales, but the category size is smaller than that, you know, then something is off.

So, you know, we're trying to understand does the brand play in a large market?

And in that category, does brand matter?

Consider the dynamics between branded players and private label in your category and see, you know, are people, is private label a really, really big player in your market?

Or say it's private label is small, but do you see that branded players are converging on price to where private label is?

So try to understand just how much brands matter in the category that you play in.

I would love to dig into the private label comment that you made.

I think that's really interesting.

Could you expand on that?

So are you saying that you, if you have a brand with a product that has a private label analog, what does that tell you about the opportunity for the brand?

Well, first I like to just see like, is private label, first of all, every category has a private label, unavoidable, but try to see if that private label share is really outsized in the category.

Then it's going to probably be a harder battle for branded players.

Not every category is like that, but I think every founder should try to understand how private label dictates pricing in your category.

And I think one way to also check is when you're on promotion and your pricing comes down closer to your private label, does your sales spike?

I think that's one way to see just how private label matters in your category.

If you do see that when you take your pricing down closer to what the private label analog is, what does that mean?

Does that mean you need to figure out a better differentiator so that you can sell at the price you need to be at?

Exactly, yeah, I think so, exactly.

The higher the stakes is, the more you need to really accentuate why your brand matters in that category, what differentiation you have besides price.

If you're, whether or not you're in a big enough market was something that you just talked about a little bit.

Walmart, for example, Target, for example, they have programs for emerging brands where perhaps you're not in all of the stores, you're in a handful of stores.

Is it important for you to be able to see that they're succeeding in the emerging brand program?

Like, do you need to be able to see they're making it onto the shelf in center store?

Like, what are you typically looking for if a brand isn't a major retailer, but perhaps they're in that sort of first phase of testing?

I'd say, first of all, getting into those national retailers, major logos is definitely a feat in and of itself.

And it's a hard one.

You have to make sure that you have marketing support on your own to drive consumer awareness that you're in those stores.

We definitely look for strong velocity data once you get into those stores.

And in order to accomplish that, you need to have built enough brand love by them.

And so I think that's why getting into, say, a store, a mass store like a Walmart or Target of the World is something that we tend to see emerging brands stage great a bit later in their growth process.

One of the other green lights you mentioned was gross margin, which is obviously such an important one.

And I think you said that 30% for an emerging brand, that seems reasonable, but that you have to have a path to a better gross margin in the future.

Where are some of the places that brands can look to be able to improve on those gross margins?

I guess gross margin, it is a whole bunch of factors.

Pricing obviously, like your own pricing on shelf is one.

And obviously, pricing on shelf, you're limited by what your competitors already priced that.

But I think the more you can provide value to your consumers of what your brand offers, you can justify a bit better pricing.

So I think I'd leave with that piece of advice.

Obviously, try to see if you can always renegotiate with your co-manufacturer.

I know it's really hard.

For emerging brands, but as you scale, always come to the table and always try to see where you can squeeze more dollars and more margin from your supply chain and your co-manufacturers.

And then, I'd say in the last couple of years, freight and logistics have been really expensive, but I think now is really the time to relook at the rates that you're distributing and see if you can also renegotiate on those costs as well, or try to figure out from your network or people who actually...

There are people who actually go find better rates for you on freight and logistics, and maybe they'll take a small cut on the win that you get, but try to see if you can find a better distributor with much more efficient rates.

Certainly VMG wants to make their money back, and a big part of that is a strong exit strategy.

What does a strong exit strategy look like?

I'd say that we try to make sure that the brand...

First of all, that the brand has scaled to a level that where you're a meaningful enough player to a strategic acquirer.

And usually that benchmark is...

You know, for an emerging brand, that benchmark is something going to be about, you know, 75 million hundred kind of that's the code sort of net sales or more.

And at a healthy margins where your margin is actually pretty comparable to the strategic acquirer's margin levels.

Because those acquirers typically will not acquire a brand that's margin diluted.

And then obviously a healthy EBITDA margin or cashflow dynamics.

But even then, we want to make sure that the next acquirer of the brand has enough growth to be excited about the brand.

And so we have to show a path to, you know, continue to double the business or show that there is a path to really great innovation success.

So I'd say that, you know, while we and our portfolio companies work together during our investment period, we're constantly looking for new levers of huge growth that we can unlock.

Not just for our ownership or our investments, but for the long-term outlook for the brand.

How might you understand what the margins of a potential acquirer are?

Is that information that's readily available somewhere?

For a lot of the strategics, they're publicly traded, like go on their earnings for the overall margins.

But also, if you go back way back pre-pandemic when a lot of them are acquiring a lot of emerging brands, they will also have financials of what were the financials of the brand that they acquired at the time.

And so you can see what attractive M&A looked like for them back then.

And I think that will probably stay true for today.

Let's see, something else we certainly are hearing a lot about is valuation and how founders need to be very careful not to inflate their overall valuation so that they don't find themselves in hot water later on.

What are your best practices?

And that's an easy thing to hear, but it's a little bit vague.

Do you have any best practices so that founders have a better idea of where they should land?

In the past year, I think that kind of theme about valuation and that disconnect, I think that happened because in 2023 time period, there was a pretty big disagreement or disconnect between entrepreneurs and investors about valuation.

And I think that disconnect still exists to a certain extent today.

You know, first I'd say play your own devil's advocate when you're referencing what people raised during the pandemic times or what valuation you might have gotten in your last round a couple of years ago, because our perspective is that that was a bit of an anomaly and that we should not be benchmarking valuation to that era.

So I think, you know, the math that we try to triangulate is how much money you've raised so far and how much community sales you've generated with those capital.

That kind of goes back to my earlier comments about that ratio of every dollar of capital you raise, you should be able to generate 2 to 3X cumulative sales.

And then, you know, after that, try to see, you know, for the valuation that you raised today, you know, and the dollars that you're trying to raise with that valuation, use that math of what I just said about that, kind of 3 to 1 sales to capital ratio.

So most likely, your investors are going to look to double, triple, quadruple your valuation from today.

Then you get the number of like, what that next valuation needs to be to satisfy all your cap table.

What does that imply about your retail sales and your scale at that ending valuation?

And is that realistic?

And by realistic, does that mean you're gonna be the number one player in your category, or does that mean you're gonna be, you know, somewhere in like the number five to 10 player in the category?

Or is your category big enough to support that implied retail sales at the end?

So try to see how realistic your current valuation implies about your ending valuation that will satisfy your investors.

So earlier, we talked a little bit about what's the best way to be introduced to VMG.

And certainly if you're not in a space where your immediate circle has access to capital and has access to wealth, this whole process can be more difficult.

Are there any special opportunities that you're aware of for Latino, women-owned, BIPOC, AAPI, and other minority-owned businesses?

And for this question, I'll make a special plug for a new strategy at VMG.

This new strategy is called VMG Parity Collective, and it's on our website if you want to learn more and can see some of the companies that we've backed through this strategy.

And the underlying vision is that we want to support BIPOC entrepreneurs, acknowledging the challenges they particularly face in securing early capital.

Our understanding from experiences that we've heard from BIPOC founders is that founders of color often don't have access to a family and friends capital.

And so even if they have a great idea, it takes them so much longer to get that idea off the ground.

So we launched VMG Parity Collective, and the strategy or the criteria to identify high potential consumer brands with demonstrated proof of concept, loyal customer base, and somewhere in the one to 15 million annual revenue range.

And our goal with that strategy is to make investments ranging from 3 million up to 15 million of capital.

So that is a relatively earlier stage investment than the typical investments that VMG consumer team makes, and it is dedicated for by POC founders.

And we're really excited to get the word out there about this new strategy and to continue to really support the food and beverage ecosystem.

And the strategy, by the way, is not just for food and beverage, but it's also for beauty, personal care.

Any category that VMG invests in is open for the strategy.

Fantastic, and that's right on the website?

It is, yeah.

You go to vmgpartners.com, you can find Parity Collective.

And then I'd love to end on a fun note.

I would let you see so many brands, you go to so many shows, you're seeing so much.

What are some of your favorite current trends in food and beverage?

And it could be a category, it could be ingredient, it could be a particular kind of product.

What are you excited about right now?

So these are my personal takes on what I find really exciting.

And maybe these are not super exciting to others, but for me, like showing that you are better for you and delicious.

I think that was a theme that we, that I particularly look for at Expo West.

I'd say in the last like five to 10 years, a lot of brands or a lot of categories came up with alternatives for just better for you products.

And I think one really big factor that those brands might be missing is the fact that the number one purchase decision is price and then the second is taste.

Obviously, for an emerging brand that's offering better for you ingredients, price is not, you need to be premium priced so that you can offer those better ingredients.

So the number two factor that you should be thinking about is just how delicious you are and convincing consumers that your better for you product is just as delicious and you're not sacrificing anything about the texture or the flavor or the mouthfeel.

And so I think that's, and I actually think that's a really difficult innovation to be better for you and very delicious.

And so I think that was one thing that I was really heartened to see at Expo West.

Second is, I do think people, consumers are getting ever smarter about ingredients in any packaged food that they're buying.

Even things like erythritol, stevia, allylose, I think everyone is kind of scrutinizing these sugar sweeteners.

And then everyone is looking for cleaner, shorter ingredient list.

And I think that is actually an exciting, exciting trend because I think that just kind of gets to the overall consumer trend or theme of being more conscious about what they're putting in your body, looking for a product that's going to keep them younger and healthier for as long as they can.

And I think that's a theme that we're seeing, not just in food, but in other consumer product industries.

I think that's a trend that I continue to get excited about.

I know that founders are working really hard to innovate in and just get super inspired by the next wave of cleaner, better for you and delicious product.

I think people's thoughts and opinions about what's healthy and what isn't are constantly changing, but certainly a short list of ingredients and things that people recognize are always a good way to go.

Well, Kathy Yuh, it has been so great to have you on Community Call.

Thank you so much for joining us.

You mentioned that everybody at VMG has their email address right on their LinkedIn profile, so everybody can go over and get in touch that way.

For everybody else, you can watch a recording of this call at bevnet.com/communitycall.

You can sign up for future calls there as well.

Thank you so much.

That concludes another episode of the Community Call Podcast.

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