CPG VC Incompatibility

There’s an interesting article from TechCrunch, which details the journey, and findings, of a CPG entrepreneur in Silicon Valley. Although it’s written from the point of view of an entrepreneur pointing out holes in VC logic, it holds insights that can be used for both sides. I highly encourage anyone looking to run a startup in CPG industries take a read, but for everyone else out there, the TL;DR is as follows:

TL;DR: CPG is a huge industry, that doesn’t behave like traditional “VC focus” industries. You can’t go into it with the same expectations.

And, I largely agree. You have to operate under very different sets of pretenses if you’re looking to invest in CPG companies. But that’s why it’s probably best to stay away from Silicon Valley in general.

Investor Culture

For simplicity’s sake, let’s assume we’re looking for funding for our new potato chips business. Assume we have a competitive advantage compared to the traditional players in our markets, specifically in taste tests involving consumption of 20 pieces or more. On top of that, we have scientific evidence that the chips are healthier, albeit by a slim margin, than traditional offerings. By all metrics, this is bound to be a successful business. It just won’t be a billion dollar tech unicorn.

That’s the first problem with going to Silicon Valley for funding on a CPG venture — they operate under different values. This is fundamentally different from not understanding how to valuate a company of this nature. That involves tweaking assumptions. This requires them to shift their core values.

Silicon Valley, since its conception, has operated under the narrative that it is home to the world’s growth engines — companies that will fundamentally alter the world in one way or another. Singularity University puts it best, I think. This is what it says on their SU Ventures website:

“We look for startups that are tackling the world’s most difficult problems and take a long-term approach to help them build high-growth sustainable businesses.”

And this isn’t just SU either. You can see this with Y-Com, 500 Startups, Tech Stars — I can go on. The thing is that even the gateway funds like startup accelerators are focused on high-growth, potential monopoly businesses. They’re not interested in your CPG venture because a) the IRR on the project is far below what they require, b) the opportunity costs of investment in your business isn’t worth their time, or c) association to your brand will negatively impact the fund’s ability to source deals, or raise future funds.

Bear in mind that this isn’t how I think, just the general sentiment I got during my time in Silicon Valley.

Consumer Culture

But, let’s say we somehow found an investor — most likely an angel — to invest in our vision. Then, there’s the problem of overcoming the consumer culture that’s unique to this part of the world.

Silicon Valley, for everyone who’s unfamiliar, is very unique. For starters, it has a serious gender imbalance issue, exemplified in the labor force statistics. What’s more is that the labor force is highly specialized, with a majority of employees focused on engineering and application. These people do not make up the majority of population anywhere in the world, and yet, it does here. These people have very particular dietary tastes, often dictated by scientific papers coming out of local educational institutions like Stanford and UC Berkley.

Let’s return to our example of our potato chips venture. A largely male population bodes well for this business, at the start. But, based on the specific dietary trends in the region, backed by scientific white papers from prestigious institutions, potato chips often find sales numbers under performing in comparison to other regions of the US, let alone the world. In a place where Soylent came to be, it’s hard to imagine they’d see potato ships as anything than the antichrist.

That’s not to say CPG always fails in Silicon Valley. Soylent is a great example of this. It’s just that the market in Silicon Valley is very niche, and specialized, that a general success globally is rather rare. But that’s the case with any CPG industry, and it just goes to reinforce the point I made earlier about investor culture — if it won’t become a unicorn, it’s not worth it.

Hubs Exist For a Reason

Cities tend to specialize in terms of industries. Dusseldorf is a great example of this. It’s home to some of the biggest names in telecom, like Vodafone, T-Mobile, and AT&T’s European head quarters. Other times, cities grow so large that it becomes an amalgamation of multiple hubs, like New York’s instance of housing a financial, fashion, and cultural hub in a single city.

But the fact remains, hubs exist for a reason. Convenience.

It’s convenient for people and entities of similar interests to situate close together, as it improves communication between the parties, which allows for greater collaboration. This collaboration gives rise to new ideas, some of which prove commercially successful.

Silicon Valley is home to the greatest names in tech, both in hardware and software. Samsung has offices there. So do SK Hynix, Broadcom, Paypal, Toshiba. The point is, there’s no strategic advantage to having Silicon Valley offices unless there are partners that you can cooperate with to improve your business. For many CPG companies, collaboration with tech companies means, essentially, a D2C (direct to consumer) business model. Sometimes, it can be a channel partnership with e-commerce companies. But that’s it. The scope of mutual benefits is highly limited. It doesn’t warrant a presence in Silicon Valley.

Likewise, seeking venture funding from Silicon Valley based investors is probably not worth the time and effort required, as these investors don’t have much to offer entrepreneurs in terms of advice, connections, or even expertise. They became tech investors for a reason. If they were good at CPG markets, they’d be somewhere else.

Alternatives?

What I’ve found to be interesting is the rise of corporate VCs, specifically from large, household brands. Heck, even Walmart is getting in on the game. These corporate VC players are looking for something that differentiates them from Silicon Valley players — they’re looking to bolster the parent company’s portfolio of business.

Target operates an accelerator in India, particularly to find technologies that will bolster their online presence, and increase sales. Lotte is doing the same, while Samsung has a fund specifically looking for software startups developing AR/VR and AI software. For a CPG startup, it’s probably a lot easier, and more beneficial, to seek out funding from such entities instead.

Trouble is, there’s not many of them, yet, and they’re mostly looking to make later stage deals, Series A onward, with many seeking Series B size deals. This means bootstrapping is not just suggested, it’s necessary. It also means that they look for a lot of traction before making any sort of decision. Corporate players are playing with their corporate cash, after all, which is very different from the LP-GP dynamic of traditional VCs.

But, with many companies finding it difficult to innovate in house, they’re realizing that perhaps their role, as big, established players, is, not to innovate, but to find innovators, and foster their work in a sheltered environment. This is a point a Google employee raised to me when I met him in an Uber ride in Silicon Valley (a strange story, I know).

 

 

Is CPG Doomed to Fail?

No.

Well, we won’t see major IPOs, or headline worthy exits any time soon, which, to a VC, spells the death of any industry. But, CPG markets are huge. There’s immense market opportunity to be exploited, and there’s a lot of inefficiencies to be addressed. What’s more, CPG markets are almost impossible to monopolize (on a brand basis), which signals a low barrier to entry, which will always draw entrepreneurs to throw their hat into the ring.

But, if you’re thinking of making headlines on the Wall Street Journal any time soon, it’s not the industry you want to be in.

This is the sort of industry for people who are really enthusiastic about their product, and the value proposition they bring to market. It’s for people who can see themselves doing this for a life time, or sell out early, and small, to a bigger player. It’s for “extremophiles”, and not for the traditional “entrepreneur”.

That’s how I see it, at least.

Is CPG doomed to fail as a startup industry? No. Are CPG startups doomed to fail? No. But it definitely is one of the harder markets to tackle.

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