Food startups grapple with financial roadmap as coronavirus sows uncertainty


When Michelle Retik shuttered her New Jersey bakery last fall to launch the Better and Delicious Food Co. (B.A.D. Food Co.), the former financial planner was preparing for a major retail push in April by selling her cookies, brownies and granola online and eventually in Whole Foods and Sprouts Farmers Market. She had just raised $1 million from friends, family and other investors to facilitate the roll out. Then coronavirus upended her financial roadmap.

“It’s really hard that I just raised the money and just brought people on board and then the bottom fell out of the world and now I’m responsible to answer to these people,” Retik told Food Dive. “And while I’m updating them and telling them how I’m shifting, certainly the plans that I showed them are completely topsy-turvy.”

Whole Foods and Sprouts delayed carrying her products as they focused on keeping shelves loaded with popular frozen meals, condiments, baking supplies and other items for consumers who were stockpiling at home. For Retik, instead of focusing her promotional and marketing efforts in these brick and mortar locations, she prioritized launching B.A.D. online by building her website and setting up a presence on Amazon.


“I am being a little more cautious when it comes to spending dollars right now, for sure. We’ve had to react to the reality of what’s going on around us and shift our focus.”

Michelle Retik 

CEO, Better and Delicious Food 


The move created a host of other challenges for her nascent company. It takes time and money to break into the online market, attract customers and keep them coming back — something that is less of an obstacle for existing brands, especially if they already have a store presence. And while B.A.D. gears up for an online marketing and advertising blitz, a social media campaign and promotions, it can’t blow through all its cash now. It still has the retail launch to prepare for later in the year.

“I am being a little more cautious when it comes to spending dollars right now, for sure,” said Retik, who expects her cash stockpile to last through at least late 2021. “We’ve had to react to the reality of what’s going on around us and shift our focus.”

Flush with cash

The coronavirus outbreak has had a widespread impact on all facets of the U.S. economy, and the food and beverage sector is no exception.

As large, deep-pocketed CPG companies such as Nestlé, Unilever, Kraft Heinz and Mondelez International wrestle with how to handle a surge in demand for their food offerings, upstarts like B.A.D. are just as attuned to watching their bottom line and whether cash on hand will get them through the current epidemic or if they will have to raise money to stay in business. 

Analysts who follow the food and beverage space said investors remain loaded with cash they are looking to spend despite the current turmoil. Still, with uncertainty as to when things will improve and what the food industry will look like when it does, investors are even more focused on companies with strong growth, in-demand products like plant-based or clean label, and what channels the businesses are targeting, such as selling straight to a supermarket or direct-to-consumer. 

“We know that the markets still are flush with cash. We know that. Nothing has changed from the day before this all started,” Howard Dorman, a partner and practice leader for the food and beverage sector at Mazars, told Food Dive. “I don’t see private equity or branding companies closing up shop and saying we’re not investing.”

Permission granted by Veestro

 

Raising cash, even when the market is humming along and free of disruptions like the coronavirus, is no easy task. But for the ones that do, it can give them an immediate financial boost that allows them to increase production, hire more staff, market their products and create invaluable relationships that can increase their chances of success later on. In 2018, nearly $1.5 billion was invested across 247 food and beverage deals —​an average check size of $7.3 millio​n, according to Food + Tech Connect.

At Veestro, the maker of frozen organic meals experienced rapid sales growth in 2019 with revenue doubling from the prior year; the company posted its first profitable year since CEO Mark Fachler founded the company with his sister in 2013. 

As the Los Angeles-based company prepared for 2020 where revenue was forecast to double again, Fachler​ and his team started looking in November to raise additional cash to meet demand. They ultimately settled on getting $2 million from existing investors. As a result, when sales soared in March as the impact of coronavirus became more pronounced in the U.S. and around the world, Fachler said Veestro was prepared for the surge in sales. ​

“Not even counting the virus, I knew that I wanted to [raise money] because you don’t know what’s gonna happen and we’ve seen this growth. I’d rather be able to supply to our customers than to start having a lot of stockouts and unhappy customers,” Fachler said. “I’m definitely happy we did it.”

The manufacturer of plant-based meals like enchilada casserole and country fried chicken considered doing a larger Series A funding round drawing in outside investors, but decided that by increasing capacity and showing growth now, it could command a higher valuation later on, Fachler said. Veestro is considering a Series A funding round toward the end of 2020.

“Over the course of seven years, we’ve raised very little capital,” Fachler​ told Food Dive. “So, which means that we’ve had to become very disciplined on how we grow this company and [be] very scrappy and very creative. Now that we’ve reached the point where we’re at right now, we’re still following those values and still making sure no dollar is wrongly spent.” 

Division over worth

A challenge for companies and investors alike is determining what the so-called new normal is going to be after the coronavirus has dissipated, Jeff Robards​, who leads the consumer foods sector for Alantra in North America, told Food Dive.

For some businesses that have seen a lasting surge in demand during the outbreak, there may be a disconnect between the companies and potential investors over how much of the increase will be sustainable. This fissure has prompted some upstarts to delay more robust fundraising at a richer price until they can prove to the broader market that the uptick in business will last.

Robards said other growing brands posted a spike in revenue in March before sales flattened in early April — the companies attribute this to the fact that consumers are now stocking up more on food staples as compared to earlier in the outbreak when people were loading up on anything they could find. These businesses are postponing raising cash until the current volatility subsides, and they can demonstrate a growth rate that is more consistent with what they experienced prior to the outbreak. 


​ “Not even counting the virus, I knew that I wanted to [raise money] because you don’t know what’s gonna happen and we’ve seen this growth. I’d rather be able to supply to our customers then to start having a lot of stock outs and unhappy customers. I’m definitely happy we did it.”

Mark Fachler

CEO, Veestro


“Some people might be adopting the view that consumer behavior is changing as a result of this. And we don’t know how it’s going to impact categories now. We don’t know how it’s going to impact consumption,” Robards​ said. “It’s not that companies won’t get dinged — some will. But I think there is just a lot of uncertainty in terms of evaluations right now. … It makes it difficult to place values on things.”

Christie Lagally, the CEO of plant-based chicken company Rebellyous Foods, raised $6 million on March 31 through a Series A funding round after about four months of work — a process she called “a heavy lift.”  

Lagally​, a former Boeing engineer, said investors were attracted to her company’s mission of helping combat climate change, tackling large-scale meat production, addressing chronic health issues and responding to threats such as the current pandemic to the food supply. Despite the outbreak, they saw a plant-based space still growing quickly, increasing the likelihood that they would get a solid return back on their money. 

“What our investors saw was not only that the potential before the pandemic was a good enough reason to invest because that was going to exist no matter what, but that the market drop wasn’t necessarily an indication that this market was not going to do well,” Lagally told Food Dive. ​“I think the forward-lookingness of our investors is that they understand that the links between what is good for the world and what is good for investors is more linear than it’s ever been before.”

Courtesy of Rebellyous Foods Photo / Kristie Middleton

 

Lagally said the coronavirus outbreak prompted Rebellyous to “double down on our engineering efforts” to develop technology to create a cheaper and better quality faux chicken nugget and produce more of it in a shorter amount of time. 

“I think this pandemic just blows that whole concept up … It makes it as clear as day that if we ignore issues like the impacts of future pandemics, if we ignore the impacts of climate change, all we see is destruction to our economy and losses to our companies,” she said.

Robards encouraged companies to do what they can to conserve cash while spending to tap into growth when practical. At the same time, they should not lose sight of the fact that eventually things will return to more normal patterns of consumption. When they do, food companies need to be ready by making sure they have ample liquidity, an efficient supply chain and a robust labor force or co-packers already in place.

He recalled a piece of advice he received from the CEO and co-founder of an $80 million food company focused on airlines and hospitality before 9/11 that survived and now generates more than $500 million in sales across a more diversified assortment of products, customer and channels. 

“The guy said, ‘The key is to be prepared for the rebound. More companies go bankrupt on the ramp-up after a crisis, than from the contraction.’ And what he meant by that was that companies should be prepared for when demand returns to normal, and when there’s a market and the demand for their products again,” Robards​ said. “Things will return and if you’re not ready, then someone else is going to be more prepared than you are and you’re never going to get a leg up.”



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