Navigating The New Reality Of CPG Investing

Food & Drink

Unlike many of her peers in Venture Capital and Private Equity, Melissa Facchina comes from a background in Operations with a focus on food and beverages. Today, Facchina is the Co-Managing Partner of Siddhi Capital, which was born from a joint venture between her operating firm, Siddhi Ops, and the family office of her co-founding partners Steven and Brian Finn. I sat down with Facchina for a comprehensive look into the complexities of CPG investing, offering practical advice and strategic considerations for entrepreneurs navigating this dynamic landscape.

Dave Knox: Let’s begin with Siddhi and its origin.

Melissa Facchina: Siddhi Capital, a relatively new player, is almost 5 years old. We stand out due to our unique formation as a joint venture between my operating firm, Siddhi Ops, and the food and beverage/CPG division of a family office. The family office, led by a father and son duo, Brian Finn, the former CEO of Credit Suisse USA, and his son Steven, who are my co-founding partners. Steven focuses on the intersection between food and tech, while I bring CPG expertise and manage day-to-day firm activities. We like to say that we fell in “deal love” quickly, deciding to merge both capital and operating expertise. This led to the formation of Siddhi Capital Fund I. Fast forward, we have a handful of investing vehicles in-house and most notably are now operating out of our second growth equity fund. Our entire operating team is in-house, with our team consisting of two-thirds operators and one-third investors, setting us apart from the typical structure with a suite of investors and a separate operating partner.

Knox: Your background in operating is unique. What were you doing in the CPG world before Siddhi and investing?

Facchina: Before Siddhi, I have always had a deep connection with the food and beverage industry. My father, a successful entrepreneur, built one of North America’s largest privately held juice manufacturing companies. Growing up in this environment, I – very begrudgingly at times – had hands-on experience, starting on the factory floor at age 11. We were the family who did supermarket aisle walks while on vacations, so to say this industry was instilled in me is an understatement. Over the next 20 years, working in various roles, both on the factory floor and in administration, I fell in love with the industry. My father provided invaluable mentorship on entrepreneurship and leadership and the weight required to both build and drive change as a leader in the industry that nearly everyone understands, as we all eat and drink several times a day. What stood out to me was the way food connected people emotionally. This journey shaped my understanding and passion for the space. Recognizing the gap in nutrient-dense, quality food options, I saw an opportunity to build a business that could aid in building and investing in some of the greatest brands of the future with substantial scale and acquisition potential.

Knox: How did you connect with the Siddhi team?

Facchina: The bridge to meeting the Siddhi team is an interesting story. As I had recently found myself jobless with my former employer “tossing me from the nest” because I was destined to be an entrepreneur and not an employee, as he would say. While visiting my cousin in Sedona, Arizona, I found myself at a bookstore with a thesaurus of Sanskrit words and their English equivalents. Browsing through words meaningful to me, I came across “superpower” and “success,” both linked to the Sanskrit word Siddhi. On a long walk that day, the idea of building an operating execution firm resonated with me—a place where expertise goes beyond advice, actively immersing in growing businesses. Originally focused on manufacturing and co-manufacturing, as those were my core skill sets, it was easy to see the need brands had for navigating from commercial kitchen to manufacturer, a skill many lacked. Thus, Siddhi Ops emerged with that initial area of focus. As we expanded into distribution, procurement, supply chain, and more, the operating team grew over nearly a decade, contributing to the success of 425 food and beverage companies. In 2019, the transition from an operating firm to private equity gave rise to Siddhi Capital. I am fortunate that as the years go on, some of the greatest talent in the industry want to work for Siddhi Capital and our portfolio companies.

Knox: How did you approach the shift from operating to an investment firm, integrating operational experience with financial capital?

Facchina: The transition to Siddhi Capital was not a straightforward process, and after nearly five years, there’s no perfect answer. While investing and deploying capital seems simple, the challenge lies in both identifying next generation businesses and the level of control an investor has to insert operational talent and support. As minority investors, securing buy-in from the brand team and co-investors is crucial. Fortunately, our positive relationships with portfolio companies have facilitated this collaboration. Yet, once inside, another challenge emerges—managing decisions. Our operators, accustomed to driving decisions, can face frustration when unable to effect change as quickly as they may like. Thus, the complexity of minority investing becomes apparent. When considering an investment, we conduct extensive diligence, including operational scrutiny, resulting in a comprehensive report that serves as a blueprint for the next stages of business development, foundational support and deploying our talent to address gaps as these businesses face the ever-changing rules of scaling.

Knox: Given your unique approach, is your deal flow primarily outbound as you actively seek brands you can assist, or is it more inbound with founders seeking your differentiated expertise?

Facchina: To be entirely transparent, in our entire investment journey, only one company was actively pursued by us due to its high competitiveness and attractiveness to a variety of investors. Aside from that, 100% of companies approach us with either the founding teams, referrals from our other portfolio companies or we’re brought to the table by existing investors. All in all, nearly every deal is driven by an interest in our operating abilities.

Knox: With such substantial deal flow, how do you quickly identify standout opportunities amid the initial influx, considering the extensive vetting process that follows?

Facchina: Our in-house investment vehicles and their mandates vary. Our second growth equity fund focuses on 70% CPG and 30% food tech. Additionally, we have scout funds, both a food tech one and a recently launched broad based CPG scout fund. Both invest smaller amounts in early-stage businesses. For the scout funds, we seek innovation, unique product concepts, and founders with a clear understanding of their offerings. On the food tech side, intellectual property is crucial, while CPG businesses must approach the market differently. In larger companies, where substantially greater dollars are deployed, our approach is strategic, identifying gaps in our portfolio based on product, size, distribution, manufacturing, and influenced by conversations with major retailers. The market shift has also impacted our criteria; businesses must demonstrate high growth or profitability to survive in the current landscape, reflecting my co-founder Steven’s perspective that not being either right now could be detrimental.

Knox: The landscape of CPG investing has undergone significant changes in the past decade, evolving from a lack of interest in the early 2010s to tech investors treating CPG like tech companies, and now facing a new reality as you described. How do you navigate and approach this challenging period, considering both early and late-stage investments?

Facchina: So first I’ll say that what you just described is a total disaster and you described it perfectly. The shift a handful of years ago in evaluating CPG businesses as tech companies has been disastrous. Many companies formed between 2012 and 2018 embraced a growth-at-all-cost model, prioritizing top-line revenue over bottom-line infrastructure. However, constant losses do not align with the essence of a business, which should be cash flow positive. Now, founders are grappling with the need to stabilize their foundations, shifting away from the obsession with top-line growth. Some may have secured rounds with inflated valuations, making it challenging to bring in new capital without facing down-round scenarios, an unfair position for the businesses that they shouldn’t have been in to begin with but founders are incentivized to keep as much equity as possible so if they were being offered an unreasonably high valuation by an investor, it’s not impractical to think they would take that. Unfortunately, many are paying for that mistake today and the blame is shared between investors and management for that. Exit strategies are complicated, as previous valuations require much larger exits than practically feasible in today’s market. Investors are restructuring previous investments, impacting returns and necessitating the creation of management incentive structures to offset dilution for founders and teams. We find ourselves in a period of ongoing restructuring, aligning business valuations and cash needs with the goal of achieving financial stability, such as cash flow neutrality or positivity. The complexity deepens with the challenge of securing new capital in a market where funds themselves struggle to raise capital to deploy, creating scarcity and putting businesses at the mercy of available capital and its terms.

Knox: Given the challenging landscape, entrepreneurs in the early stages of CPG face unique hurdles. In the context of your scout fund that deploys checks ranging from $50,000 to $500,000, what advice do you have for early-stage entrepreneurs, and what milestones are you looking for them to achieve in those early days?

Facchina: My advice to early-stage entrepreneurs is to recognize the significance of their earliest investors. While emotional attachment and belief in the brand are crucial, these early investors often set governance thresholds and shape the business’s trajectory by serving on the initial boards. The board’s decisions can either make or break the business. It’s crucial to understand and establish appropriate milestones. For instance, if a company raises $1.5 or $2 million in its first round, and Siddhi invests $500,000, it would be impractical to expect them to reach $10 million in sales or achieve cash flow positivity on that amount alone. While there are businesses that have accomplished both on less, they are exceptions. Holding a company accountable for unattainable objectives can lead them astray. The dating game analogy applies to investing – just because someone wants to invest doesn’t mean you should accept their investment, and vice versa. Rejecting capital from individuals who might not be the right fit is an essential aspect often overlooked in the investment process.

Knox: Coming from an operational background, especially in supply chain and co-manufacturing, you’ve observed the trend where brands in their rush to be direct-to-consumer failed to differentiate their products and formulas. How do you guide entrepreneurs to find manufacturing partners that prioritize uniqueness and proprietary elements rather than just mass-producing similar products?

Facchina: Manufacturing partnerships are as crucial as investor, retailer, and co-founder partnerships. The emphasis on manufacturing goes back to the understanding my dad instilled in me – no matter how many sales interests you have, if you can’t consistently, safely, and cost-effectively produce a product, it doesn’t matter. While there are lists of co-manufacturers available, success in scale requires more than just finding manufacturers capable of producing specific food types. Consolidation in the late 1990s and early 2000s resulted in larger outfits acquiring smaller businesses, leading to a shortage of capable manufacturers. The rise of small-batch manufacturing brought back many small manufacturers, but not all are stable businesses with proper cash flow, investment, and infrastructure for producing safe, high-quality products consistently. As a result, they cannot possibly be stable partners to your business.

Successful brands in our portfolio can meet sales demand year-over-year, necessitating the ability to scale production. This means transitioning them to higher-caliber manufacturers faster, requiring a relationship-building process akin to dating. Site visits, relationship-building with manufacturing leadership, and running batch products are essential. Manufacturers are businesses themselves, and a fair pricing strategy is crucial for a mutually beneficial partnership. However, the legal nuances of creating something new often get overlooked. Our commercial legal team specializes in IP and commercial matters and helps close gaps immediately post-investment. This includes addressing trade secrets, processing IP, and procuring CapEx equipment, preventing competitors from entering the line. While such measures may incur costs, protecting both the uniqueness of the product and the terms of manufacturing are essential for maintaining and enhancing the business’s value over time, especially during an eventual exit.

Knox: When considering the diverse array of brands in your portfolio, spanning from the scout fund to growth equity, at what point do you engage in conversations about co-manufacturing? How often do you find it necessary to reassess and redefine the approach, especially in the context of growth equity investments?

Facchina: 100% of the time. We have operating conversations with our businesses prior to deploying cash every single time. The approach varies depending on whether we’re dealing with food tech or CPG and whether it’s within the scout funds or the growth funds. Food tech, with its emphasis on intellectual property (IP), may not yield significant revenue in the short term. In contrast, CPG, which tends to have less IP, operates differently. In the early stages, our goal is to assist these businesses in establishing the right infrastructure, avoiding potential pitfalls that may require future restructuring. I’ve witnessed numerous instances across our portfolio and client base where companies had to repurchase inadvertently surrendered IP to manufacturing, R&D, or formulation partners. This process incurred substantial costs for the companies involved. We strive to guide scout fund companies to sidestep such issues and help structure their endeavors appropriately.

In the case of growth equity investments, the stakes are high due to the substantial funds involved. This phase undergoes rigorous diligence, and our team is ready to intervene if necessary to stabilize and restructure aspects of the business within the first year of investment. Notably, the deployment of capital often aligns with the resolution of identified gaps. While closing these gaps before capital deployment may be impractical, we often include it as a contingency in the closing process.

Knox: Throughout our discussion, you’ve provided valuable advice for founders navigating the challenges of the current consumer packaged goods (CPG) landscape. Are there additional aspects of guidance, particularly for early-stage founders, that you find crucial in positioning themselves for success within this evolving CPG reality?

Facchina: One key aspect we emphasize is the importance of practicality. Success in any worthwhile endeavor requires considerable time and effort. While we’ve witnessed some direct-to-consumer (D2C) businesses experiencing rapid growth, reaching $50 million seemingly overnight during the COVID era—many of which are part of our portfolio—this isn’t the norm nor the future trajectory. Customer acquisition costs have surged, requiring a realistic approach. Reflecting on the past two decades of exits in the CPG space, it becomes evident that most successful ventures are 15 to 20-year endeavors. While our team can help identify strategic shortcuts, it’s essential to acknowledge that these generally won’t condense the timeline by 15 years. Realistically, a three to five-year reduction is conceivable, resulting in a 7-12 year growth horizon.

The first consideration is the founder’s commitment to the long haul. Next, a nuanced evaluation of the cash needed for business growth is crucial, accounting for yearly, quarterly, and opportunistic fluctuations. When assessing the capital raised by CPG businesses, the reality is that they are securing tens of millions of dollars over the company’s lifespan, not just $2 to $5 million. Founders, whether in the early or later stages, must grasp the financial landscape. Even businesses achieving $50, 70, or 100 million face three to five more years ahead, along with potential additional investment cycles. Understanding the business’s trajectory in these scenarios is imperative.

Despite the supportive and collaborative nature of the CPG community, where competitors readily share information and assistance, it’s essential to recognize that building a successful business requires more than positive sentiments. The relatability of a product does not guarantee its widespread appeal, emphasizing the need for a holistic approach to business growth and stability and supported by financial viability and sustainability.

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