After seeing an influx of interest from grocery stores and retailers, CPG brands are planning expansions through fundraising.
The GIC Boom was booming throughout the pandemic, as many digital native brands have struck deals with major retailers and grocery chains. In turn, more and more CPG startups are looking to raise venture capital funds to fund capital-intensive wholesale expansion. Better-for-you beverages and brands like Voyage Foods, energy drink A Shoc and Upside Foods, for example, have attracted increased investor interest. However, some early-stage investors anticipate a slowdown in funding for the category as economists warn of a recession later this year.
According to CB Insights, food startup funding reached $20 billion in 2021, a 16% increase from 2020, indicating continued interest in the food and beverage industry at the height of the pandemic.
Recent releases of consumer goods have focused on beverages, especially alcohol brands. Earlier this month, Corona maker Constellation Brands acquired ready-to-drink Austin Cocktails by buying the remaining stake in the company. In April, Diageo acquired flavored tequila brand 21Seed, founded in 2019.
In late April, cold-pressed lemon water Lemon Perfect announced a $31 million Series A funding round — with investment from Beyoncé Knowles-Carter, as well as Trousdale Ventures, Beechwood Capital and NNS Capital.
Yanni Hufnagel, the brand’s founder and CEO, said the fresh money came at a perfect time for the brand, as it rolls out at Costco and CVS this summer. “Drinks are a capital-intensive game, and you’re only as good as your next case sold,” Hufnagel said.
New beverage brands, in particular, are expensive to scale. This is due to rising costs for materials like cans and bottles, high shipping rates for heavy liquids, and an increasingly crowded field that makes it difficult for startups to compete for retail space. by retail.
Since launching in 2018, Lemon Perfect has raised five fundraising rounds “and we’ve hijacked dollars each time,” Hufnagel said. He said Lemon Perfect has a few advantages in the space, including interest from celebrities and retail buyers, as well as an attractive price of $1.99 a bottle. “There’s a lot of buzz in drinks right now, so we’re focused on executing the expansion across all channels this year,” Hufnagel said.
New brands are also feeling the costly pressure of national distribution.
Mac and cheese brand Goodles, which launched online last November and debuted at Target this spring, raised $6.4 million ahead of its launch.
Co-founder and CEO Jen Zeszut said amid rising production and distribution costs, CPG is more capital intensive than ever. “If you’re going to start a billion-dollar brand, you need funding,” she said.
Goodles was co-founded with actress Gal Gadot, Kraft brand manager Paul Earle and Annie’s Homegrown co-founder Deb Luster. The brand was only sold on its DTC site last year “but Target was in the works from day one,” Zeszut said. She added that these days, digital-native brands are expected to expand into wholesale within months of launching online, and the exploit requires cash flow that seeded startups cannot match. “We will likely raise more funds as we enter more retailers.”
In late April, the San Francisco-based company Today closed a $7 million funding round to expand its line of plant-based chickens. Participants in the current round included Selva Ventures and the Standard Meat Company, a private meat processing and packaging company that supplies restaurants and grocery store chains. Today, Nuggets is currently available direct-to-consumer through its website and will launch in Whole Foods stores later this year.
Indeed, herbal and better-for-you products continue to dominate CPG’s funding interest. Kiva Dickinson, co-founder of Selva Ventures, said the trend is simply a byproduct of food and taste trends. In 2021, sales of plant-based foods in the United States reached $7.4 billion, surpassing other categories, according to the latest data from SPINS, the Plant-Based Foods Association and the Good Food Institute. This figure represents a 6% increase from 2022.
“We have so many questions about why you wouldn’t start with vegan and gluten-free varieties,” Zeszut said. “But I knew the $4.4 billion noodle market was made up of regular noodles and I didn’t want to limit ourselves to just one food preference.” That said, Goodles contains more fiber and protein than typical mac and cheese — and the brand just won the Clean Label Project’s Purity Award, Zeszut added.
“We’ve come across investors who didn’t want to include us in their plant-focused portfolio for this reason,” she said. Goodles quickly expanded into more “mature” flavors, like cacio e pepe, which Zeszut also said “investors were doubtful at first.” The flavor has become one of the brand’s best-selling SKUs since its launch in January.
Dickinson noted that the rounds announced at the moment had been in the works for some time. He added that the recent public market chaos, including a looming recession, has yet to play out in venture capital deals. “The real changes will come in the months and years to come.”
Dickinson expects the number of companies receiving funding to decline – with venture capital money likely going to brands that have proven their value proposition and distribution model. “Capital is and will be harder to come by,” he said. Direct-to-consumer brands and startups as a whole are facing a VC chill due to a variety of factors, including the economy and category saturation. Although food and beverage startups are yet to feel the effect, they likely will in the coming months.
“But there are reasons for consumer product entrepreneurs to be optimistic about their tech counterparts,” Dickinson said. “CPG valuations have not been overinflated, so there will be fewer corrections needed.” Additionally, GICs tend to do well in an economic downturn – because most people still need to shop even during recessions.
“If you don’t need to raise capital now, don’t wait to do it,” Dickinson said. “Take this opportunity to expand your track for the next two years.”