Early Stage CPG Capital & Go To Market Strategies During the COVID-19 Pandemic, Part 1

As I write, events continue to unfold before our eyes, the flow of information is constant, and the entirety of what’s happening is fluid. We know the COVID-19 pandemic has created an unprecedented time of uncertainty, a range of emotions, and behavioral changes. Take a moment to breathe (like right now). The disruption we’re experiencing is extraordinary, but it is temporary, and we will return to normal even if a new normal is yet to be defined. 

This is part 1 of 2, where we’ll assess the pandemic’s implications on capital accessibility & financial management for CPG, especially for emerging brands. 

Part 2, here, focuses on commerce, consumer & market dynamics, and their implications on go to market strategies.

What’s happening with capital:

• Among the early stage investors I spoke with, the vast majority of deals & transactions that were in play are moving forward. However, middle and upper middle market deals are on pause.
• Potential investments are being considered more thoughtfully, including more downside scenarios. Capital continues to be available but will be slower to obtain, in addition to the many other considerations outlined below
• Many PE firms & investors are prioritizing their attention to support their current portfolio rather than seeking new investments. Investors are pushing their portfolio companies to focus on collecting their receivables and enforcing cash terms to maintain cash flow.
• Stock market volatility (declines) have forced many angels, private investors and others who rely on asset stability & growth to make investment decisions to defer new investments for now.
• Many angel & seed investors are tightening their criteria and lowering their tolerance for risk. Where they may have previously bet solely on the founder of a brand with little market proof or traction, angels are now likely to need a clear and compelling proposition and line of sight to success as a key criteria
• Market uncertainty is forcing downward pressure on valuations in general, but liquidity remains in the system (there's still money to invest). 
• While some investors are retreating for the short term, they are positioning themselves for a buyer’s market on the other side of this event
• Reliable asset based lenders continue to lend for working capital secured by receivables, and in some cases, inventory. PO financing is still an option for larger PO’s.

Note that the above applies to “many”, not all. Several investors assured me they are still actively seeking deals and to deploy capital as close to the pace as they have been, and are maintaining the same criteria as before.

What it means:

• Sales velocities and consumption patterns during this period are volatile and are anomalies. Neither brands, investors, nor trade partners should consider spikes or declines right now as indicative of trends or future potential. For investors in particular, this means it’s harder to take action with confidence, so many will simply wait things out until there is a longer post-event horizon to assess. For brands, cycling this period next year means speaking to the context of today’s unusual events and using a longer horizon to speak to the strength of the business. The potential silver lining here is that brands that obtain trial due to out of stocks of existing consumer favorites may stick post trial. 
• Companies that are insulated from or a part of the solution to COVID-19 could experience an uplift in valuation.
• Funds with “dry powder” (money to still invest) will be shopping for good businesses who exit the crisis with strong potential
• Some investors may shift from top line opportunities to bottom line sustainability & capital efficiency
• Investors will make the distinction between a bad business and business being bad.  Good business models with solid, experienced leadership will be more likely to prevail during times of uncertainty.  

What to do:
Keep in mind we want to act with two strategic goals in mind: Protect and strengthen our vulnerabilities during the crisis, and set the stage to emerge post-crisis ready to capitalize on opportunities.

>> Preserve capital & increase capital efficiency

• Review your fixed expenses/overhead and pare back to essentials
• Collect receivables
• Ask suppliers for extended terms
• Pull down all open lines of credit
• Review & manage cash flow on a weekly basis
• Create a dashboard to help monitor KPI’s and communicate to those key operational stakeholders

>> Seek capital

• Leverage existing investors for bridge capital.
• Investigate if the SBA Disaster Loan Program is a good solution for your company’s situation. 
• Utilize the provisions in the government stimulus package once finalized and announced (being negotiated as I write). Loan requirements are likely to be relaxed in the government’s effort to distribute as much capital as possible, plus interest rates could be lower.
• If you’re in a raise round or about to start, raise more money than you originally planned, to ensure more runway and cushion during uncertainty. In your investor-facing materials, include information about the impact of the pandemic on your business and how you’ll address the new realities, including a possible recessionary environment.
• Continue reaching out to new investors to establish connections and set the stage for post-crisis emergence. Almost all investors I spoke with plan to keep meeting founders during the crisis (virtually) because they too have a short term and long term strategy through this period. They may not be able to give you the attention or consideration for the time being, so keep in regular contact. Once the crisis abates they’ll be able to focus better on new opportunities.
• Expect to be flexible on terms, especially valuations and dilution. Terms are also likely to be more favorable to investors. If your business is ultimately worth what you think it is, in the long run you’ll achieve that valuation. Right now, check your ego: The priority is to keep your eye on a sustainable business model so you’re still in business to achieve that valuation and exit. That said, a good business is a good business and an investor will recognize this. 

>> Re-forecast & strategically adapt

• Update and revisit monthly your revenue and expenses. Create alternative, varying planning scenarios, including revenue declines of 25% or more.
• Shore up your balance sheet to prepare for a long recovery – no one knows how long ‘long’ means (6/12/18/24 months?)
• Refinance to improve your interest rate and payment terms in a way that improves short term cash flow (or reduces short term debt service)
• Shift campaign spending to only the most profitable and/or those that achieve the highest ROI
• Evaluate business interruption insurance if appropriate
• Build redundancy & back up plans into your operations & supply chain in particular 

Additional resources:

• Check out these 50-60 min webinars (recorded last week) from Stage 1 Financial on Emergency Coronavirus Business Planning. Scroll halfway down the page for the Food & Beverage webinar. Personal Care & Beauty is just under that.  
• Small Business Administration - Coronavirus (COVID-19): Small Business Guidance & Loan Resources.
• Community Development Financial Institutions (CDFIs) are likely to offer disaster loan programs. Learn more about CDFIs here and find a local program here. 
• Brandjectory is an all new & soon to launch platform to facilitate discovery, connection and relationship building between early stage brands & investors. Learn more at: https://brandjectory.com/ 
• In the spirit of mindfulness, Deepak Chopra's book, The Seven Spiritual Laws of Success is my go-to book for whenever I am feeling out of alignment.  Reading it shifts my thinking back to center and allows me to clear my thoughts and move forward. 

Again, this too shall pass. Take practical and prudent action on the things you can control, and accept the things out of our control. Of the latter, go with the flow, for resistance is the source of stress and anxiety. Acceptance is a source of peace and strength. Allow the disruption to inspire new possibilities that will serve us better in our lives. While much seems to be changing, what is important to us has not changed. Relationships may take on more importance, and certainly good health and well-being is a priority. Breathe, and be grateful and mindful of the many blessings we have in our lives today, right now.

We’re here to serve – feel free to call or write when you’re ready.

Wishing you peace, strength and wellness,

Michael Movitz
Managing Partner
The Movitz Group LLC

​Click here for part 2: ​commerce, consumer & market dynamics, and their implications on go to market strategies.

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I would like to thank my many professional capital friends & colleagues who provided their valuable perspectives for this article:

Amberstone Ventures
Asset Based Funding Solutions
Bluestein & Associates
Cambridge Companies
CompanyFirst
Findaway Adventures
FocalPoint Partners LLC
MWNY
Pass The Honey
RCV Partners
Ridgeline Ventures
North Castle Partners
Safer Made
Stage 1 Fund
Zenfinity Capital LLC
2X Consumer Products Growth Partners