What drives valuation in an early stage, branded food company?
What does an early stage investor look for in a growing food company when they attempt to put a value on a potential investment? Many food entrepreneurs think it is the rate of growth in sales that drives valuation. That is partially true but does not tell the whole story. I have found the following to be the key factors in valuing early stage high growth food companies.
SAME-STORE SALES GROWTH: Continued growth in stores the company has been in longer than 6 months is a critical measure. No one wants to invest in a company whose base volume is shrinking no matter how much new business they are bringing in.
BROAD CUSTOMER APPEAL: Investors look for products that appeal to a broad demographic base. A high valuation is based on the ultimate market scale of a product so niche products are usually avoided by high growth investors.
MULTIPLE CHANNELS OF DISTRIBUTION: Can your product sell in retail, foodservice, on-line, in c-stores, clubs etc. The more channels, the higher the growth potential, the greater the
MARGIN: No matter how well your product is selling, if it does not have a sufficient gross profit margin to support a long-term growth strategy it will be avoided by early stage investors. For
retail a Gross Margin of at least 45 to 50% range is expected.
SCALEABLE SUPPLY CHAIN: Do your vendors have the capacity to supply your growth plans? Does your co-packer have the right certifications to sell to large accounts? How scalable is your supply chain, what will it look like at $25,000,000 in sales and what will be the cost structure?
FOCUSED GEOGRAPHY: To prove out the above, a company does not need to be a national organization. It is often much easier to stay in a focused geography and go as deep as possible to prove out as much of your concept as you can before broadening your sales geography.
Investors at the start-up stage are investing in a concept that they find compelling with a team they believe in. When a company has been in the market and has reached $1,000,000 in sales or more the evaluation changes to how much of the concept you have already proven and how scalable is it. Keep
this in mind when positioning your company for that critical first round of outside funding.