How To Raise Investment For Your Consumer Brand Without Losing Control! Phil Hails-Smith, Joelson (Part 2)

0:00Phil Hails-Smith:I think there's a lot of people out there, including myself, who it's kind of slightly embarrassing to say that you don't understand all this inside out because there's so many founders who have been on the fundraising journey who really understand it in incredible detail. And for 99 % of the rest of us, it's like, oh, God, this is really complex. So I'm leading the charge by saying it's OK not to understand it all and to just be on a continuous learning journey.

0:28Phil Hails-Smith:so what's the next uh milestone then in terms of shareholder investment let's talk about investment now and fundraising let's start very early stage and and what investment and fundraising looks like and i'll just try and i suppose draw out what what is typical so in the uk we have a fantastic tax incentive for early stage riskier businesses which is the eis scheme so enterprise investment scheme. It has a baby brother called SEIS, so seed enterprise investment scheme, which essentially gives great tax advantages to the investors. And this is for individual investors, or there are certain things called EIS and SEIS funds, where they basically, for those individuals, there is an incentive to invest because they get some tax relief on the amount that they invest.

1:18So if it's an SEIS, they get 50 % of what they invest back on their tax return against their income tax in any given year. There are obviously limits and criteria around it. And then if they hold the shares for three years and the business is sold, after three years, it's entirely tax-free. That's incredible. It's a great incentive and it's for individuals who are UK taxpayers. So normally for most businesses that we work with in the consumer space, because it's a capital intensive business. And because, you know, you kind of need quite a lot of money up front to actually get things going. There is usually a fundraising round.

1:53And normally it's a seed round, which will be, you know, benefiting from seed enterprise investment, which is capped at£250 ,000. You then go on to EIS, which is capped at£5 million. If you're able to find the right networks of individual investors or EIS funds, then, you know, that's a significant amount of capital that you can raise, you know, with individual investors or funds who represent those individual investors.

2:26Phil Hails-Smith:Welcome to Brand Growth Heroes, the leading podcast for the founders of Challenger grocery brands. I'm your host, Fiona Fitz. My 25 years at global giants such as Nestle and Challenger brands such as Goo Chocolate Puds, Chobani and Strong Roots, as well as coached to over 400 scaling brands, means I have the experience to ask the questions that truly matter and get you the insight that will inspire you to think differently and drive serious growth for your brand.

2:58Phil Hails-Smith:So let's talk about valuation then. How is a business valued at those early stages when they have? View, sales? I mean, I kind of have a view, but ultimately the valuation, it's an art rather than a science. And what you've got to look at is category, growth potential, opportunity, and ultimately, you know, the valuation metrics, you've kind of got to look across what other businesses have raised that. And that's very difficult information to actually get. So quite often, it's very much sort of thinking about a multiple of revenue or categories like that where you're kind of saying okay well the benchmark is three five six times revenue but that depends on what the investor base is is thinking about in terms of that valuation but ultimately for early stage businesses you've kind of got to look at if it's pre-revenue then it's it's very much you know what ultimately you can you can agree based on what you think the the growth opportunity is if it's got some revenue, then you're looking at a multiple of revenue.

3:58Phil Hails-Smith:Are you saying that this is the valuation of what the business would be worth if it sold right now or if it sold in the future? The valuation you're agreeing ultimately today, if you're raising capital, is the value you're placing on the business today, not in the future. It is the value today. Based on future performance and potential. If you don't have any revenue and you sold that business the next day, it wouldn't get, you know, 1 million or 6 million. It wouldn't be saleable unless the IP was worth something. So if the intellectual property is worth something or the idea is worth something and somebody is willing to pay for that.

4:33Phil Hails-Smith:So what you're really doing is you're valuing being in or being out. You're putting a value on being in on the journey or being out on the journey. Correct, correct. Yeah, and I think that's the bit that it took a while for me to click on because actually, can you really say it's the value of the business, like literally, if the business wasn't saleable on the market that day? You know, that's why it's confusing. Yeah, but look at lots of private companies that, you know, you're like, OK, so how is it valued at that amount? Ultimately, because there's no open market valuation. So if you go to a list of business, obviously, you can see what the trading price is.

5:04You can see what the price per share is. And therefore, that gives you a valuation for the whole business. For private companies where there is no open market, it's what the founders think it's worth and what the investors are prepared to invest at to get to that point. So there isn't really a benchmark. I mean, there are obviously benchmarks in terms of what other businesses have raised at, if you're able to find that information.

5:24Phil Hails-Smith:Now, let's speak about that. So over the years that you've been doing this, supporting founders in all sorts of categories to set their business up correctly and their agreements up correctly and raise money and eventually exit. What crazy stuff have you seen and where are we at now in terms of valuations? I mean, weirdly, it's all very cyclical. We go back to, I don't know, innocent. At that point in time, we didn't have a big VC market in the UK. EIS was just been created, so there was the ability to raise capital from individual investors. But a lot of those sophisticated benchmarks or milestones weren't there.

6:01The valuation discussions ultimately will always be around what are the investors prepared to invest at, what are the founders prepared to accept in terms of dilution, because it all comes back to the lower the valuation and the amount that you raise, the greater the dilution is for the founder. But there then becomes a really difficult sort of cyclical thing in terms of if you raise at too high a valuation and the business doesn't perform and you still need more money, that ultimately your valuation will come down and therefore you're going to get dilution later. It's very difficult. But weirdly, I mean, the trend I've noticed at the moment, there was a slightly sort of bonkers moment.

6:35Maybe just everybody's getting very excited after the first sort of lockdown and COVID. 2021 to 2022, valuations for consumer business went off the charts. I mean, it was absolutely mental, like completely crazy. You know, we did, I mean, hundreds of fundraising deals over that period of time. Investors were literally, you know, fear of missing out, green, crazy valuations. And then weirdly, we then had the cost of living crisis that came in and people started not spending much on discretionary consumer spend. You know, suddenly you had a valuation place where actually it was really difficult to raise capital.

7:10You had a lot of sort of tech businesses that were racing at crazy valuations. Over the last few years, I've seen valuation. I mean, it's still really tough. So, you know, in consumer, it's tough to raise capital. The expectations of investors is getting more and more. But I've sort of seen a trend where because of AI and because some of the tech and sort of SaaS product businesses are less defensible because of the threat of AI, the thesis of a lot of investors is changing. And they're kind of saying, well, actually, consumer, despite some of the challenges of what's going on in the macro climate, you know, they're real products.

7:44People really buy them and they kind of either consume them or eat them or put them on their bodies or whatever. and ultimately if you've got a good business with a defensible proposition and something that you can show is a growing category, it's a much safer bet than some of the sort of tech businesses. So there is a kind of weird cyclical thing.

8:04Phil Hails-Smith:Are you calling this, are you saying that you can see it coming back around to consumer? Yes, I've seen a lot more interest in consumer over the last, I don't know, three to six months in terms of both early stage investment and slightly later stage investment. I would have thought that right now, you know, the gold rush for AI based companies would have been huge. But that's obviously turning already. People are wary. Weirdly, right, the Q1 stats for the fundraising environment in the UK dominated by London. The majority of those investments went into AI tech. But there were still some, you know, significant transactions in consumer, right?

8:45I mean, you look at Huell as an example that happened quite recently. a billion euro valuation and and weirdly you do the economics on that it's a three times revenue multiple right they haven't got a reported EBITDA for the stats they didn't the deal off it's still a multiple in M &A sometimes is also transferable to fundraising as well so you can point a lot of these data points and this is where AI could be very helpful right is you kind of from a valuation sort of perspective is you could get AI to do an analysis for you in terms of M &A transactions and fundraisings that have been announced and see what the average valuation was.

9:22And that might help.

9:27Phil Hails-Smith:Hey, just a quick word about Brand Growth Heroes partner, Jolson. So look, as a founder, you've got loads on your plate. Fundraising, shareholders, co-founders, co-manufacturing, product, NPD, you name it. Scaling is really complex and the legal side of scaling can be really complex too. Who your legal partner is really matters because it's not something we can afford to get wrong. That's why I work with Jolson. Jolson have worked with brands like Little Moons, Trip, Two Chicks, Graze, Costa Malika, and they've even advised the innocent founders on their sale to Coca-Cola. And they still work with them today at Jam Jar.

10:00Phil Hails-Smith:And for me, it's not just that they're brilliant at what they do, but they're also really good people. They care about founders, they care about doing things properly, and that really matters. And they're also one of the few law firms that's both B Corp certified and a member of 1 % for the planet. Recently, I asked one of Jolson's managing partners, Paul Chappie, a tough but crucial question. Should co-founders discuss right from the start what happens if one of them wants to leave the business? Absolutely. I mean, with any joint venture, that's what a sort of co-founder relationship is. You've got to be very clear from the outset as to what each party is bringing to that business.

10:39Look at the skill sets, look at the time commitment. I often see founders coming where, you know, one founder might have a full time job. They're still getting the same amount of equity. And you can see immediately that there's an imbalance in that relationship that they either haven't looked at or are ignoring. And eventually that will come home to roost. So I think the key thing is to look at, you know, what are we bringing? What is that future going to bring? what are the things that, you know, if I have to go and look after kids or have to emigrate somewhere, what's going to happen to this business?

11:17What happens to my equity? All those questions need to be thought through, discussed. And contractually, you can then just draft those provisions into that contract and set that relationship on the firm footing.

11:31Phil Hails-Smith:You're not going to believe this, but Jolson is actually offering a free legal consultation to any founders who listen to Brand Growth Heroes podcast, and I would definitely take them up on it. You'll find a link to book now directly here in the show notes below, or just drop a comment underneath the episode and I will connect you with them directly. And now let's get back to the show.

11:57Phil Hails-Smith:Speaking of AI, you know, I run this community called NextGen CPG, and we have 200 founders incredibly active. Actually, after this at one o 'clock, we have a luncheon share. Sorry, I'm now choking on my Brazil nut, which isn't a good thing, but we can leave that in, Jip. We don't need to panic about that. That like shows that it's authentically a real interview and chat. It's real. Right? Yeah. It's real. It's not AI generated. It's not AI generated. At one o 'clock, we are getting together today to share what we're working on. So I have a poll and it's the most amazing group. I'm in a really is.

12:34Phil Hails-Smith:And we say, who wants to share what they're learning on? And depending on the conversations of the previous two weeks, we talk about something that's top of mind for everyone. At the moment, it's about organizing your data, your library of what this company does. Like, for example, what's our brand book? What's our tone of voice? How do we deal with customer complaints? Our HR policies, our supply chain agreements, everything. Where do you store it? Who has access to it? Now, that used to be a shared drive, but nowadays it tends to be Notion or Obsidian. And then it's like, how do you give access to different people based on different kind of permission layers to change documents, to not change documents, to use them?

13:16Phil Hails-Smith:If an employee is able to work within that AI system or within an AI system that is connected to that library of complete company knowledge and know-how, they're able to generate work, documents or marketing, assets or whatever that is on brand on par with expectations okay so that's the idea how do you make sure that your data is safe how do you make sure that that everyone in the organization knows what they're allowed to use and what they're not allowed to use on company laptops these days or on their own you know once they're connected to the company system how do we know what our company policy is on ai should we have one what's best practice and nobody really knows and any of the big consultancies out there who have given talks about AI, you know, it all tends to be very generic.

13:59Phil Hails-Smith:Nobody's giving us like really concrete advice. We've got our own policy internally and we're being asked by clients, you know, in terms of what the parameters are, because the issues you've got to think about, you know, is obviously confidentiality, what you're uploading and that you wouldn't be prepared to share, what the settings are in terms of the actual models you're using, you know, is it using that information to learn itself so So therefore, is it ingesting it? And therefore, is it is it basically using that information? And then the other thing, obviously, is the the overriding principles about data protection.

14:34So, again, if you think about, you know, sort of we've got quite stringent data protection laws in the UK. If you're using a model that's US based, where's that personal information going? You know, are you providing aggregated information into the into the model? is it going over to the US to be processed over there how does that work you know if you're using a Microsoft system which ultimately you know through something like copilot uses a form of chat GPT right if it's within a Microsoft environment ultimately it's going to be subject to the agreements you've already got signed up with Microsoft so therefore it should be confidential yeah okay so so all of these things you've got to think through well ultimately you've got to you've got to make some decisions about what goes into that policy how does that get implemented within the business, how you disseminate it, and then you kind of work through the permissions that you give to people in different categories, right?

15:23Phil Hails-Smith:It's quite complicated, isn't it? Because if I have something linked to my MailChimp and my MailChimp has three, 5 ,000 people on it, and then I'm using, I mean, am I breaking the law? Possibly. It depends how that works through, right? I mean, it depends what information is going into the model and what you're feeding into whatever model you're using or whatever chatbot you're using and what personal information is then, you know, kind of being used by that. I wonder, yeah. And so you've got to look at permissions within the model, where that model's located, how that then sort of works in terms of the, you know, so there's quite a lot to think about.

15:58And what, you know, what we've done here internally is we've got our head of IT, you know, and one of the partners is, you know, kind of leading the AI committee. We've got a policy that disseminates across the whole business. And ultimately we still haven't deployed necessarily AI in sort of a live environment with clients because we're still kind of experimenting to work out what's the right suite of documentation and suite of products that we're going to then use.

16:27Phil Hails-Smith:Yeah, I mean, I wonder what advice would you be giving to the scaling CPG brands that we work with in terms of should there be somebody who is responsible? Like what are you saying? Someone should be responsible leading on it and what should they be looking at? Like any project, you have a project lead. That project lead ultimately then sort of works out what the parameters are. And then you have a policy that guides usage, what goes in, what goes out. And that has to link, you know, with most scaling CPG brands. They're all handling sensitive personal data. And that's not just customer data, but it's also employee data, supplier data, all of that sort of stuff.

17:04They're subject to data protection in the UK. so they've then got to think well how does that get changed when I'm starting to use ChatGPT or Claude or Copilot or whatever. You've got to look at all of those different things.

17:18Phil Hails-Smith:Yeah I think there's going to be all sorts of spin off adjacencies on this where you know somebody makes a mistake but there is a policy but they haven't been trained on it and then there'll be a whole you know it'll be something very public and then there'll have to be regulation and then there'll have to be expectations, a whole lot of expectations in terms of employment law on, you know, if you're going to be using it in this way and you're going to have these kind of policies, you have to also have this amount of training and updated training and whatever. There's going to be training on how to use the models, but training on what you can put into it, what the authorities are and all that kind of stuff.

17:51Phil Hails-Smith:I think you can't put that expectation on employees of, you know, there's a policy. It's a huge, massive burden of responsibility, right, in terms of privacy and secrecy and confidentiality and, you know, the company being sued because they have by a partner or, you know, something's got out. But nothing changes though, right? I mean, in terms of your operating model, you're using, you know, and again, I don't want to, you know, kind of dismiss AI as something that's not revolutionary because it is, but ultimately it's still about if I send an email to the wrong person, that's still a breach of confidentiality, right?

18:26It's not something where you're kind of having to reinvent the wheel, right? You know, so that's that's again is that, you know, for all of this, it's like it's a new tool. Yeah. And it's a new tool that we have to get used to working with. And it's there's going to be different consequences. But ultimately, you've got to go through it in a sort of, I suppose, a responsible and systemic way. And then the other the other lens that we are always coming up against is, you know, being a B Corp. We've got to think about the sustainability angle of the use of AI, you know, the amount of energy they're using, the amount of water they're using, all of the data centres.

19:00The balancing act here is obviously being able to use a new tool that's going to make things faster, more effective, and hopefully will enable us to deliver a better service to clients. But we want to make sure that we're doing that in a sustainable and responsible way as well.

19:15Phil Hails-Smith:Yeah, I mean, that's something that we just debate a lot in the group. And a lot of the feedback has been or the links shared is, you know that actually on balance, it is a very small amount of electricity and water compared to a zillion other things. But the mindset should be it's one extra thing, isn't it? It's one extra source of all this. If you're getting value and insight out of the conversations we have with the founders and business leaders on Brand Growth Heroes podcast, then please like, follow, subscribe wherever you're watching or listening to the podcast, whether that's iTunes or Spotify or YouTube or whether you're connecting with us on LinkedIn or Instagram.

19:53Phil Hails-Smith:It really matters. It matters that you click that button. It matters that you comment. It matters that you engage. We love hearing from you. So write a comment, write a review on iTunes. Tell us if it's making a difference to you. Tell us if you like it. Thank you so much. Jelson is B Corp, which I always thought was, you know, incredible for a law firm to actually go to become a B Corp. And I know that You personally, and as well as Paul, are really big into nature and the environment and the planet. Where does all that come from, on a personal level? Yeah, I mean, on a personal level, you know, I think it's sort of part of my sort of belief structure in terms of, you know, I live in central London.

20:33I mean, I'm lucky I live next to a park. So, you know, it's sort of there's lots of greenery around, but I kind of went to school in the countryside. And so it's sort of just something that I've always thought about. But I suppose within our professional lives, the whole concept of growing businesses, scaling businesses and all that sort of stuff was was, you know, kind of seen as something different from nature. And ultimately, for me, actually, you know, maybe maybe it's just sort of an age thing. I'm getting older and, you know, kind of thinking about my legacy here and also, you know, thinking about my children who are kind of kind of the age where they're starting to think about their careers and professions.

21:08And actually, wouldn't it be cool to have all businesses who are really kind of thinking about sustainability, you know, the impact that we have on the planet and trying to be better workplaces? You know, because so to me, B Corp kind of resonated quite strongly, not just from, you know, kind of a values, personal values perspective, but also actually as a leader of this organization, making it a better place to work because we're responsible. You know, we care about our employees. We want to, you know, we care about our clients. our clients, we care about the planet. We also do need to make money because, you know, that's part of being a business, but it's balanced, you know, along all of that.

21:45And actually, it was really important kind of as part of the evolution of this next generation of the leadership of the firm, you know, which Paul and I are kind of leading, is very much about we want to be a sort of seen as a kind of leader in this field in terms of ethics, values and sustainability.