What Consumers Care About in Health & Wellness Products, How Competition Builds New Categories, and Will Ozempic Have an Impact on CPG Demand? with Dayton Miller, BFG Partners

0:00Once you take capital from an institution, it's either a gift or it's an investment and people are going to want their money back at some point. What kind of made you decide that you wanted to become a VC? I began my career in consulting and investment banking and then moved over to Disney, which I was in the strategic planning group there, which I felt for kind of managing the capital and managing Disney's balance sheet. I knew kind of in my heart of hearts that I had interest in being an entrepreneur. It was one of the reasons why I moved back to LA. Do you find that companies don't want to raise as much when it comes to venture capital?

0:30We always say like venture capital is not for everybody. I try to give super honest advice, right? because hello i'm your host mike gelb and this is a consumer vc podcast brought to you by propeller industries the leading strategic finance and accounting partner for venture stage companies on this show we discuss the intersection of venture capital and consumer innovation and if you're enjoying the show please subscribe on youtube or whichever platform you're viewing this content and if you want the full experience i highly recommend checking out the newsletter at theconsumervc.com. You'll get all the new episodes straight to your inbox and a weekly recap of all the consumer deals that are happening.

1:08All content and episodes are for informational and entertainment purposes only and is not investment advice. Our guest today is Dayton Miller, who is a general partner at BFG Partners. BFG helps entrepreneurs build exceptional businesses and deliver sustainable growth and outperform competitors in the better for you food, beverage, and consumer product space their investments include olipop athletic greens cauli power and bobos we discussed the inflection point at seed series a in series b in today's market categories that he's particularly excited about ozempic and what ozempic maybe means for the future of of consumer brands or does it mean anything for the future of consumer brands what are the metrics it looks for from an operational perspective and we also cover his time as an entrepreneur building function drinks, which he founded and built from scratch to 20 million in sales.

2:05Without further ado, here's Dayton.

2:13Dayton, thank you so much for joining me here today and also bearing with me because I know we have to reschedule this. How are you doing? I'm doing great, Mike. So great to be connected with you today. So great to connect with you today. So I'll let the focus first of all on today's market. I know that BFG focuses on seed, series A, series B type stages, and certainly investing in consumer brands, which we'll obviously get to. But for those different stages, seed, series A, series B, can you talk to me a little bit about the ideal metrics, the valuation ranges, the revenue ranges in those three different parts that you're seeing?

2:51because I talked to brands, talked to investors. Everyone seemed to have a little bit different in terms of how they evaluate different stages. So we'd love to see from your standpoint what the benchmarks are. Sure. I'd say we consider ourselves seed agnostic. So that's really seed to Series B, although we'll be a bit opportunistic. And we have gone even later stage than that in areas where we either know the company well or we know the founder well. But I guess as we think about those kind of various classes, a seed would be something that's maybe less than a million in revenue or sometimes even pre-revenue.

3:36It's funny, kind of years ago when you would start this, like even your seed or Series A could be considered pre-revenue. But now there's like pre-seed and pre-pre-seed and all kinds of different things. And, you know, years ago, venture capital used to be for businesses that weren't making money. And growth equity was really for growth because the businesses were actually making money. And so the classifications definitely change over time or the nomenclature. You know, we try to just think about the business more so than like, oh, is this going to go into like the seed bucket or the core bucket or the opportunistic bucket?

4:16Obviously, you know, looking for great businesses and great partners. So, let's see, on the kind of Series A side, I'd say that's typically these days for us, like more in the$1 to$15 million of revenue. And then kind of Series B is typically north of that. Sometimes maybe Series B is kind of north of$10 million of revenue. And then, gosh, check size is really across the board. I think we certainly think about positioning our check size relative to kind of the stage of the business and the size of the opportunity. And so there's definitely been times when we've gone early with a really small check in order to get to know the opportunity, get to know the founders and then follow on throughout the life of the business.

5:08and in certain situations, six, seven times after our first check. So when you count convertible notes and then priced around. So yeah, that's how we think about the landscape. No, that's really helpful. Thank you. And thanks for giving ballpark in terms of revenue ranges. That's, I think, really helpful because I was talking the other day to somebody and I said, oh, they invest in Zerese. a and they were and uh the person was like oh like what is series a and i'm like well um they describe it as you know like uh uh like maybe like like two to five million in in terms of revenue um uh but i mean it really it really kind of depends um uh you know um on the company i imagine category two um uh depends as well so um that's that's really helpful um so i know you went um In your incredible career thus far, you went from Disney, you started Function Drinks that I know you had a great exit for.

6:12And then what kind of made you decide that you wanted to become a VC? And how did you actually end up being part of BFG? Really, I mean, as I kind of think back, it's funny because when you look back at your life, you're like, oh, the kind of points really make a lot of sense. But I began my career in consulting and investment banking and then moved over to Disney, which I was in the strategic planning group there, which is responsible for internal M &A as well as kind of long term planning and also new business development for the company. So if we're launching a new line of business, like while I was there, we launched into education, things along those lines, or if we're building a new cruise ship or if we're buying a TV station in India, like that's all stuff that would get hit by this group.

7:02and that gave me kind of a pretty good flavor I felt for kind of managing a pool of capital and managing Disney's balance sheet and also kind of combining some of the skills I'd picked up as a consultant and on the banking side. But I knew kind of in my heart of hearts I had interest in being an entrepreneur. It was one of the reasons why I moved back to LA to work at Disney after business school. It was, you know, I knew I liked the industry, liked the location, but it would also be a nice platform to kind of do something a bit more entrepreneurial. And then, as you said, I launched a beverage company, built and managed that through exit for the next five years.

7:50And while I was doing that, I linked up again with my current partner, Tom Spear. He and I actually went to college together many moons ago now at this point. And I'm two years older. So we knew each other, although not super well. But we would see each other at Expo West, which is obviously coming up next week, and various trade shows around the country at the time. He was doing Bare Naked Granola and Evolve Foods. So we would kind of just reconnect with these shows. And then the timing worked out such that he had exited Evol and had raised his anchor investment for Fund One. And I was exiting my company to SunSweet Growers.

8:40And so I was on the tail end of that. And fortunately, the timing worked out. I was pursuing opportunities in consumer at that time. I felt like I should I should note that while I was an entrepreneur, we had raised some money from Wasserstein & Co. They had done Adwalla and so delicious. And we had a really great board member from there. Ellis Jones to this day is a fabulous mentor of mine. And and I just felt really grateful for everything he he shared with me over those years, including during the Great Recession, which was a tricky time to be running a business. and I felt like I had a lot to offer from those experiences.

9:23And doing early stage investing was a way to kind of combine those experiences with some of the other M &A transactional experience from Disney and other places. I'd love to hear about the evolution or, yeah, evolution maybe of BFG's thesis. I know it started off as Boulder Food Group, now it's BFG. Can you talk to me a little bit about the initial types of businesses that would be interesting or that you'd like to invest in back when it was in the Fund 1 conception point versus now you're in the midst of closing Fund 3? How do you think about the evolution in terms of also categories that you're interested in?

10:10Sure. So Fund One was a roughly$50 million vehicle, which I think maybe is context in terms of, as we explain the evolution of BFG. But with that fund, we were focused pretty much exclusively on branded food and beverage consumer packaged goods. We did make two business service investments out of that fund into Greenspoon sales and Cartograph. Jeff, but primarily that fund wasn't entirely food and beverage. Tom obviously had a lot of food experience. I had a lot of beverage experience, both early stage. At that time, at least, it was pretty unique to kind of have founders and entrepreneurs move over to the investing side.

10:58It's obviously become a lot more popular since then in the last 10 years. And yeah, that was kind of really how we got started. what we saw during Fund 1 was that we were also seeing some interesting personal care opportunities. And we believe that a lot of the trends and the customers and the channels and just the decisions were very similar for personal care businesses as they were for food and beverage. And so with Fund 2, which was about twice the size, about$100 million, in. We did expand the mandate to include a sliver of personal care. And, you know, we are very much, I think, you know, hopefully thoughtful entrepreneurs, but, you know, we want to walk before we run.

11:49We want to kind of prove that we have the right to win in certain areas. And so we took it pretty slow on the personal care side. And thankfully, we're fortunate to make some nice investments there and already have two exits in that personal care space. So we feel pretty validated in our ability to earning the right to do that, I guess. So we're going to continue that on with Fund 3. Fund 3, which is 125, is just, you know, exactly mirrors Fund 2. So, you know, we've been pretty patient and methodical, we think at least, in terms of how we've been building the business. We only raise capital every four to five years.

12:36And we try to be pretty discerning in terms of our deployment in any given year and thoughtful around that. We're obviously LPs in our own funds. So we kind of put that, put our own investor hat on. And what would we want to see kind of deal? No, totally, totally. Can you explain a little bit about the deployment strategy? I understand that you, from fund one, fund two, fund three, it's every four to five years that you go on to raise the next fund. How many companies do you typically want to invest in with the upcoming, for example, let's say, fund three when you start deploying? And how does that kind of work from like an annual rate as well?

13:24Great question. So I think as we think about kind of fund three in terms of mirroring fund two, I think we're envisioning 20 to 25 investments in total in fund three. We do think about those as kind of seed, core and then opportunistic with the large checks really being in that kind of middle middle bucket, the core bucket with a core. Yeah, with a core investment size of call it three to 10 million. But we will go down to 500 grand, a million dollars on the seed side. And a lot of that's just driven by we think that opportunities are changing. And I think first and foremost, like if you're not in a deal, maybe early on, it's really hard to get into a deal later.

14:15I think capital efficiency is certainly changing. So it might be the only time some of these businesses raise. and hopefully we can kind of at least get to know the entrepreneurs, they can get to know us. It's obviously a really long-term relationship that folks are entering. And if it's a fit and it makes sense for everybody, then we can become partners in a bigger way. It's really interesting what you said too about like capital efficiency and about how that might be the actual only time companies raise. Do you find that companies now maybe don't want raise as much when it comes to venture capital or that they're maybe more hesitant from that perspective?

15:01It's interesting. We always say venture capital is not for everybody. And I try to give super honest advice because in a lot of ways, once you take capital from an institution or anybody for that matter. Like you're starting a clock and it's either a gift and people don't want their money back or it's an investment and people are going to want their money back at some point and they're going to want back more than they gave you, even if they're a wealthy uncle. And so I think there's a lot more thoughtfulness around the right amount of capital to raise. How long will that last? and what are the milestones that this capital will allow you to achieve that you wouldn't have been able to otherwise achieve having not raised that money.

15:55I think during the go-go years, there was a lot of, well, my competitor raised X, so I need to raise Y. And it's probably still very true in a lot of industries. In our world, in the consumer world, we just think there's so many different ways to win. You can win with being really capital efficient, or you can also really push hard and layer on the marketing gasoline and win that way too. There's no right way to win. How do you think about if you're a company, right? And you're thinking about maybe debt versus equity, right? And whether it makes sense to use debt versus equity. And of course, some pitch decks or what have you, they'll usually outline, maybe not always, but of course, it never goes according to plan, but in terms of how you actually use that money if you were to raise from an equity investor or anything about debt.

16:52In your scenario, when do you think that... I know that there's no silver bullet here, but when do you think it makes sense for equity to be deployed to actually use in terms of financing growth for a business? versus, you know, debt, for example. And typically, what, when you make investments in the companies, what are they typically using BFG and maybe other VC money? What are they typically using those funds for? Great. Yeah, sure. So let's see, the way I think about kind of equity versus debt really gets down to cost of capital. Someone who's giving equity is going to expect a higher rate of return, maybe be more accepting of risk.

17:37There's a lot of companies out there that might not be eligible to get debt because either they don't have the operating history or the financial profile or even like the inventory to kind of back the debt. So that's maybe a bit more kind of nuanced. But I think when you're early on, the way I think about kind of taking capital in general, it's just what are you getting in addition to the capital? and what do you need from that capital? So that also goes to like, where does our capital tend to go? I'd say often it goes towards augmenting team. A lot of times when we invest in businesses, it might just be two co-founders or a very small founding team.

18:23So we certainly do a lot to support the build out of teams. There's typically some product development or innovation uses. There can also be some kind of scaling of the supply chain involved that can take kind of many different forms, whether it's more on the actual building of production facilities. I think that's a good example where you might want to take debt because you have a hard asset that can be used against the debt and you don't have to pay such a high rate of return on building out a production facility, for example. You know, in a perfect world, I think the businesses where we get involved, they either have kind of really strong unit economics, but maybe they're not profitable on an absolute basis yet.

19:23Or, you know, this is kind of capital that allows them to achieve the growth necessary such that they're effectively break even. And then it's up to them and they kind of control their own destiny in terms of how fast they want to grow relative to maybe market forces and the opportunity side. From your perspective, when you underwrite, what is, from a timeframe perspective, what is the timeframe when it comes to ROI for these companies that you underwrite? What's the ideal scenario? Yeah. So, I mean, speaking, I guess, from a personal standpoint here, so our fund life is 10 years, although it can be extended beyond that.

20:13I mean, that is very standard in the industry. A lot of times it can extend for up to four years after that. But regardless, there's a real-time consideration there. I think, you know, we often say like 80 percent of the bell curve will will occur between three and seven years from the time the investments made. You know, sometimes you're pleasantly surprised to the upside. I mean, one investment we were in for 16 months. So that was, you know, really, really nice and surprising. Doesn't happen often. It's not what you underwrite, but you'll take it when you can get it. Um, and, uh, uh, and then other times, you know, there's things take longer to, um, mature and develop than, than, than maybe you, um, had thought.

21:04And I think, you know, predicting when consumers are going to catch on to something is really tricky. You know, I was just listening to another podcast and someone was talking about how Skype must really be kicking themselves because of, you know, you think about nobody went to Skype when when COVID hit and they were there 10 years earlier than everybody. I remember doing Skype calls years and years ago, but it never caught on. And so need some type of catalyst and and predicting when that catalyst will hit is hard. Yeah, that's a great, that's very true. I remember using Skype interviews like a long, long time ago.

21:52And yet, you know, for during COVID, there's of course, we're all Zoom. um what um what like i think that what's you know kind of interesting in terms of investing consumer brands versus you know technology businesses is that you typically have longer timelines um in terms of when a brand actually you know matures or or from also from like an roi perspective it might not it's really kind of hard to achieve in terms of what like a breakout brand is would be very different to like a breakout piece of technology when it comes to like from an ROI perspective, but you might have more of them in, in like a portfolio, like a more, more breakout brands per se, the more like breakout technology companies.

22:40It's a bit less power law, maybe like dependent when it comes to consumer. Is that what, is that, is that like your like approach or, or how you understand it when it comes to like, when you think about what, what the actual performance of the, the ideal performance of the portfolio? I think that's absolutely right. I think, yeah, I mean, underwriting every deal for it to return the fund or 2x the fund, like some of the early stage venture folks do, I think is a bit unrealistic. I think it mirrors kind of the stage and risk you're taking. So when we do our seed investments, we're obviously looking for a much higher multiple.

23:25And we say to ourselves, you know, does this have the potential to return a much higher multiple? But then to your point, like a lot of the businesses that we invest in as core investments have been around for a number of years prior to prior to us investing. It just so happens that they might be at like an interesting growth point or an interesting inflection point where hopefully partnering with us and taking on the growth capital makes sense. I mean, one One example that we're particularly proud of in Fund 2 is Bobo's. They're celebrating their 21st birthday at Expo West this year, 21 years.

24:01And, you know, I think if you were to ask a lot of people, they wouldn't realize it's been around that long. A lot of people in Boulder probably do. Um, but, uh, but, you know, just in the last couple of years, has it really taken off from, uh, an innovation standpoint and, um, and just what they've done in, in the last few years in particular, it's truly remarkable. Is that hard then from your standpoint, when I think about pro rata strategy and whether you actually should, you know, follow on into brands because you might not just not to compare investing in brands versus technology, maybe like software, pure software businesses.

24:43But I'm going to go there. I'm going to compare the two where you might have, it might be maybe more like a hockey stick type growth on the technology side, but it's maybe much more slowly to get that kind of inflection point on the consumer side. Does that make it more tricky when it comes to when it actually makes sense to follow on? Well, you know, I haven't done much software investing, so I can't really speak to that. But I will say from our side, yeah, it's very tricky. Right. And not only that, like thinking about what's the right amount of reserves. So, you know, we're going from kind of fund two to fund three.

25:22How much capital do you hold back for those fund two investments in order to make follow-ons? You know, every situation is truly different. I think, you know, we welcome opportunities where the capital of the round could be the last capital if needed. And then it's really, you know, you control your own destiny. And then if you want to raise more capital, then you're really doing it for true growth reasons, because the opportunities that that capital presents more than offsets the cost of that capital. Um, and then, you know, there, there've been times where we've been positively surprised and negatively surprised.

26:04So, uh, gosh, if someone's got that figured out, I would, I would love to learn more. This episode is brought to you by propeller industries. If you run a high growth business and you're focused on profitability, extending your runway and improving your operational efficiency, you probably need a finance and accounting whiz that will grow with you. Well, instead of hiring someone full-time, what would be cost-effective is working with Propeller Industries. Propeller Industries is a leading strategic finance and accounting partner for venture stage companies and has partnered with over 1 ,000 startups and high-growth businesses across consumer products, consumer tech, and enterprise.

26:39Some of the brands that they've worked with are Liquid Death, Olipop, Hymns, Farmer's Dog, Away, MoviePass, and Giphy. Propeller also provides specialized support for fundraising and M &A with transaction advisory services. Propeller's TA team of former investment bankers and investors can step in on more of a project basis when pursuing full-scale financing and M &A. There's a link to Propeller Industries in the show notes if you want to learn more information. How much do you pay attention to what the strategics are doing or how they're operating the market when it comes to thinking about maybe from a category perspective, maybe thinking are they even from a metrics perspective or what a company maybe needs to achieve?

27:33Is that at all also a consideration as you look in terms of deploying your capital or not as much? Yes, I'd say, you know, I think in general, we're certainly looking to invest in big, big categories, you know, disruptive brands, you know, businesses that have potential to be really big and profitable. I would say just first and foremost, we are most focused on building a good business. And we're strong believers that if you build a good business with attractive margins and financial profile, there will be a buyer there. You know, maybe with interest rates moving as much as they have in the last 18 months, private equity isn't isn't maybe quite as formidable.

28:22But, you know, that's obviously a real real option, too. Right. And I'd say in terms of maybe thinking about what type of hole a brand or a business could kind of fill in a portfolio, it typically happens for us, at least, later. So maybe when you're two to three years away from starting to think about an exit, maybe it informs your innovation strategy. strategy? Do you want to go into certain channels or certain product lines? If you do so, would you be more or less attractive? Would you be likely to have those product lines valued by who might be the two or three most logical buyers? It's stuff that you talk about, but I think you would never let the tail wag the dog.

29:14I think building a business for acquisition is a scary way to build a business.

29:22And yeah, it's just, I don't know. You're just waiting for the train to come. And if it doesn't come, you're SOL. It's funny. I mean, it reminds me of a conversation I had with Luke Vernon a little bit because when he was an operator, he said, we first kind of built the company for acquisition and then it never kind of happened. So they had to switch gears and like, and like make it a lot more profitable. And that was like a really big learning experience for him, um, on his episode. And like, and I really appreciate that, you know, I, uh, like that, that, that, that honesty and also, you know, um, and also some of the differences too, um, um, in terms of, you know, growth versus profitability, which there's a lot of conversation these days around,