For Better Or Worse, Treat Investment Like A Marriage

0:00This week on the NOSH podcast, what did the team take away from the Sovo's sale? how are investors thinking about the current investment climate, and how brands need to be thinking about raising capital in 2023.

0:22Hi everyone, I'm your host Carol Ortenberg. On the NOSH podcast, we go inside the business of natural, organic, sustainable, and healthy food. Today we'll discuss a saucy deal by Campbell's, and then hear from two investors that were on our Nosh Notables list about their thoughts on the current climate for investment. Joining us today are reporters, Adrienne DeLuca. Hello, Carol. Hi, and Lucas Southerd. Hi-yo. Hi-yo, Lucas. And of course, our editor-in-chief, Jeff Kleinman. Feeling saucy, Carol? Always, Jeff. Always. Well, Well, to that point, last week we saw a pretty big deal in the food space with Campbell's announcing it would acquire Sovos brands, the makers of Rayo's, Michelangelo's, and Noosa.

1:10Jeff, what stood out to you about the deal? Well, a couple of things. First of all, you know, the sort of name value of Rayo's apparently has captured many people's attention. And, you know, while the restaurant was not thrown in as part of the deal, I think it does reflect some of the value that people put on name brand restaurants right now. And, you know, I think you can see that as well with the other sauces that are growing really fast. What's that one called? Carbone? Yeah. And then I think there's been also some others from like Rubarosa. And I feel like I've gotten pitched a lot of sauces and pizzas by Italian restaurants.

1:58Yeah, yeah. But I mean, Rao's is a pretty old school name. And it does have a lot of significance for folks. I can remember when it was first sold to Sovos after its startup period. Michelangelo is a pretty well-known quantity in the frozen Italian specialty space. And Sovos did a really good job of putting these three or four brands together, packaging them up, getting margins up high. And it looks like Campbell's is going to have a lot of running room behind it. The price point for Rayo's is really good, and it gives them sort of a premium brand to put up above its Prego at the sort of ordinary brand level.

2:50And what I think is really interesting about it is it's another big deal. We've seen some big investment by KDP in La Cologne. We've seen the Yasso deal, the Brynwood pickup of Marie's and Dean's and Mars buying Kevin's. So it feels like things are starting to loosen up just a little bit. You know, these are big brands that are getting bought by the strategics or that are having deals done with them by the strategics. It's not like they're operating at a really small level, but it does bode well in terms of a little bit of a thaw in the environment. Well, let's break that down a little further.

3:46I think that's a great overview of everything. I was curious what the team's thoughts were on what made Sovos an attractive target. Jeff, you referenced how they had put together a great group of brands. Part of that clearly was divesting from brands that weren't working for it. So they sold Birchbenders last year, which a lot of people at the time sort of hypothesized that was because that it diverged too far from the portfolio and would be hard to find an acquirer who wanted baking mixes and sauces and Italian things. Certainly NUSA is still in that position, but I think Campbell said repeatedly on the call that they're kind of seeing what happens with NUSA, but they're not going into yogurt, and that's not a long-term strategic play for them.

4:32Although there are probably people at Campbell's who do have some experience in that outer perimeter of the store, given what they did in dips a few years ago. Jeff, you're right. With Campbell's, though, they did have that experience with Bold House as well. So that is interesting that Sovos kept Noosa on board, but we'll see where that heads next. It's not like they're adding dead weight with Noosa. It's not a major, massive brand, but it's not something that I think it costs them a ton to run. And they can prop it up until they get rid of it. I think the other part about Sovos and Rayos in particular was seeing that expansion into other categories.

5:20So for so long, Rayos was a sauce brand under Sovos. They had expanded further into soups, pasta, frozen entrees, and it really showed that that brand could move beyond that one category. Yeah, it's always interesting, though, when you see a brand like Rayo's, which has this one really powerful element to it in sauces, get bought, whether they'll shave off those other categories that it plays in or if they'll try and do the major brand platform expansion. You can remember when Annie's was picked up by General Mills, the idea was we were going to see Annie's everywhere, and instead we now see a lot of mac and cheese getting sold.

6:11Sometimes it's just easier to support the main product in the portfolio. You just don't know. Well, it seems like they definitely want to go further into Frozen and Mills, so that may have some more sticking point. Also, in a deck they showed about the deal, they specifically called out that just like the sauce is a more premium option on Prego, the Raos, along with Pacific Foods, which they acquired a few years back, provides a sort of premium upgraded version of Campbell's and Swanson's. So we'll see, but it seems like there was at least some interest in what they expressed to investors and analysts.

6:51Yeah, I mean, I think that happened with Annie's as well. Okay, fine, Jeff. I mean, it's just, you know, there's a long way between what they say they want to do and what they're eventually able to do. Okay, fine. You got to wonder what this does for the market for carbones, though. It's got similar leadership to Rayo's. Our friend Eric Skay is driving that right now, and it's, again, a premium product, and a lot of the things that they were saying about the Rao's deal, the idea that people want to have premium at home, maybe don't want to go out to restaurants anymore, could work for Carbone's, could work for, who is it, Roberta's Pizzas are out there.

7:45Now, we've seen, who is it, Milk Bar have a little bit of trouble gaining headway as a sort of, you know, really hip restaurant brand that's gone into CPG. But, you know, sauces are nice. You get a nice margin out of a sauce. I think there's also a difference in that Milk Bar's bakeries are easier to go to and purchase something as a consumer. So you have the direct comparison of, well, this doesn't taste like what I bought. Whereas Rao's Carbone, it's really hard to score a reservation. Rao's, I don't even know if you could score a reservation given the tables they had booked for regulars. It's not like you have the authentic version to compare to.

8:30It just kind of is something that you can imagine what it's like. And if it's a great product, you say, OK, this must be like what it is to get it in the restaurant. Milk bar, a little easier to see that directly. But, you know, it is interesting, Jeff, because we haven't seen that as a discussion with a brand like Momofuku, where I'd say it's kind of in between the two. It's a little easier to get into one of those, especially some of the lower end restaurants that they've launched or fast casual, I guess I'd say, restaurants they've launched. But I'm curious to see what happens there. You raise a good point.

9:04Yeah, no, I think you made a good point there, Carol. And, you know, the thing with Momofuku is it just hasn't been in stores. You know, it's a much newer product. And it will be interesting to see if that turns into, you know, a brand that transacts. But I completely agree with you that the baked stuff is much more accessible from a consumer standpoint. The sauce is just a carrier for something else, whereas with Milk Bar, you were biting into that cookie, probably not turning it into something else. Well, I think we've unpacked a lot about Sovos. What do you guys think this says about where Campbell's itself is headed?

9:52I thought it was interesting just given, you know, over the past year or so, Campbell's moved, you know, all of their offices to New Jersey, kind of consolidated and seemed to be cleaning up the business a bit than to just, you know, go and invest in what it's outwardly claiming as a really high growth portfolio of brands. So just, you know, I think it benchmarks where some of these larger conglomerates are thinking right now and thinking about where they need to be headed. Yeah, it's almost like they're finding they need to be reaching a younger consumer and they need to be reaching where consumers are.

10:28And for these legacy brands like Campbell's, they've been around. And if anyone hears Campbell's, they first think of a canned soup. But canned soup is, in my opinion, not what it was, whereas a sauce brand is always going to be usable, especially as they called an ultra premium sauce. I got to say, Rayo's makes some good soups though, Lucas. You got to try them. Give them a chance. Similar to sauce, everyone has some canned soup in their pantry, so it's not a bad move. But I think diversifying as Kellogg's has into some of these other categories, strengthening their snacking portfolio has shown that they want to be known for more than just soup.

11:10And they also want to be reaching a certain kind of younger consumer that are reaching for a Rayos, shall we say, instead of a Prego. Campbell's has tried to restructure its business a few times now. So there's always a lot of addition and a lot of subtraction with these big companies. You know, you're seeing Mars do similar stuff where they add a Kevins. They start to invest more heavily in PET. You know, these companies have so much money and so much reach from a distribution standpoint that when they see a place where they think they can get some traction, it makes sense for them to follow it a lot of the time.

12:01we've kind of touched upon it too for Campbell's that idea of creating a premium product I was looking at their deck and they have a strong salsa business in pace and they also talked about the fact that okay well we're doing this for sauces and soups we have this strong snacks business now we want to focus on salsa a little bit so they teased that there will be a new premium salsa. I don't know if it's an acquisition or launch that they're going to bring out in 2024, but that certainly is part of the business I haven't heard discussed as much. Rayo's real Italian salsa? I don't know, Jeff. Maybe, maybe.

12:43But it seemed like, according to the deck, they're launching it under the late July brand, or that was just kind of - Late July already has salsa. Oh, they do? Okay. I always just think of the chips. All I'm hearing is that Campbell's is about to be like the largest tomato purchaser of all food companies. Yeah, I think that makes sense. Now, are you calling Pace a salsa or a picante sauce? They refer to it as a salsa slash picante. So maybe it's like a sauce that they're coming out with. I can't speak to that. That could also make sense, Jeff. Maybe they just like to say salsa a lot, you know?

13:20Well, I think we've discussed salsa more than I expected today. Slash picante. Slash picante. Picante is not a product. That's a descriptor. It is. It's true. But I mean, salsa is sauce, right? Yes. The direct translation would be yes. But for the American audience, probably not. That's like I've been yelling at my family about, oh, we're having challah bread. No, you're just having Brett or you're just having Paula. Oh my God, this is just two grumpy old men yelling at the kids to get off their lawn. But going back to the Sovos deal, what do we think this says about the current M &A marketplace and what companies should be doing if they want to be acquired, certainly possibly in a smaller deal, but are looking for that exit down the road?

14:15They should have a half billion dollars in revenue. I mean, it's hard to scale, you know, to create a real comparison between the Sovos deal and a lot of the investment that takes place at lower levels. I think our, you know, John Craven on the Taste Radio podcast was discussing it in terms of something that's just should be encouraging for entrepreneurs. It's something that's, you know, good for the ecosystem to see these kinds of deals take place and to get talent and money back into the system. But, I mean, look, Rayo's, Michelangelo's, Nusa, those were corporate brands even before this transaction.

15:03That said, you know, I think there are probably folks who were in the mix a little bit better who can talk about it. Right, Carol? Yep, you got it, Jeff. I sat down with two of the investors who made our NOSH Notables list, Sunrise Strategic Managing Partner Peter Burns and Coefficient Capital Managing Partner Franklin Isaacson, to get their take on the current climate for capital raises and exits. Long story short, they know it's a tough time, but reflecting back on their prior experience, feel there's still much to be excited about. Well, I can't wait to hear it. Hi, guys. Peter, Franklin. Thanks so much for joining me today.

15:49Thank you for having me. Good morning, Carol. Thanks for having us. We're all in different time zones, I think. So good Friday, I guess. So to start, you guys both run very different firms. And I want to just get a quick overview about what the thesis of the firm is and the types of companies you invest in. Peter, let's kick it off with you. So Sunrise as an entity has morphed over a period of time. So our original outlook was to be more focused on smaller venture companies, anywhere between $10 million and$30 million in revenue. and as we've moved through our first investments, we're going to move in and change relative to where we invest and how we invest.

16:41So we're moving up market. We've brought a lot of operating talent into the firm, people who are experts in their field on sales, marketing, ops, finance, and moving up in market is something that we want to do and we think we have a truly value added, which is an overused word, but we think we're truly value added to most businesses in the best way possible? So Coefficient Capital is a New York-based investment firm. We invest in growing consumer companies, not just CPG, although that ends up being a lot of what we do. And we will invest at the low end a minimum check of about$5 million in companies doing$5 to$10 million of last 12 months revenues all the way through sort of 30,$40 million checks when brands are much bigger and perhaps more mature as well.

17:36Peter, you were previously an operator leading teams at Justin's, OneBrands. How does that impact your investment choices and how you go about managing Sunrise? Great question. It's so much into the diligence of the business, right? In terms of if you operate a business, there's a certain set of criteria that you need to understand, right? Size of category, margin, expansion, distribution, format, et cetera. It's really no different checklist than when you're investing. What we look at maybe a little bit differently is size of category is important. innovation, special sauce, IP, those things are more important relative to the investing side.

18:28But again, one of the benefits we have here is the team of people are so functionally experts in their field that when we get into the investment and the real diligence, we really have the ability to go deep and add the questions. So there's no such thing as a safe bet. I'm sure Franklin will tell you that. But hedging our bet relative to the diligence and the questions and the involvement we have just allows us to get the clearest picture that we can have on the opportunity. And if we feel comfortable with that, obviously, that's when we write our checks. So, Peter, I have to ask, what do you like better, being an investor or an operator?

19:11Are we going to see you go back to the brand side? Not really. No, my job as operator has been complete. And I have been incredibly fortunate to work with a series of founders and have had my CEO chops. And I'm checking that box, right? But I can't help myself in terms of from the investing side, I want to be involved. I like to be in the game and the connection with the founder of the business and getting all excited about where it can go. I'm never going to lose that, but I am realizing that as an operator, you control those things as CEO and as investor, you don't. I'm learning it. Not to say I won't make some mistakes along the way, but no, I'm an investor.

20:03Franklin, you have spent a long time on the investment side. How does that impact how you make deals? Is that different than Peter's perspective? I think both perspectives are really valuable, right? And it's a team decision to make an investment. And when we make investments, we call on the advice of people that have operating backgrounds as well. We very actively use our venture partners. So these are founders that we've previously invested in that are now associated with our firm. And so for the very reasons that Peter's experience is so valuable, we call on that and we ultimately make a team decision.

20:43There is a benefit to being an investor all these years in that you do start to recognize patterns, of course. So you start to find common denominators amongst certain companies that either predict success or not, as the case may be. But I think both perspectives are valuable. Well, I think that, you know, in terms of making the investment, I'm a little bit older school, right? And I think that the people side of that, you know, is important, right? The best relationships and outcomes that I've had from an operating perspective are when there's this connection with the founder and there's an alignment around outcome and roles and responsibilities.

21:28I think both of you have alluded to this, but it's one thing to select an investor who's going to write a check into your business. But for a lot of the investors on the notable list, they bring more than just that capital, you two included. There's this intangible value, be it experience or maybe for Snoop, some marketing attention. What's your advice for brands on how to evaluate if an investor is the right fit or brings the right value, particularly when it comes to each of you and what your firms bring? I think, first of all, Carol, let's just be realistic that, you know, the current fundraising environment is not easy, right?

22:10So to the founders that have multiple options, that's today rarefied air, right? To be able to be in that position. But I do think that choosing a select, you know, or choosing an investor is, you know, it's very much like a marriage. These, for the most part, are long-term partnerships, right? There's, we all know of successes where companies sort of sell very quickly, but for the most part, you're embarking on sort of a decade-long relationships in many times, or, you know, or longer even still. And so it is very important to Peter's point that there is alignment, right? Are you both sort of aligned with when you want to sell the business, at which milestone, like the trade-off between growth and profitability, what are you going to do about innovation and expansion and at what pace.

22:56And so making sure that alignment is there is really paramount. Again, just similar to what Peter just said. And then it is also understanding where your blind spots are. What are your weaknesses and where do you need the investor to come in and complement you and your team? And it can be in anything from building out your team to international to a new sales channel. And obviously, you know, if you can find an investor that contributes to areas where you might be weaker, that's obviously ideal. Yeah, I think I think similarly along those lines, it's the upfront conversations that you need to have, you know, with with with the founders.

23:41and again, being more traditional here, the best way to do that is just face-to-face and spend time and have conversations, get to know the person personally, get to know the person professionally, walk stores, take the time, right? We certainly have to have an understanding of each other, what we're trying to do. And I have been in situations where you think you are 100 % aligned. and you get to a very critical point to Franklin's point. You know, do we get off the bus now? Do we exit? Do we keep going? How do we grow? We want to go to club. Boy, you better make sure that you've had a lot of these conversations that take time and you've got those things rock solid before you write a check and agree to do business with each other.

24:33Looking back over 2023, 2022, maybe even before then, certainly the climate for fundraising has changed. Franklin, you definitely alluded to this, or maybe flat out said that. How have you seen that change in terms of how you're making deals, what you're looking for? Yeah, I think it's worth spending a second on, right? So if we go back to the last reset of 08, 09, I mean, Peter and I both invested through that. Coming out of that, there really wasn't a lot of capital for growing CPG brands. There were maybe, I mean, I'd struggle to come up with 10, but let's call them 10 dedicated CPG funds, right?

25:17I remember the private equity reception at Expo West the night before the show opened with Janica and some of the early protagonists. It was basically, I don't know, 10, 12 people there having drinks and talking about what they wanted to invest in. And now there's the last one I went to. I think there were probably 300 people at that reception. So coming out of 08 or 09, there was not a lot of capital available. You had these, call it 10 consumer funds. You had definitely some family offices that were active, and that was pretty much it. And then because of low interest rates and because of all the repercussions that that had, you had all these new entrants, all these new capital providers enter the CPG space.

26:03So hedge funds who were in the business of investing in public companies found that the public market valuations were very high. And so they were investing in private markets. I mean, you saw funds like D1 and Tiger do tons of deals in our space, massive checks at massive valuations for the most part, right? You had the tech funds. So think Lightspeed and Sequoia, where, again, they felt that valuations in tech were very high and that actually CPG valuations relative to tech valuations were quite reasonable. And they were now investing in plant-based meat companies and cereal companies and all sorts of CPG businesses, right?

26:42You certainly had family offices become much more active. They were seeing their money sitting in the bank earning 0%. And they felt that investing in consumer was a great way to generate a return. And so they became incredibly active. And in addition, you had those 10 original consumer funds raise a lot more money, right? I don't know, the early consumer funds like TSG and Catterton, they're now, I don't know, $8,$10 billion funds, right? They used to be$200 million funds in 2009. And so they had all this capital to deploy, writing$100 million checks into CPG businesses. And so there's been a tremendous amount of capital that's gone into the CPG space over that period.

27:28And now interest rates have gone back up. Public market valuations have come down. And the hedge funds are saying, we are better off deploying our capital in the public markets, which is what we were designed to do. And by the way, those private investments we made, most of those didn't go so well. And so our investors are saying, stick to your knitting. The same is true for tech funds, right? Right. Their portfolios didn't do great with the reset. Their fund sizes are now smaller again. And they're being told by their investors, focus on what you're good at, which is tech. And so they're pulling out of CPG in a big way.

28:04Same is true for family offices. Right. They're now getting five, six percent investing in boring bonds. And they're maybe seeing better opportunities investing in, I don't know, commercial real estate. And they're like, you know what, that's a better risk return for us. And so a lot of that capital has left the market. I think some of the consumer funds that were raised the last few years are having, you know, in some instances are harder time raising. And so they're not raising funds that are quite as large. And so, yeah, there is less capital going into business. Now, again, the optimist in me will say there are still many more capital sources and much more capital going into CPG companies today than back in 2009, 10, 11, 12, 13.

28:48There's more money available for founders now than before, but it's certainly a big step down from what it was. And so if you're a founder and you're particularly a newer founder, maybe who's only ever experienced this abundance of capital, it certainly can feel, and it is in many ways quite tough. Yeah, it is that moment in time, right, again, and if you've been doing this long enough, the pendulum swings, and sometimes it swings violently, you know, from one end to the other. So the environment around there, I mean, if you just look at just the overall state of the state, right, you think about, you know, we sold one bar to Hershey in 2019, right?

29:31And that was, you know, pre-pandemic, pre-interest rate, pre-political disruption, domestic abroad, pre-Ukraine, labor, supply chain. I mean, I will tell you, I don't think there's ever been a tougher time than the one hopefully that we are coming out of at the moment. Knock on wood. But it's super hard. And a lot of the founders, big businesses, small businesses have said to me, well, I get it. But you guys sold this business for three and a half times net sales. And, you know, I want that valuation and it likely isn't your fault, but a lot of things have changed in the marketplace. But good businesses will be able to to go through the good times and the bad times.