Raising Capital? BFG's $125M Fund Should Be In Your Sights.

0:10Hello, friends. I'm Ray Latif, and you're listening to the number one podcast for anyone building a business in food or beverage, Taste Radio. This episode features an interview with Tom Spear and Dayton Miller, the managing partners of BFG Partners, a venture capital firm with investments in several high-profile and fast-growing brands, including Athletic Greens and Olipop. What compels an established VC firm with a track record of investments in high-growth companies to take a leap of faith on a small and relatively unproven brand? Investing in early-stage companies is inherent to BFG partners, but managing partners Tom Spear and Dayton Miller say that regardless of a brand's size, their evaluation is always led by four pillars—people, product, brand, and strategy.

1:01Established in 2014, BFG funds Better For You and sustainable brands seeking seed through Series B rounds of capital. The firm recently announced the activation of its third fund, which according to a February press release, has commitments already approaching 70 % of its$125 million target size. Fund three follows ones valued at$54 million and$108 million, respectively. BFG's portfolio includes stakes in several food and beverage companies, including Olipop, Midday Squares, Barnana, Athletic Greens, Caulipower, and Graza. Successful exits include Chameleon Cold Brew, which was bought by Nestle in 2017, and Birchbenders, acquired by Sovos Brands in 2020.

1:47I sat down with Tom and Dayton at Expo West 2024 for an expansive conversation that dives deep into BFG's investment strategy and includes their evaluation of fast-growing categories, how they assess gross margin in the near - and long-term lifecycle of a brand, and what a polished pitch says about a founder.

2:09Hey, folks, it's Ray with Taste Radio. Right now, I'm honored to be sitting down with Tom Spear and Dayton Miller of BFG Partners. Tom, great to see you. You too, Ray. Great to see you. Dayton, how are you? Wonderful. Thanks for having us, Ray. It's like a tradition now. Every five years, we need to sit down, evaluate how the industry is going, evaluate how you're investing in emerging food and beverage brands, and kind of crystal ball the future, as it were. because we did this in 2019 at this show, Expo West. And it's funny how on point you guys have been with your investments. I think about some of the companies that are part of your portfolio, including Olipop, that would be the crown jewel for a lot of funds.

2:52And it's really cool to see how it's all developed. Thank you, Ray. Yeah, it's been a fun five years. And yeah, we appreciate that. Yeah. Dayton, you know, it's a trade show that everyone is waiting for. It's an exciting place, Expo West, that is. But like everyone else here, we're trying to sift through the booze, the brands, the products that are going to be the next level, the next gen leaders of their categories, their respective categories. When you come to a show like this, how are you trying to figure out the best places to be? Because I don't think you guys can walk the entire floor, right?

3:31I mean, the entire show floor. I mean, you may try to, but how do you zero in on the things that are most valuable for you? I think everybody has their own strategy. I'd say my personal strategy is I'm here to taste as many products as I can and have as many quick conversations as I can with entrepreneurs. And to your point, is it kind of push forward or do you kind of maybe not pass is too strong of a word, but like who's worth following up with? And so hopefully we're meeting a lot of entrepreneurs. I think there's no better place and kind of time in our industry than Expo West to do that. and also really try a lot of things and both stuff that's on the tables as well as behind the tables and then getting a better sense for just holistically where maybe different trends are going.

4:12But to kind of say, you know, these are the two trends or three trends and we're going to kind of opportunistically target them when you have 85 ,000 people here, to me doesn't feel realistic. What's most important for you? Is it taste? Is it package design? Is it the entrepreneur themselves? You can't say all three. Don't say all three. I mean, I would say taste. I think taste rules. I think without taste, you don't get repeat. And without repeat, you can't have a sustainable business. I would agree. And it's funny how often taste gets forgotten with really cool ingredients or package design or a really interesting founder story.

4:46And then you're like, wow, they have all this. And then you take a bite and you're like, you're missing something. You're missing something. Do you tell entrepreneurs that they need to improve taste? Or how do you gently explain that to them? Yeah, I mean, I think you need to be thoughtful about it. And different people do have different taste preferences, too. So I mean, you know, just because I may feel one way about a certain profile, it might really be someone else's cup of tea. So yeah, I think that, you know, you might say something like, you know, are you make sure that you're solving for a large enough audience here with a taste profile like this.

5:20And, you know, you may want to consider that. But yeah, I think generally, people are putting a lot of effort into into these, these projects and companies. And so, yeah, the products, you know, you have to solve for mass appeal to get scale. And scale is sort of what's needed to do what we do, which is try to find companies that are hopefully attractive to larger fish in the ocean. You're a good guy, Tom, because I see folks who sometimes don't like what they're eating and they just toss it into the trash, flick it into the trash and walk away. That's not a nice thing to do. I've eaten a lot worse over the years.

5:52I don't need to tell you where or when. You've also seen a lot worse. I mean, in terms of package design and branding, I think everything these days seems so slick and it feels like amazing package design is just table stakes now. Five years ago when we did our interview, it wasn't. And with everything looking nice these days, everything looking cool and looking like they spent a lot of money, the founders spent a lot of money on labels and brand, what really stands out to you guys? Maybe I would shift even away from the packaging then And then it's then more going back to, you know, and even away from taste.

6:26And then you're talking about the people, you know, who's behind the business, how much, you know, discipline and perseverance do they have? And what does the business model look like? What are their margins like? You know, if you have two packages that are beautiful, but one's at a 70 percent margin and one's at a 40 percent margin, you know, I'm probably going to choose the 70 percent. So I think that it really, you know, that's where the homework is, is we try to dive in and figure out which companies are the most suitable for our partnership. How many early stage brands do you know have a 70 % gross margin?

6:57There's a few. There definitely are a few. Yeah, there are. Yeah, you know, there's certain categories that lend themselves to higher margins. You know, personal care comes to mind, of course, just, you know, broadly speaking. and then yeah even you know in food depending on what you're talking about if you really have uh you know figured out your supply chain and your manufacturing you can accomplish a lot 70 is a huge margin yes it is on the uh on the packaging side while i agree everything's looking really slick and kind of definitely stepped up um to me it's just about being different so you've probably tried the tortillas uh coyotes sure um and uh it's like just very different packaging.

7:34It almost feels a bit homemade. And even though the products are super forward and amazing tasting, it's a package that really pops on the shelf when you think about its competitive set. That's how I tend to think about packaging. I'm glad you brought up Coyotes because the industry has embraced, and I think consumers have embraced, ethnic foods and ethnic foods that are developed for modern consumers. Great branding, great communication about what they are, great story, and great flavor. I wonder about the opportunity, the big mainstream opportunity for ethnic foods and how that sort of fits into your investment criteria and investment strategy.

8:16Sure, yeah. It is a big opportunity. When you're thinking about brands, obviously, some brands really lend themselves to going after multi-ethnic opportunities and others may not. But in the frozen food world, certainly that's an area where I think we've had success. Within ethnicity, there's a lot of areas, but some of the key areas, Asian-influenced food, Mexican, South American-influenced food, and then Italian is just sort of an area. Those are really huge segments. And then beyond that, you start to look at other key areas as well. And there's just a lot out there. And I just think you need to think about how do you have a brand either that's so deep in one ethnicity that you're going to own it, or do you have something that's more of a platform that allows you to move across in a way that's still credible and authentic?

9:08And I think that, you know, that's not easy to do. No, it's not. But you're seeing a lot of companies that are making their way beyond that ethnic food aisle and getting into the traditional center store shelves and aisles. you know, Fly by Jing is a great example. Everybody brings up Fly by Jing because they've done such an incredible job. And I don't know, 10 years ago, you'd expect to see that, you know, somewhere in the ethnic food aisle and just you'd never really pay much attention to it. And now it feels like they've given other brands permission to break out and become a more mainstream offering.

9:46Yeah, again, they're playing within the Asian subset, which is a huge subset. So that's a great place to play. they have there's pure authenticity behind what they're doing and so they have something that ladders up and you say oh yeah that that makes a ton of sense you know for those entrepreneurs that are trying to go after that opportunity i just think you have to to look at the overall addressable market and make sure you're not playing in an area where it doesn't work and maybe it does work i mean you could be a small giant have a great business in a category that may not be the biggest but if you own it and you control a lot of the category you know you're still going to have a great business.

10:21So I'm not, you know, diminishing the value of that. I just think if you're going after a big idea, you need to be in big categories or you have to be able to access multi-ethnicities. Dayton, did Flyby Jing ever come across your desk? I think we did chat to them, not me specifically, but yeah, I mean, it's certainly an area of interest for sure. And, you know, I think a lot of more kind of ethnically forward position brands kind of start in that sauces and seasoning area and then is able to kind of bring it to multiple different products and parts of the store. And so that strategy is a good one.

10:57Are more investment opportunities generated by inbound interest or are you seeking out brands that BFG think would be a good fit for its portfolio? It goes both ways. Certainly, we love to get inbounds. Of course, that's critical goal to our business. And it's how we, you know, a lot of the deals, you know, we learn about them the first time. And then, you know, our team is canvassing, you know, any way we can to try to understand what's out there. And if there's a company that's really interesting to one of our partners, then, you know, that individual would reach out and try to, you know, make a connection.

11:30So yeah, we all have our own sort of personal ideas on potential opportunities that we're chasing. And then sometimes there's an inbound that comes in that just makes a ton of sense. and we track it down. Midday Swears, for the record, was an inbound on LinkedIn. And speaking of product first, it was one where we got the product and we loved it. Obviously, Nick, Jake, and Les over-delivered in terms of people and connection and community building, but it was first and foremost a product bet. First and foremost, products, great leadership in terms of the personalities and what they bring as a team to the industry feels very, very different than a lot of things we've seen in the past.

12:14But since you brought up gross margin, Tom, we'll talk about that. When you are evaluating an investment opportunity, when you're evaluating a brand, how much does gross margin factor into your decision to invest or not? Yeah, it's incredibly important both in the near term and the long term. There's certain projects, Midday Square is being a good example, You know, they had not dialed their supply chain when we met them. And we took a bit of a leap of faith at that stage. But, you know, that's sort of what we're in business to do with being a venture firm. You know, we're not buying bonds. So, yeah, sometimes, you know, we have to sort of do a little bit of back of the napkin math and say, yeah, if they're selling it for this and, you know, they, you know, can make it more efficiently.

12:59Could we get there? And could it make sense? And, you know, sometimes we're wrong. and sometimes the companies figure it out and ultimately can deliver on that. And then you're in a pretty good spot. I think there are ways, too, to increase your gross margin without just reducing the cost of goods sold. Pack size in particular. Midday squares went from a two-pack down to a one-pack. It was really helpful. And, yeah, when we first invested, they were making it out of Nick and Les's apartment in Montreal. And we knew that wasn't the long-term vision, but we have faith in them in figuring it out.

13:31Did it help that they own their own manufacturing? So at the time, they just signed the lease for not their current facility. So they went from the apartment into their first facility. And in that situation, I mean, this is something we talk about quite a bit internally. There was no other alternative. I think if you, and they've done a really great job being very methodical in their growth, and they've been very cognizant of bottom line as well. But it's really hard to just have exponential growth if you're not outsourcing some piece of it because just it takes time to beef up your supply chain and your production capabilities.

14:06So it's not for everybody, but for them, it made a lot of sense. As a venture firm, yeah, you're making a bet that other funds or other investors may not make. Why would you take a leap of faith? What is it about a company? What is it about Midday Squares that made you confident that you were taking a calculated leap? Yeah, it really has to ladder up with, you know, some key factors, some of which we've already mentioned, people, product, brand, strategy. So it's sort of these four pillars. And, you know, we have to believe that the people are the type of people who, you know, have the wherewithal to, you know, manage the ups and downs of our industry.

14:49You know, the brand, Midday Squares in particular, I mean, we were, it was, it made sense to us. I mean, it was a simple proposition and something that we really felt like, yeah, that's something we can get behind. That, you know, that's something that makes sense for a lot of people. So it just made it was a simple kind of value proposition there. The product Dayton mentioned, it stood on its own at the very beginning. So we believed in that. And yeah, the leap of faith was really, you know, could they execute and could they deliver on the margin? And that's that's the hardest piece. And over the years, when we see the most challenging situations, it's quite often that the supply chain really is that difficult to build and scale.

15:28So it's not an easy one to figure out. Were you also concerned maybe that you would miss your shot on a great brand if you didn't invest, that is? Not necessarily at that time. I think there are definitely brands that we've known for years prior to making an investment. So it has to be a good fit on both sides. we definitely miss things for sure in this situation in particular it was so early and you know we just just lined up really well for us so yeah i think we would have hopefully gotten another look at it given the relationship and a lot of times you know how you pass really matters some so like on the you know uh olipop side like we passed on obi but thankfully uh hopefully did it in a thoughtful way in a way that allowed us to get a look at olipop really early yeah obi being sort of a forerunner to this Better For You Soda category, probiotic soda, and Olipop being one of the pioneers of this Better For You Soda space.

16:25When I first met the Olipop folks in 2020, again, I mentioned this before we hopped on the mics. I was like, wow, that's an interesting idea. And they had some traction. They had some interest, a lot of interest in Southern California. They were big in Erewhon. I don't think I could have imagined that they would be where they are today. And that's no stain on the better for you soda category. I think it's just, I didn't see them getting as big as they are now. When you first met those folks and when you were sort of assessing the opportunity, did you see it being where it is now? Soda has always been an enormous category.

17:05I think we would never underwrite it. Hopefully there's an upside scenario where you can be pleasantly surprised and things just exceed your wildest expectations. I do think these businesses can run a lot further, a lot faster than you maybe realize. And, you know, we've seen it even in our portfolio where brands might plateau for a period of time, and then they launched an innovation. And it's just amazing how fast it grows from there. But, you know, to me, it's a sign of a really great product that the word of mouth kind of takes on a life of its own. And, you know, I mean, there was like a, it's hard to remember now, but like Like a year and a half ago, I couldn't even really find it in L.A.

17:44It was selling that fast. And so that means people were really talking about it. And really, when they saw it, they were buying a ton of it. And so, yeah, it's just been amazing. So total credit to the team there. They've done a fabulous job. How much has it helped that they have running mates in the space, like a poppy or a culture pop? You know, generally, I think that if you're bringing more awareness to a new area like that, having that take place can help buoy everyone. And, yeah, I don't, you know, clearly competition, you know, can be a challenge, you know, in terms of trade promotions and aspects of being on the commercial side.

18:22But I do think that the awareness piece is a lever. Yeah. How do you advise founders like those of Olipop when there's so much hype around a category or a brand? I mean, earlier this year, we'd heard, you know, Pepsi's interested in this space. Coke's interested in this space. Curry Conductive Pepper's interested in this space. And when you're talking to these founders and operators, are you encouraging them to throttle up and press the gas on what they can do and what's possible, given all the hype? Or is it time to be more cautious? Our advice is generally play your own game. I think no matter what, like the brands that have really just created a good connection with their communities have done things differently and done it their own way.

19:09I do think competition does matter. I think to Tom's point, generally, awareness in a category is a really good thing, especially in beverage when you think back to like the coconut wars and water wars and things along those lines. So I think the awareness is good. But, you know, there's more than one way to win is the other thing. And so you got to do kind of what feels right to you as an entrepreneur. Some people are comfortable kind of, you know, really laying on the gas on the on the marketing side. And and other other folks want to take a more thoughtful, methodical approach. And I think you can be successful with both.

19:43Do you have a heavier or a lighter hand in how brands operate their businesses? Because sometimes investors and they have a bad reputation. I'm not saying, you know, this is what I hear about a lot of investors who are like, no, you need to be doing this. You need to be doing that. And then founders just like, thank you. But, you know, I need to run my own company. But I mean, is there a balance between? We're a minority growth investor. So we are not seeking to acquire control of businesses. We sort of recognize that where we play in the market allows us to be a great minority partner. And sometimes that means we're, you know, one of our partners is on the board, you know, advocating for great ideas.

20:26But a lot of times we're just a phone call away. And we hope we get a phone call when there's a great outcome or a bad outcome. And, you know, we think we're often the first phone call, even if we're not on the board, because we try to just give good advice. We recognize that, you know, we're not in control and people don't have to listen to us. But we'll try to, you know, be as thoughtful as possible. I have noticed that, I wouldn't call it a theme, but I've noticed that a lot of your investments have been in categories that I think other people would be wary of. Refrigerated, frozen, these are difficult categories because of all the issues you mentioned, supply chain issues and just, you know, it's a tougher business for a lot of reasons.

21:09What's given you confidence that a refrigerated brand or a frozen brand can avoid some of those pitfalls, those challenges that have tripped up so many other brands in their spaces? I guess I think it's a double-edged sword because I think difficult can be good. And for that reason, maybe it's easier to break through the noise and get your message and product out there. At the end of the day, the consumer is the one leading it. And if you're following the consumer and they want more nutrient dense and cleaner labels, then by virtue of that, you can't always have the fillers and the things that create the shelf stability.

21:48So it does present some problems from a supply chain standpoint. Maybe that infrastructure isn't built out quite as much, but at the end of the day, the consumer wins. And so to me, it's following the consumer, and that gives me a little bit of confidence. generally we we we've worked in a lot of these areas so we can draw from those experiences you know shelf life for us is important you know working in in areas where the you know it's very short-coated items produce that you know I think that maybe that's not our area of expertise we haven't done anything there I would don't think we would do that it's just you know not what we're what we're good at so yeah we we definitely want to work in areas where we you know have some confidence and some knowledge to bring.

22:32Okay. Well, let's do some word association then. I'll mention a category or an area of the store. Uh-oh, am I in trouble? I don't think so. I don't know. That's all good. And you can just give me a one-word answer or just a phrase about how you feel about it. All right. Ready? Sure. Tom, we'll start with you. Kids foods. Good. Okay. Dayton, dairy. Innovation. Expound on that, please. You know, huge category, flatlined or declining, that can be solved with innovation. Candy and confection. Opportunity. Yeah? Why so? Just a lot of the products out there, I think, still have a lot of, you know, kind of packaging challenge with ingredients and nutritionals.

23:22And, you know, it's been proven already by a few of the winners. Smart suites, of course, being the most notable. you know there's a lot of opportunity there to deliver on products that are healthier for people alcoholic beverages tricky i mean i don't know if we want to get into like the glp1 discussion but i think i'm generally a believer that you know in addition to kind of suppressing appetite it suppresses cravings more more generally and i think that can overlay into alcohol as well plant-based meat patients okay yeah you're still a believer in the potential for the category i I am, yeah.

23:58I think that just as we look at where the planet's heading long term and the need for production and the type of proteins and fibers that people are looking for, that it's going to be a big part of the mix. The products, there's a lot of money that's been invested. The innovation is still happening and getting better. and once I think these products are more broadly available at price points that are really competitive, I think it's just going to take more and more share but this is not a five-year fight or ten-year fight. I mean, this is going to play out for decades. I don't know if I'd call this a category as much as I would something that has been talked about, a phrase that's been talked about quite a bit, ultra-processed foods.

24:43Dayton. Curseword, basically. Yeah? Right now. I don't know. I think so. So, you know, rightly or wrongly, I think the perception is that for sure. But yeah, every single day, I mean, there was just that article in the journal a few days ago talking about how they impact cognitive development. I think probably unfairly. I think, you know, going back to it's great for folks in our industry and folks who are doing great to kind of lift their noses at ultra processed food. But like there's a huge swath of the market that's just trying to kind of get their kids fed and try to do the best they can holding it together.

25:19And their food needs to, they need to be solved. But what about the better for you ultra processed foods that are out there? Because there are. Errol Schweitzer wrote about this in Forbes a couple of weeks ago and he had talked about we need a new sort of era for ultra processed foods. I just don't think that word's out, the message is out there enough yet, at least today on ultra processed foods. You know, I think some of this comes back to, you know, the ingredients, not necessarily maybe the processing of how those ingredients are assembled, but, you know, are these organic products? Are there, you know, are they pesticides in the products that are residue from pesticides?

25:56I mean, so some of these issues are beyond just the processing and get more down to sort of the agricultural aspects of where these products come from. All right. Last one, and it's very much tied to ultra-processed food, cereal. It could be the next domino that falls. Oh, interesting. That's always more than one word, but I should have just said dominoes. So the hype around premium cereal you think is about to fade? I don't think it's about to fade. I think it's kind of the other, you know, I think that it's still a pretty big category. It's definitely been under a lot of pressure over the last decade.