Late last year, CPG brand builder Mercenary acquired StrikePoint CPG Accelerator with the aim of creating a next-gen consumer goods accelerator that can develop, scale and commercial brands across a range of natural and better-for-you categories. Led by new venture partner Joey Murray, the $20 million Mercenary Ventures fund will cut checks from $10,000 to $250,000 to pre-revenue and seed-stage brands – including California-based iced tea maker HALFDAY – over the next three years. Under the new organizational structure, StrikePoint will support sales regionally for innovative and healthy brands, specifically with off-cycle placements.
We caught up with Mercenary-Strikepoint’s management team – managing partner Jacob Timony, managing director Adam Louras, and Murray – for a round of questions, including about their economic outlook for the year, how price-conscious brands can ride out inflationary pressures, and what emerging categories are capturing their excitement. This conversation has been edited for clarity and space.
Why CPG? What excites you about the space/keeps you motivated about the business?
Every partner at Mercenary has the “founder itch” that we believe is innate in all entrepreneurs, and each has acted upon it either in their own founded startup or through joining an early-stage venture. The “founder itch” is one of those things that is hard to describe, but everyone that has it knows it, and they can spot it in others.
We, entrepreneurs, are all self-starters and possess an action-oriented motivation to get sh*t done. We guess the best way to describe it is that we like to control our destiny, we enjoy making tough decisions with little data, and we aren’t scared of making mistakes. We think less and do more. And, with a positive outcome, the rewards are worth the risk.
As it relates specifically to CPG, we are all passionate about products you can touch, feel, and consume. Sure, we are also fans of software, the metaverse, and NFTs too. Still, there is just something different about being able to see consumers physically experience the products that we make and sell.
We also love the challenge of addressing consumers’ rapidly changing needs and wants within the CPG space. Plus, we are excited about solving new challenges as the complexity of the CPG industry keeps compounding, given the modern speed of information, the expansion of new digital and retail sales channels, and lower and lower barriers to entry to produce all kinds of innovative food and beverage products.
What is your economic outlook for 2023 and beyond, and how is that influencing strategy?
We, as entrepreneurs, are more optimistic than most and believe that the economic outlook for brands won’t be as bad as all of the doomsayers out in the world. Will some brands suffer? Unfortunately, yes. There is a temporary drought in the capital markets, and some brands with little runway left might not be able to raise money quickly enough to sustain their operations.
The other trend we are seeing is that many VCs and Angels are offering “take it or leave it” term sheets with punitive terms. Things like mandatory 2-3x share matching on money invested, anti-dilution provisions through Series A, and 2x Liquidation preferences. This type of predatory investing is not only bad for founders, but it might also backfire on all the company’s investors if these terms calcify the cap table for future investment or if they disincentivize the founders from continuing to fight for the long-term viability of the company.
We also believe that pre-revenue brands without deep-pocketed friends and family to call on will wait a lot longer to launch or might not launch at all. But early-stage founders shouldn’t lose hope.
Brands don’t necessarily have to be profitable overnight, but they should find creative solutions to keep margins above 40%, VPOs over 10, and have a positive ROI on every marketing dollar spent. This is easier said than done, but that’s why founders need to keep complexity down and get creative. Founders can’t just follow brand playbooks of the past – they need to invent their own.
Lastly, the best of the best brands should find that fundraising this year is actually easier than over the past few years. We postulate that the shortage in overall dry powder in the investment community will be more than offset by a concentration of money chasing the best deals – investors are going to have a hard time getting into these oversubscribed rounds of the top brands. Essentially, we see a 2023 where established brands with more traction and better fundamentals are rewarded for their business prowess as we head to a quick recovery in mid-2024.
How can you make natural brands more affordable during a period of high inflation?
If the MSRP of a brand is ultimately based on its underlying costs, then making a natural brand more affordable necessitates a focus on cost reductions. Finding and trimming any unnecessary costs is the hard part.
All startup brands, natural or otherwise, cost more because of low economies of scale – especially during inflationary times. It’s just expensive to make, move, and sell a small volume of something. Sales cure all ails in this regard, but selling enough to address these scale issues doesn’t happen quickly – generally over 3-5 years.
Natural brands face the additional burden of costs that come from their own chosen Product Pillars, features, ingredients, and packaging options. Product Pillars are addressable almost immediately, and with some effort and creativity, brands can find ways to stay true to their mission without breaking the bank.
Do you really need to use raw, unpasteurized, fair trade, organic, never frozen, NFC lemon in your drink with 20 other ingredients, or would the Non-GMO NFC suffice at half the cost? It’s your choice as a founder, but don’t expect the world to reward you with low COGS and a simple supply chain based on your own chosen Product Pillars.
Do you need 10 SKUs when the Pareto Principle would suggest that 2-3 of them make up 80% of your sales? Maybe you should SKU rationalize and simplify your business to reduce costs.
Are you saying “yes” to retail authorizations that only buy small volumes of product in remote places to which you can’t viably distribute? We get it, it’s flattering and exciting that the yoga studio in Madison, Wisconsin, wants to carry your product, but you can’t make money shipping in bulk UPS boxes from New York every three weeks.
Excess costs are everywhere in a startup. Remember that many of them are your own choice and are reflected in your Brand Pillars. Brands need to know where to find costs, eliminate them, and then pass the savings through to your price point.
What is the responsibility of retailers with regard to making natural brands and products more affordable?
We hope that retail buyers only authorize and place products into stores that consumers want to purchase, so we can’t blame them if they support products that are cheap and unhealthy if that is what the customer demands. We trust that retailers are using objective reasoning and data to make their buying decisions and that they aren’t influenced by hype or their own personal agendas.
If this is true, it is ultimately the responsibility of the brands to find ways to make their products more affordable. This stems from brands understanding their cost structures and the regional margin expectations of retailers and distributors.
We don’t feel that it is realistic to expect retailers or brands to subsidize healthy and natural food options to make them more affordable, but given that we know that natural brands are in high demand yet underrepresented at larger retail chains, it is reasonable to expect that these brands and retailers work together to build healthy businesses that will enable the products to be more accessible and affordable.
Historically, the difficulty that we have seen for natural brands is that the incumbent brands, the ones that are generally the least healthy and most unnatural, tend to win the authorization showdown. Incumbent brands usually have the most sales data and historically, the largest trade-spend budgets, and they have the ability to afford talented sales teams. All of this support can cloud the ability of buyers to identify and confidently select new healthy challenger brands lacking such resources.
What is the profile of a company or brand that you are targeting for investment?
We write checks in sizes [up to 250K], and we are category agnostic – we look at brands in alcohol, non-alc, cannabis, beauty, or anything CPG, or services supporting CPG, as long as they are disruptive. We like to bet on companies targeting modern consumers that make products or services that attack large categories dominated by tone-deaf incumbent brands and companies.
Our “sweet spot” is scaling brands from pre-revenue to $10M+ in annual run-rate, so we are one of the few companies that bet very early on founders. Because of our early-stage investment view, there likely won’t be any history or data that could be reliably used to make an investment decision, so we aren’t expecting that.
In lieu of data, we look for a stellar founding team. We bet on founder(s) that have a superpower at either Selling, Marketing, Operations, or Fundraising that puts them in the top 1% for that skill among all people in the industry. We also look for coachable founder(s) that are critical thinkers, problem solvers, and have a natural “likability factor.”
Lastly, we look for brands that offer products or services that are universally better suited to the target audience without a significant compromise to the existing standard being disrupted. To win, we believe that Chocolate Cake needs to taste like delicious Chocolate Cake regardless of how many adaptogen, plant-based, gluten-free, vegan, or Non-GMO certifications it has. We don’t like brands with complicated messages, products based around single ingredients, offerings of features or benefits that require a bunch of consumer education, or uncorrectable, elaborate manufacturing processes, to name a few.
What categories or broader trends are capturing your interest in 2023?
Looking back again at the last recession in 2008, most economists and financial analysts said that places like Starbucks Coffee were “unnecessary luxuries” that consumers would drastically cut out of their spending and never go back.
The outcome, however, was quite the opposite. Starbucks sales declined moderately from 2008 to 2009, but their aggressive revenue increases returned year over year from 2010 and beyond. This was primarily due to the company doubling down on its commitment to giving consumers a comfortable “escape” from the malaise of the depressing economic environment. We discovered that consumers run towards Affordable Luxuries or Indulgences as a means to cope with economic depression.
We believe that every year is ripe for a challenger brand to disrupt an incumbent, but specifically for 2023, we are looking for brands that offer Affordable Luxuries and Indulgences. We like brands disrupting snacks and sweets, confectionary desserts, and frozen novelties with better-for-you benefits. We also like quick kitchen foods and snacks like mac & cheese, chicken nuggets, French fries, or pizza bites with cleaned-up ingredient panels. We believe that all of these categories will see significant growth during economic downturns and beyond.