I want to talk about Tardigrades. If there is anything that 2020 has taught us it’s the importance of being nimble, capital-efficient, and resilient. On a recent TIG Talks episode, I was joined by Nick McCoy of Whipstitch Capital and Chris Fenster of Propeller. Nick and Chris both brought data points that support my belief in the Tardigrade.
One of the critical data sets came from the review of two distinct cohorts of brands. The first burned $1 of equity for every $1 in revenue. The other cohort burned $0.20 for every $1 in revenue. To get to $20MM, the first cohort raised $20MM, and the other cohort raised $5MM or less.
As they went a little deeper into the data, interesting differences appeared. Between the highly capitalized companies and those in the other more conservative cohort, there was almost a 7 point difference in trade spend. The former spent far more on slotting, which given the growth at all cost mindset typically embraced by highly capitalized brands, makes sense.
Another interesting difference between the two cohorts was the amount spent on SG&A. The more conservative companies spend on average 35% of revenue on SG&A while those highly capitalized averaged 61%. Just contrasting these two data points, trade spend, and SG&A, it is easy to see the weight the high-capitalized brands place upon their shoulders. For every dollar of revenue generated by this cohort, an additional 33 cents went to trade and SG&A.
Channel mix was also something that stood out to me. Those in the more capital-efficient cohort had 2 to 3 times more revenue from eCommerce than those in the other cohort. One thing that did surprise me was that the data showed no statistically significant difference between the two in other channels, such as food service.
What about at the exit? Those in the high-capitalized cohort did see the bigger exit. However, that did not necessarily mean that the founders walked away with more money. There was a lot of complexity in the capital stack and, obviously, a lot more dilution.
Nick made the point that there is also a change afoot. Many of the strategics driving much of the high revenue multiples now have a more diminished appetite for acquisitions. I believe that they’ve realized it is challenging to maintain the culture, innovation, and brand authenticity post-acquisition.
I want to be clear. I am not against the unicorn. In some cases, it makes sense. If you’ve developed a truly disruptive product and being quick to market is vital, I am all for the unicorn strategy. However, for most, this does not apply. Chris Fenster said it well, “It’s this whole notion that we’re glamorizing fundraising. It is glamorizing dilution, and you’re giving up your flexibility to build a great business and hold it for a long time. Some founders choose that path, and it’s the right path for them. I think there are a lot of people that choose that path without realizing that they have chosen it.”
That is why I find myself a champion of the Tardigrade. Because too often, founders often find themselves on the path of the unicorn without even noticing that they made that choice. There is another route, one that celebrates the creation of a nimble, capital-efficient, resilient brand.
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Elliot Begoun a 30-year industry veteran, author, and the Founder of TIG, a practice focused on helping emerging natural product brands grow. TIG works with its entrepreneurs to build nimble, capital-efficient, resilient brands that become tardigrades, not unicorns. Learn more about TIG’s programs here and catch him at FoodBytes, the Hirshberg Entrepreneurship Institute, the Natural Products Business School. You can find his articles in publications such as the Huffington Post, SmartBrief, and New Hope.