Guys, please remember investors are not your fairy godmothers.
They're not interested in slow, steady growth.
They want an EXIT.
They want your company to get acquired or go public so they can cash out their investment – and make a hefty profit.
This is how the equity game works.
So, what does this mean for you?
- Validate your exit potential. If you can't envision a clear path to an exit, whether through acquisition or IPO, then equity investment might not be the right path for you at this stage.
- Explore alternative funding options. Consider bootstrapping, loans, or grants if your business model doesn't lend itself to a high-growth exit.
- Don't get blinded by the hype. Remember, equity investment comes with strings attached. Are you prepared to give up control and potentially change your company's direction to satisfy investors?
Remember: Equity investment is not the only path to success. Don't get caught in the exit strategy trap.
Focus on building a sustainable, profitable business that serves your customers. If an exit opportunity arises naturally, then great. But don't make it your sole focus from day one.
The takeaway?
Choose your funding wisely.
Understand the expectations of equity investors, and make sure they align with your long-term goals for your company.
The New Beauty Standard
What Does Profitable on First Sale Mean?
You've probably heard terms like gross margin, contribution margin, and profitability thrown around. But what do they mean in plain English? Essentially, a product is profitable on first sale when the revenue generated from that sale covers all the costs associated with bringing it to market.
Let's use a hypothetical example: A beauty brand launches a new $45 face cream.
Industry average gross margin for skincare: 65%
Cost of goods sold (COGS): $15.75 (calculated as 35% of the selling price)
This means the brand keeps $29.25 from every cream sold to cover other expenses like marketing, salaries, and overhead. If these expenses are lower than $29.25, the product is profitable on first sale.
The Challenge of Customer Acquisition
While profitability on first sale is crucial, the beauty industry also faces the challenge of acquiring new customers. Platforms like Instagram and TikTok have made it easier to reach consumers, but competition is fierce. Many brands rely heavily on influencer marketing, paid advertising, and discounts to attract customers. These tactics can be expensive and impact overall profitability.
To succeed in today's market, beauty brands must strike a delicate balance between customer acquisition and profitability. It's about building a loyal customer base while ensuring each sale contributes positively to the bottom line.
So, what can beauty brands do?
Focus on product development: Create high-quality products that customers love and are willing to pay a premium for.
Optimize pricing and promotions: Ensure products are priced competitively while maintaining healthy profit margins.
Streamline operations: Identify cost-saving opportunities in areas like production, packaging, and distribution.
Build customer loyalty: Invest in customer retention strategies to increase repeat purchases and reduce customer acquisition costs.
By understanding the importance of profitability and implementing these strategies, beauty brands can position themselves for long-term success.
Contribution Margin for beauty brands
I was listening to a podcast yesterday that talked about how the number one thing they focused on was profitability. And guess what was the biggest driver in that? Contribution margin.
Whether you're a bootstrapped beauty brand or an established CPG company, understanding your contribution margin is crucial for making informed business decisions and fueling sustainable growth.
Let’s dig a little deeper. First, what is contribution margin?
Contribution margin is the profit you make on each product sale after subtracting the direct costs of producing and selling that item. This leftover cash fuels your operations, marketing efforts, and ultimately, your bottom line.
Let's use your popular face cream as an example:
Retail price: $45
Variable costs:
- Cost of goods manufactured (COGM): $12 (includes ingredients, packaging, direct labor at the contract manufacturer)
- Inbound shipping from manufacturer: $2
- Outbound shipping to customer: $3
Total variable costs per unit: $17
Contribution Margin: ($45 - $17) / $45 = 62.2%
Why is this so important for beauty brands?
Contribution margin allows you to:
- Profitability Insights: Using the above example, knowing your 62.2% margin on that face cream helps you understand which products are your true money-makers.
- Pricing Strategy: You can confidently set prices that maximize profits while staying competitive.
- Inventory Optimization: Focus on high-contribution products to streamline inventory and allocate marketing resources effectively.
- Acquisition Appeal: A healthy contribution margin demonstrates your brand's profitability potential, making it more attractive to potential buyers.
Turning Your Financials into a Compelling Story: A Founder's Guide
As a CFO for hire and founder of TBC-Capital, I've seen countless investor pitches – some amazing, some... not so much. The biggest difference often boils down to how founders use their financial models to tell their story. It's not just about the numbers, it's about weaving those numbers into a narrative that captivates investors and demonstrates a clear path to success.
Here's my framework for using your financial model to communicate your business vision:
Align Your Model with Your Pitch
- Identify Key Themes: What are the core elements of your business story? Is it rapid growth, unique technology, or a massive market opportunity?
- Map Metrics to Themes: Which financial metrics best illustrate each theme? Revenue growth might speak to market traction, while gross margins could highlight your product's uniqueness.
- Highlight Key Assumptions: Be transparent about the assumptions driving your model. Explain how changes in these assumptions could impact your projections.
Storytelling with Data
- Go Beyond Numbers: Don't just list financial figures. Explain what those numbers mean for your business. A 50% month-over-month growth rate isn't just a number – it's a testament to your product's demand.
- Show the Path to Success: Your model should clearly illustrate how your business will achieve its goals. Connect financial milestones with key business strategies and operational initiatives.
- Use Data-Driven Anecdotes: Bring your data to life with anecdotes that showcase real-world impact. "Our customer retention rate of 90% has translated to 10,000 repeat customers in the past year alone."
Tailor Your Presentation
- Research Your Investor Audience: Different investors have different priorities. Angels might be more focused on early traction, while VCs may be looking for scalable business models.
- Adjust Content and Language: Tailor your pitch to resonate with your specific audience. Use language they understand and emphasize metrics they care about most.
TL;DR
Your financial model is more than just a spreadsheet – it's a powerful tool for communicating your business's potential.
I give an actual example and script in my newsletter. Sign up here: https://lnkd.in/dU_dAe6j
I also talk way more about this in the RaiseSmart accelerator which is now self-paced and a whole lot more accessible for founders in a financial crunch. Learn more: https://lnkd.in/gY7zPNRD
What you need to be prepared for when raising money as a beauty brand.
Equity Fundraising for Beauty Brands: A Quick Guide
When raising equity funding for your beauty brand, there's more to it than just impressive sales growth. Here's what you need to prepare for:
Financial Performance:
- Early Stages: Demonstrate strong top-line growth and a clear path to profitability.
- Later Stages (Seeking Strategic Partnerships/Acquisition): Explosive top-line growth coupled with healthy EBITDA margins (20-30%).
- All Stages: Meticulous compliance, supply chain management, and inventory control. Investors are scrutinizing every aspect of your business, not just marketing and brand awareness.
Long-Term Vision: Investors are seeking brands with staying power. Can your brand stand the test of time and thrive even after acquisition? Build a brand, not just a product.
Tactical Preparation:
- Pitch Deck: A polished, investor-ready presentation.
- Data Room: Organized and easily accessible financial and inventory reports.
- Clear Vision: A compelling brand story and value proposition.
- Investor Communication: Know your audience and speak their language.
- Customer Insight: Understand your target market intimately.
- Ideal Investor Profile: Identify potential partners aligned with your vision.
TL;DR
It isn’t just about explosive top line growth. Brands need to have staying power and the business fundamentals must be there when looking for investors and strategics.
Why Bootstrapping Might Be the Better Option for Your CPG Brand (And When to Reconsider)
The current fundraising climate for beauty brands is undeniably challenging. Investors are increasingly hesitant, often citing concerns about profitability. This has led many founders to consider bootstrapping as a viable alternative to equity investment. Here's why bootstrapping could be the right path for your brand:
- Prioritize Sustainable Growth: If you value steady, organic growth over rapid scaling, bootstrapping may be a better fit. Investors typically seek high-growth potential, which might not align with your brand's slower-paced approach.
- Maintain Full Control: Bootstrapping allows you to retain complete autonomy over your business decisions. While investors offer guidance, they can significantly influence your brand's direction and pace. If maintaining control is paramount, bootstrapping offers that freedom.
- Retain 100% Equity: Many founders dream of building a highly valuable company. By bootstrapping, you can retain full ownership, maximizing your potential return. Jamie Schmidt, who bootstrapped her brand to a nine-figure exit with Unilever in 2017, serves as an inspiring example.
Considering Equity Investment? Here's What You Need to Know:
- Fundraising Takes Time: Be prepared for a longer fundraising process than anticipated. It can easily take several months, even up to a year, to secure investment.
- Niche Focus Can Be Advantageous: Investors are drawn to brands with a clear niche focus. If your brand caters to a specific audience or cause, aligning yourself with investors who share that passion can increase your chances of success.
- Maintain Business Momentum: Fundraising is a full-time job, but it's crucial to maintain your brand's momentum during this process. Consistently hitting your business goals will strengthen your position when negotiating with investors.
- Profitability Matters: Demonstrating profitability or having a clear path to profitability is paramount in the current climate. Investors are more likely to invest in brands that can generate sustainable revenue.
Need Fundraising Guidance?
If you're still considering equity investment, I can help. My self-paced accelerator, RaiseSmart, equips you with the knowledge and strategies needed to navigate a successful fundraising journey. Learn more and enroll today at https://lnkd.in/gY7zPNRD
Let's make your beauty brand a success, whether through bootstrapping or securing the right investment.
How to Talk About Your Business
Founders, please remember you are constantly dropping clues for investors.
I like to call them breadcrumbs.
I was talking with a founder and started to ask questions about customers and pricing. The answers I got were all consumer-type responses.
“5,000 customers”
“19.99/month pricing”
So, I stopped them and asked “I thought this was a B2B business.”
Their response: “It is.”
Me: “So how are you getting 5,000 customers in the next 18 months?”
Conversations like these are why you aren’t getting investment.
You are going into meetings and speaking about your business in a way that is incongruent with your industry and investor expectations.
Not understanding how to talk about your business shows naivete, poor research, and industry knowledge.
Founders, please remember everything you say is being judged against a laundry list of bullet points, assumptions, and expectations an investor already has about you, your business, and your industry.
Do not give them any reason to say no by not following the general rules of your industry and business type.
Using a Founder Mindset
I’m applying for a grant and I got this question: share a time you faced a challenge as an entrepreneur. How did you use your “founder-mindset” to overcome and stay on top of your game?
I was thinking about my response and I thought I’d share.
My response:
Over the past year, I would say that there wasn’t one challenge that I faced. Instead, I would say that the entire 18 months have been challenging not just for me but startups in general. And it all came to a head in March of 2023 when SVB, a very popular startup bank abruptly shut down.
I was set to speak at SXSW when I received an email that the bank had shut down. Now as a fractional CFO, managing tens of millions of dollars for clients you could imagine how panicked I was.
I had multiple clients with multiple millions of dollars at SVB and had to figure out very quickly how to allow those businesses to continue operating. Payroll needed to be run, vendors needed to be paid. It was a nightmare.
That event triggered a market correction in which startups
1. Were not able to fundraise
2. Lost millions in revenue as customers stopped spending
Essentially their sales came to a halt and money completely dried up. This was especially bad for Black and women founders. I had multiple customers in the last year shut down, cease operations, and essentially not be able to afford my services.
So as the market changed so did my business.
What I have done to continue to support my community and the founders that I am put on this Earth to serve is the following:
1. I created tiered pricing that would allow my customers to pay at a rate that was more suitable to their current financial situation. I did not want to abandon them as a service provider so I created a price and structure that worked for both of us.
2. I created ways that my clients could work with me without working with me. I created a self-study fundraising course so that you could get all the experience I’ve gotten over the years for a fraction of the cost of working with me 1 on 1. I’ve helped founders raise over $40M that’s .2% of all pre-seed and seed stage deals in 2023. I can learn you something and you can learn it at any time.
Staying on top of my game and having a founder-mindset has always meant that I need to be able to serve the community I was put on this Earth to serve. IN ANY CLIMATE. And if that means that I need to change my pricing or change my offerings then so be it.
How have you had to change your business to stay alive in this market?