Are The Days Of The High Multiple Exits Coming To An End?

Everyone in the food industry is aware of some of the big multiples paid for early stage branded food companies over the last few years. Exit valuations as high as 6- or 7-time sales have been seen. This has caused a large number of entrepreneurs and funders to create companies searching for these exit valuations. I have noticed some recent developments that will make these high-priced exits more and more difficult. They are as follows:

  • Big food companies struggle when managing a portfolio of mid-size specialty brands rather than billion dollar plus brands. Even when a specialty and better for you company grows significantly, it often will not attain the volumes required by big food company infrastructures to efficiently manage.
  • The traditional product development no longer works. Large food companies used to bring a new product to market by developing a new product internally over a number of years with millions of dollars invested in market research and product testing. This strategy does not work in the high change, short product life cycles in today’s market.
  • It isn’t paying off. To compete in this new marketplace, large food companies began acquiring early stage growth companies for very high valuations putting most of their financial and organizational resources behind a couple of big bets. This strategy has actually paid off in only a few instances and misses are very expensive.
  • Today, the more sophisticated large food enterprises are developing the same fast fail methods that the start ups have been using for years. They work closely with an increasing array of sophisticated co-packers that can both develop and scale new products rapidly. A company can often bring 10 to 15 new items to market in this way for the same cost and far faster, without having to buy an early stage company.
  • The ones that do not gain traction, they kill early. The ones that look successful they rapidly expand with the co-packer. They do not want to build their own production capacity as a successful new food item generates many copiers in a very short period of time, making an acceptable return on new production capacity problematic.

You may still see some very high valuations for companies like the Impossible Burger. But these will increasingly be companies that develop entire new markets with very heavy R&D and start up production costs often in the 9 figures before the first dollar of revenue. Think lab-grown meat as future new market segment for environmentally sound and clean label real meat. The development cost for this project may approach a billion dollars before reaching the market.

So, where does this leave a startup food company in today’s market?

Is your goal to significantly grow a start up food company over a short period of time? To never make money and hope for sufficient funding and a high value exit? I would caution against it.

Do you want to build a food company for the long haul with distinctive products in multiple channels, including both retail and food service? Is your goal to reach breakeven as quickly as possible while financing your growth with a mix of internally generated funds and traditional bank lending? Then I would say let’s get started.

In this environment, a traditional PE firm can develop a very profitable strategy around hitting 6-8 out of ten doubles rather than 1 out of 10 home runs. Family offices with their longer investment horizon and flexible financing structures should thrive. This would leave the search for the next unicorn with the increasingly heavy front-end investments to the true venture capital firms that are structured on big risk big reward strategies.

A final note. Whenever I would discuss future trends with my late father, Angelo, he often ended the conversation with the same phrase “It could be and then again….maybe not”. Always something to keep in mind when predicting the future.

John Geocaris
Managing Director
New Food Strategies