Over the past three to four years, investors have been much more circumspect about the ability of consumer businesses to grow. This is showing in the value of deals, and where those deals are happening.
Deal value fell 32% quarter on quarter in Q1 2023. Meanwhile, capital raising in BTC and DTC has become more polarised around the consumer health and petcare sectors. Investors are particularly keen on companies that have demonstrated they are seen as broad consumer staples and not just a part of selective discretionary consumer spending patterns. In conjunction, some investors are also looking towards B2B to reduce direct consumer exposure, while some DTC businesses are adopting an omnichannel approach to broaden revenue streams in the current market.
There is no place to hide for propositions that are failing to gain consumer traction quickly. The march of premiumisation and value-focused brand propositions have created a polarisation in the market, and there is a sense that being in the ‘muddled middle’ is not a strong enough position to sustain a brand’s growth in a flat market with low consumer confidence. Therefore, what sort of brand propositions remain targets for investors?
Firstly, creating a resilient business model that meets a true need in the market may sound obvious, but we have witnessed numerous consumer propositions that have launched without core consideration for funding a model to profitability.
The lure of the permanent low-interest-rate environment had, until recently, made the price and cost factors in any model less important. That has now changed irrevocably, and whether your business has enough cash for a period of six months is a key consideration when fundraising. If this doesn’t happen, it might be problematic – and other considerations will have to be made. Are we at the end of the ‘extend and pretend’ model? Yes, I think we have seen the end of that.
Secondly, profitability is the all-important, non-negotiable metric for investors in evaluation – not just growth at any price, as growth accompanied by low and persistent margins will not attract investors. The particular emphasis is now on gross margin and EBITDA. This could prove challenging for certain sectors, such as the plant-based sector and meal kits.
Thirdly, is there a specific point of business growth and development when a sale should be considered? It’s worth exploring all options, including a potential exit, as any additional capital injection would require significantly more future returns on capital and may risk further dilution of an owner’s stake. A good advisor can help explore different options, including an exit. It may be the most viable option as opposed to an ‘I must exist at all costs’ approach – the essence of emotional attachment to a business in a very tough trading environment.
Debt raises and internal rounds are also becoming more popular, as they offer a way to avoid external valuations impacted by market conditions. Other options include consolidation, mergers, and combining with smaller businesses with significant synergies and scale. A commercial partnership, or B2B partnership, with potential eventual buyers for cash/profit could help demonstrate the commercial viability of some of these businesses and also demonstrate the rationale for an eventual acquisition.
Owners may start a business with a survival-at-all-costs mentality. But they should evaluate fully where the business is in its stage of development, and whether it can achieve the most important factor: growth.
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