Raise a round: why CPG founders can be cautious with venture capital

Woman raising a round for her company (old man with capital included). We searched stock photos for “woman with investors” and this is, tellingly, the image that came up.

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Raising capital at a large valuation, especially in the consumer packaged goods (CPG) industry, can seem like a win, but it often comes with significant challenges. Here are some concerns and reasons why this can lead to a negative experience for all stakeholders chasing growth big and fast:

1. High Expectations for Growth

• Unrealistic Revenue Targets: Investors will expect the company to grow rapidly to justify the high valuation. This can pressure founders to hit aggressive milestones that may not align with realistic market demand, operational capacity, or the pace of CPG development.

• Focus on Short-Term Metrics: To meet these expectations, CPG companies may prioritize short-term revenue growth over long-term brand building or sustainability, leading to decisions that may damage the business in the long run.

2. Difficulty in Future Rounds

• Down Rounds: If the company fails to meet the high growth expectations, it might struggle to raise the next round of funding at a higher valuation. A down round, where the company raises at a lower valuation than before, can damage the company’s reputation and lower investor confidence.

• Dilution Risk: A high initial valuation can make it harder to justify further equity raises, and in the event of slow growth, existing investors might get heavily diluted in future rounds. This could also negatively affect founder equity stakes.

3. Overvaluation Risk

• Market Corrections: The CPG market, particularly for trends like health, wellness, or sustainability, can be volatile. Overhyped categories (e.g., plant-based foods, CBD-infused products) can experience downturns, and valuations built on these trends may not hold as the market matures or corrects.

• Over-Commitment: Founders might feel obligated to increase spending on marketing, production, and expansion to justify the high valuation, leading to overexpansion and cash burn. This can make the business vulnerable to financial distress if sales don't scale as expected.

4. M&A and Exit Challenges

• Acquisition Misalignment: A high valuation can make it difficult for the company to be acquired, as potential buyers (like larger CPG companies) may see the price as too steep. High valuations can price companies out of strategic exits, leaving them with fewer options when looking to sell.

• IPO Complications: If a CPG company chooses to go public, a high private-market valuation may not be supported in the public markets. This discrepancy can lead to stock underperformance post-IPO, causing reputational damage and disappointing investors.

5. Operational Strain

• Pressure to Scale Prematurely: Raising a large amount of capital at a high valuation often results in pressure to scale rapidly. However, scaling too quickly—whether through new product lines, geographies, or retail partnerships—can result in operational inefficiencies, quality issues, and strained supply chains.

• Diluted Focus: To meet high growth expectations, companies might spread themselves too thin, trying to enter multiple channels or categories, which could weaken their core competencies and brand identity.

6. Investor Control and Governance Issues

• Tighter Investor Control: Investors putting in significant capital at a high valuation will likely demand stronger control over the business. This could result in board seats, veto power over key decisions, or other governance mechanisms that can limit the founders’ control and flexibility.

• Exit Pressures: Investors at higher valuations often have greater pressure to achieve liquidity. This can push founders to aim for an exit earlier than they may want or in a way that may not be ideal for the business’s long-term success.

7. Talent Retention and Morale

• Compensation Expectations: High valuations can set unrealistic expectations for employees’ stock options or equity packages. If the company fails to live up to its valuation or if there’s a down round, employees may lose faith in the company and leave, leading to talent attrition.

• Cultural Strain: The pressure to perform at a high valuation can create a culture of stress and urgency, which may impact employee morale, leading to burnout or high turnover.

In summary, while raising at a large valuation provides significant capital and signals success, it also sets high expectations, can increase risks around growth, and limit future flexibility. For CPG companies that often require time to build brand loyalty and optimize supply chains, the pressure from a high valuation may lead to decisions that undermine long-term success.

So, those of us in CPG looking to leverage steady growth achieving sustainability and social impact goals with the intention of creating a true legacy brand, we can proceed with caution when it comes to capital.

Editors note: AI tools supported this content creation, but it was triple checked by humans for accuracy and authenticity. Thanks for supporting small business growth at AWIA. Together in change — Ange