Thread by @ryan_caldbeck

1/ Consumer industry pros have remarked that there are more emerging CPG funds today (focus: <$15m revenue) than there were 5 years ago. While true, this has been part of a pattern that has existed for a few decades. Here is how it will evolve.

2/ Consumer has long been an area private investors have loved. The vast majority of capital historically has come in the form of private equity firms -typically >$100m AuM, writing >$10m equity checks into companies with >$15m in rev.

https://twitter.com/ryan_caldbeck/status/1138094605285543936

3/ Some of the most successful buyout/mid market PE funds got their start investing into what would today be considered venture or growth equity deals.

Let’s set the table first with a few examples…..

4/ 80s to Mid-90s: TSG started as 'The Shansby Group'. First fund was ~$50m in AuM. It did very well and it scaled from there. [Oh – Chuck, one of the founders, was mid 20s at the time…..we’ll come back to that]
tsgconsumer.com/news/tsg-consu…

5/ Roughly the same time, Catterton (then Catterton-Simon) started with an $11m fund. Fund II was $50, Fund III was $100m. Today they manage >$5b. The founders didn’t have particularly deep background in consumer…..
en.wikipedia.org/wiki/L_Cattert…

6/ Early 2000’s: Castanea started in 2002 with a $75m fund. It did well and guess what? Today they manage ~$700m.

7/ So what happened in each case? The smaller investments of these firms did super well. Then the firms were able to raise larger funds. They did. Those funds needed to be deployed………and here is where I think it gets interesting.

8/ The GPs of the larger firms discovered it isn’t economically viable to write a ton of small checks in CPG. 'Lots of smaller checks' works ok in tech because a) geo density (SF/NY), b) ton of infrastructure (i.e. @ycombinator & @TechCrunch to help investors & co's connect.

9/ A GP at Sequoia can take 10 meetings a day, every day, fairly easily. In consumer it is flying all around the country to find deals that each took months to uncover.
That’s fine if you run a $50m fund and need to write 10-20 checks. Hard to make much $, but you can do it.

10/ Today the ‘rumor’ is that fairly recently TSG had >15 “finders” on retainer. Finders are people that just cold call the companies for the investment professionals. Note they also have a few that work full time at TSG.

11/ On top of those external finders, for which they pay 2x Lehman, TSG at one point was also offering to also give out a free @Porsche 911. Why? because they wanted to see the deals first and they figured a Porsche was more memorable than just cash.
en.wikipedia.org/wiki/Lehman_Fo…

12/ So imagine a world that it is so difficult to find deals that you’re doing all of those things (and much much more). Imagine Benchmark doing this.

Now in that world, if you find a good deal….you have to write a large check to make it worth it.

13/ Can the $200m fund trying to fly around the country to write 40-80 separate checks? Fly to a trade show like the disaster Expo West is, learn about a company and then fly to another state to go visit that company. And at the end of the rainbow? A $2m investment.

14/ Do you know a lot of great investors that would sign up to do that for 10-15 years?

15/ So the GPs just focused on writing fewer larger checks. That’s the natural evolution of consumer investing. Raise small fund. Do well. Then raise larger follow on fund. Move up market. Repeat over and over.

Here are some more recent examples.

16/ Alliance Consumer Growth. First fund was $43m. Today they manage ~$350m. The founders, Josh and Trevor, have become two of the most well respected mid-market private equity consumer investors on the planet.

17/ ....Both were also relatively new to consumer when they launched the debut fund in 2011. [Try googling their backgrounds if you don't believe me]

Didn't matter- they have crushed it.
forbes.com/sites/amyfeldm…

18/ Sonoma Brands' first fund was ~$12m ~2016. By some accounts they are already on the third fund - about $100m (total AuM = ~$190m). Founder Jon had a successful exit from Krave ($225m to Hershey). He saw how attractive emerging consumer was as an asset class.

19/ CAVU in 2015 planned to make venture investments out of their first $156m fund. They just found it really hard to write small (<$5m checks) out of a fund that size. Some of their investments did really well and two short years later they raised another $209m (Total AuM $365m)

20/ As each cohort of consumer firms does well, they raise larger follow on funds and move up market- writing larger checks into large companies. That creates a vacuum new firms can fill.

21/ A tech equivalent would be if all Series Seed, A, B funds moved up market after 1-2 funds and only focused on growth stage and pre-IPO companies. It constantly opens up the market for someone else to come in, build a brand & track record.

22/ There are a few things that students of investing should observe from this pattern.

23/ First, as the founder of one extremely large quant hedge fund told me once:

“Do you really think that every investor in this space is incredible? Or perhaps the beta in emerging consumer investing is just really damn good.”

24/ Second…..imagine if you’re an entrepreneur and when you start Googling around for emerging consumer funds, a) you cant find many, b) those that you can find don’t really have a track record.

25/ Those that had a successful track record left the party- they went to go focus on mid-market PE, abandoning the smaller deals. That’s not VC and not very helpful to the emerging consumer brands.

26/ The funds that will actually invest into emerging consumer brands today a) don’t have much of a brand, b) have founders that have little / if any experience doing the job, c) typically don’t have many resources (i.e. network, partnerships, data) to help the port co's.

27/ [To be fair I don’t think 26b matters at all but I thought I would throw it in there for fun.]

28/ Let’s recap. Beta of emerging consumer is amazing. Seems like most people that invest there have done pretty darn well (try to find 5 that haven’t). BUT…..economic barriers to participating in the market are just too high.

29/ So as soon as the firms can move to larger deals, they do.

30/ How can this be solved by an innovative GP (or LP)? Well let’s establish I don’t believe the answer is larger firms launching smaller ‘growth’ funds. TSG did that a few yrs ago and has struggled to invest. Why?

31/ Lot's of issues, but one is that an investment committee always has an incentive to focus their effort on larger checks. Throughout history the failure rate on that concept - larger funds launching internal smaller funds- is pretty high.

32/ I suspect technology will be needed to lower the cost to participate in the market, thus expanding participation in the market. There needs to be some structural unlock economically -i.e. through data, technology etc, that lowers the cost to participate in the market.

33/ Until then, LPs and entrepreneurs should expect to see a rotating cast of emerging consumer investors.

Life cycle is 5-7 yrs.