Rollups – How to Build a Modern Day CPG

When I was at Jarden (now Newell Brands), we always had clear acquisition criteria when it came to M&A. 

  • Strong cash flow characteristics
  • Category leading positions in niche markets
  • Products that generate recurring revenue
  • Attractive historical margins / or margin expansion opportunities
  • Accretive to earnings
  • Post earnout EBITDA multiple of 6-8x

This strategy allowed us to grow from one brand (The Ball Jar company in 2002) to over 50 brands and ~$8b in sales by 2015 when the company merged with Newell Rubbermaid. 

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Venture Debt & Revenue Based Investing

If you have a small but growing business selling on Amazon or even direct-to-consumer (D2C) you’re bound to hit a point where you require money to scale. For as much as the media talks about venture capital, the reality is that less than 1% of startups here in the US are able to raise money from VC’s. The challenge, however, is that consumer brands often have working capital needs associated with carrying inventory or affording increasingly expensive paid media.  So where do these types of businesses get the cash to grow? Traditional lenders, such as banks, often have strict covenants in their terms and have not historically catered their products to this cohort, but a growing number of new, innovative solutions are disrupting the model. I should note that pre-revenue/pre-product startups are likely not going to be a candidate for institutional debt – but a convertible note, SAFE or crowdfunding remain a viable alternative at this early stage. As a side note on crowdfunding, the SEC recently increased the cap for fundraising via this channel to $5m (from $1m) which I suspect will open up more activity in this space. 

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A Rising Tide Lifts all Ships

It’s true innovation when a business builds something for themselves and then realizes there’s a potential application beyond internal needs.  

Take, for example, a company like Apple that started predominantly as a hardware company making computers and other peripherals. Years later, when they created the App store it was originally conceptualized as a platform to deliver programs directly developed by Apple. But they realized that there was a much bigger opportunity here to create a marketplace model and the App store of today was born. In 2019, this line of Apple’s business contributed over a half a trillion dollars in billings and further reinforces the stickiness of their hardware business. If Apple had kept this ecosystem truly closed for fear of losing control, then their market penetration would be significantly less.  

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Alibaba – An Alternative to Amazon

As Amazon took off here in the US, another similar startup business took its sights on the Far East.  Alibaba may look similar to AMZN but under the hood they are very different. While AMZN handily beats BABA on top-line, BABA  wins by a large measure on opex margins. This is inherent in their business model which is more similar to Ebay than to AMZN. Whereas AMZN primarily owns warehouses and inventory, BABA is lighter and collects a merchant fee as a middleman between buyers and sellers.

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