Consumer Brand Growth and Capital Planning: The BRĒZ Story

Introduction

0:00All right, so I have a I have a pretty interesting next conversation coming up. So it'll It's not as heavy as I think it'll be, but it is definitely it's definitely different. And I've I've been having this conversation with Brent for a long time, and so I'll let him do a proper introduction. But we Actually, I think it's better to do the introduction so I can then tell them what they're about to walk into. >> Perfect. Hey, can everybody hear me?

0:23Perfect. I think this thing is on. Hey

Meet Brent NP Capital

0:24everybody, my name is Brent. Thank you, Nick, for having me. I'm one of the partners at NP Capital Advisors. We're a lower middle market advisory firm that helps consumer products businesses with a bunch of different things ranging really from hey, I'm thinking about selling my business to hey, I'm in this sticky situation, how should I think about it? And the reality of those different ends of the spectrum is they generally go hand in hand, specifically in product-based businesses. And I've been working most recently with Nick and his team. And we thought it would be a great conversation to kind of, you know, help everybody else understand what what is the art of the possible and what can be done when they start thinking through capital solutions and alternatives.

1:09>> Cuz I'm in a sticky situation. And there is And I know I know this is being recorded and then Brent pull it pull the mic up next to me and closer. I know this is being recorded. I'm totally okay with sharing all these things, and I think this is therapeutic for myself to have this discussion for you with you in front of you guys. And I think there's a lot of things that can come up here. So I'm

Brez Growth Then Drop

1:28going to I'm going to paint this picture, set the scene, and then we're going to walk through what had happened. Breeze, we just celebrated our third year on 4/20. Year one, just under 4 million. Year two, 28 million. Year three, 48 million. Don't Don't yet. I appreciate you this. Your what what we are planning to do this year is 25 million. What happened? This is the sticky situation that Brent has found us in. There's a lot of things that we are staring down. A couple of gentlemen in the front understand like there's regulations that our space plays in. Do you Does everybody understand what what Breeze is and what we're what we're selling? We have a hemp-derived THC beverage that lives in a gray area that has been approved for a period of time under the hemp bill. There's an act that allowed us to sell 0.03% weight of THC in a in a like that's why you have gummies, that's why you have beverages, that's why you have a whole assortment of things. Well, when this started, we

2:27were very, very good, probably if not the best at digital marketing and advertising from an offer perspective in our category. And I've been doing this long enough to know that like I know how to grow, I know how to scale. What I don't know how to do is run a goddamn beverage company. And build the infrastructure around from negotiations, and get rates, and all these other things that you as a partner or someone in supporting a brand does.

2:53And so what was what was really difficult was the fact that last year we found an offer, and I wasn't joking. We worked with Brandon Fink, and we went from spending a hundred thousand a day to four hundred thousand dollars a day in a matter of a period of time,

Retail Expansion Cash Crunch

3:09expanded our SKUs from three to eight, did a nationwide rollout in Sprouts, as well as launch retail in July in July, and did a price reduction. One month. We didn't have the foresight to understand cash flow constraints, nor do we understand what could we could have done from a team scalability, and actually what needs to be done. How many of you guys have retail distribution right now? Okay, how many boots on the ground do you need in your specific regions to continue to make sure that the shit's on the shelf? And I was joking like see a can turn around again. Like it's very important to be in market and move this, but you need a lot of money to do it.

3:45The only money that we ever raised was Was it less than a year ago? >> Yeah, correct. Very very small amount. >> And I was doing tweet to LinkedIn posts. We got $3.5 million doing so. Probably not the best way you could have done it when especially year two was $24 million. Probably should have done it at that point. So, this is where I have to set that scene to explain what had happened because this is why this conversation is extremely important.

4:07Yes, it's very real. It's very somber. But, I'm still very proud of what the fact that we could have done cuz last year we were actually pacing for $78 million. So, how do you go from 24 potentially 78 and then end at 48. Now, we're going to reproject to 25 cuz that's probably the realisticness of our business. I've set the scene a little bit. Where do you Where do you want me to like kind of dig in on that?

Cash Flow And Capital Timing

4:27>> I mean, all the things that you described is just complexity. And all of these businesses are extremely complex, right? So, you know, I would I would say it's a little bit more, you know, elevated and optimistic than what you said. $25 million business is still a great business, right? But, when you go from $50 million to $25 million, right? There's a lot of things that need to change. You need to change quick to make sure that you can right the ship and make sure that the business survives over a longer period of time, right? I think when when we come and we help companies think through cash flow specifically, right? Cuz these are always driven by cash flow and capital partner conversations, right?

5:06You see it You see it really happen all the time in consumer and product businesses, right? Where a business, you know, catches fire. It grows super super fast, right? And when you have that lightning in a bottle, you think that you're unstoppable, >> We did. >> Right. I mean, this is literally a tale as old as time. You think you're unstoppable. and you do see success stories where companies are unstoppable. But, ultimately, it's that inflection point where you need to take a step back and say, "Okay, everything is working today, right? Who are the relationships and who are the capital partners that we need to bring on today to make sure that we're properly capitalized and that we can grow successfully over, you know, an extended period of time because things are constantly changing and these consumer product businesses are extremely capital intensive.

5:51Right? So, as you as you think through, you know, where your business is today and say, "Okay, how where am I a year from now? What capital partner do I want to bring on who's going to be sure that, you know, we are able to achieve those goals a year from now or 2 years from now? Right? Because it's constantly changing. So, you know, where I would where I would, you know, slightly push back on on on on Breezes is that it's a phenomenal company. Even today it's a phenomenal company. It has the best product in the market. Right? It's just a question of, "Okay, so, you know, a year ago when you guys were doing, you know, extremely successful DTC business and you said, "Okay, now we're going to go into retail." Right? At that point the question is is, "Okay, we're going to go into retail. That's extremely capital intensive.

6:34Who's the right retail partner who's done it before that we can partner with to make sure that the roll out is successful?" Right? So, you know, what I see generally in my business every day is is just a it's just a timing function in making sure that you're putting, you know, the future of the business you're thinking about it 12 months in 12 months before you before you really need to capitalize on it. >> Well, cuz I I sat here and go, "It's not I'm not sad about the trajectory where it's going to go." Like to Yes, from 48 to 25, but I kind of felt like we were probably a 25 last year and we could have been 40 this year. Like we should have done another year to establish ourselves in the retail expansion cuz it's the payouts of Shopify and we are a subscription-based business with a very sticky LTV. Like as soon as people realize that you can get marijuana delivered to your door and then you can get that and drink it,

7:22they're not going to really leave you. Funny, right? You sell these people drugs, they're going to stick with it. but then you realize, well, you actually have to there's flavor and there's taste and there's a lot of people that need different flavors, different tastes, different effects. And then you also need different flavors, tastes, effects and there's different markets that want different specific things and there's different strengths on those different effects and there's different education needed on those different effects and and there's a cadence. Who would have think if you're going to sell someone an eight-pack every single month that they're probably going to want to come back three or four times within that month because the the cadence of which they're they're buying that. Like so there's a there's like logistics around when you put the right offers in front of the right people, but if I can't do that from a cash standpoint and then also balance retail growth, a lot of these retailers, they want us to have a digital first presence. Like they're

8:10telling us if we're going to launch an HEB, what is your retail and digital what is your digital to retail program? And if we don't have the money to push this, it's never going to work. So you when you saw this on on us going to retail and you've been pushing back on on Dewey and and the guys are like what does trajectory really look like? Cuz you're actually asking us about our non-infused side of the business because of regulation.

DTC Versus Retail Economics

8:32>> Your non-infused side of the business and really it all again it always comes down to cash flow. Right? I think, you know, when you think about direct-to-consumer businesses, they're they're great because of two specific things, right? Number one, you're not sharing margin, right? It's it's your product margin and then number two, you're getting the cash tomorrow, right? So those are two amazing things about direct-to-consumer e-commerce businesses. Right? But ultimately, you know, in most, you know, different types of consumer businesses, it's direct-to-consumer and then there's a retail push, right? And it's making sure that you do the retail push correctly because all of a sudden when you go into retail, you have all these retailers in your pocket. So so what does that mean?

9:14So most of the time you hear businesses that are super excited when they when they get that Walmart or that Target first PO. Like this is amazing, we've made it. Okay? But rarely have they thought through, okay, what does this mean for my business and my cash flow because they are really just thinking about I saw it work on the D2C side, my cash flow worked phenomenally, I'm I'm getting all this money and I'm getting it every day, right? All of a sudden you're talking about okay, I'm splitting my margin with the retailer, right? Cuz they're they have to make money, too. Right? I then have to pay them slotting fees. I then have to pay them promotions to sell the product. And then oh by the way, if it doesn't sell, you know, they they charge me back for all the product. So, you know, it it really comes down to in every one of these businesses, they're extremely capital intensive. You really need a line of sight to your cash flow and how

10:04quickly the money's coming in versus where it's going out and how you can accelerate that such that you can constantly be making me making new and better bets, right? I would say in in the case of of Breeze specifically, you know, what you see is it's a phenomenal business from a capital efficiency perspective. It grew lightning fast and, you know, I I think we'll still, you know, grow again on very little capital raised, right? But what as you think about okay, so in consumer, right? We always me my partner and I always say, if you're not growing, you're dying. And in consumer, growth is really driven by capital, right? Who's giving you the capital? You know, where's it coming from? How frequently are you getting it?

10:46Because, you know, you could be good today, but the product or but the product in the market is constantly evolving. So, tomorrow, you know, we're first to market in the case of Breeze with this THC product. Best in class, first to market, super super buzzy, right? But then everybody else, you know, it's like everything in life. If something's working, everybody else is going to come into the market against you. So, you have to constantly innovate. Innovation costs money, costs capital. You have to buy new product.

11:11You have to test new products. You have to fulfill, right? And now you're doing it online and in the retail shelf, right? So, you know, I always we always tell our clients and partners when they think about, you know, how they're running the day-to-day business. When you're founder and you start a business, you really want to focus on making sure that business works, right? You're in the day-to-day, you want to make sure that your team is, you know, focused on the vision and works, right? But as you scale and as you grow to the five to the ten million dollar, you know, scale, you start needing to put on a second hat and having a second job. And what is that second job? It's constantly raising capital, right? So it's I'm running the business and now I'm raising capital, too. And you need to be having the conversations with capital partners way before you actually need the money so that when the time for for raising money comes, they're up to speed and they're ready

12:05they're ready to partner with you. So, you know, it it's it's this constant evolution of a business and and just making sure that your timing sequencing correctly.

Debt Versus Equity Partners

12:14>> Talk about the capital partners cuz we we've used Talk about it first off, talk about the the capital partners that we have we are using and used, and then where we're looking for next. Can you talk about it real quick for them? >> Yeah, that makes sense. So, I think, you know, >> Cuz we are secured debt. >> Yeah, yeah. I mean, I I I'll I'll I'll definitely get there, but I think what what we see most and when founders start businesses, right? They put their heart and the soul into these things and rightfully so. There's there there's some level of of just will that needs to happen to to take something from zero to one, right? And if you start thinking about capital partners, I'm sure all you guys are are founders and you see it all the time, you you see these offers in your inbox all the time of oh, you know, these offers of oh, you can have non-dilutive capital. Oh, you know, take this debt offer. Oh, you want to keep

13:02all the equity, right? But part of really scaling these businesses and taking them to where they they need to go is is managing that that anti-dilutive capital, which, you know, is a nice way of saying debt, right? With a de-risked equity partner that can help you and continue to back you till you get to the point where you're self-sustaining and sufficient, right? So it it's, you know, most of the time when you have something that's working and that it's growing fast, it's so easy to just take that that that debt capital, that non-dilutive instrument. Like, I'm going to keep the the entire pie and you know, it it's working and and and I don't have to think about anybody else, right?

13:43But you but it what I would challenge everybody is is to shift that thinking and say, "Okay, you could take that approach, but a safer more de-risked approach is saying, 'Okay, my business is working, who has done it before and how can they help me take the business to the next level without excess risk?'" Because what we see too many too many times is it's, you know, once you get once you get hooked on on the on the debt on the debt we call it the debt drug, right? It's really tough to get out of it because, you know, ultimately at the end of the day, they're the first people who need to get paid and they all the cash flows of your business should be going into growth, should be going into product innovation, should be going into inventory and now you're stuck paying these super onerous cash flow sucking things that that just don't don't work in the context of CPG.

14:29>> Three things that are going to kill you, I say. Debt, fentanyl, and your ex-wife. >> That's [laughter] true. >> I don't know, I've never said that, but that those they definitely could. All three definitely first and all of them together could definitely do it. This is this has been the the the the the the most stressful like, I'm not a CEO, I'm not a I'm not a founder on this. Like, I'm I'm a early partner in Incredible at Growth and Operating kind of guy. And so when I have guys with great large visions come in and be like, I know we could do XYZ and I go, "Okay, cool. but how much money do we have to play with?" Because the speed The difference between a team that has a lot of money and the team that has a little bit of money is the speed at which they learn.

15:08The faster you can learn, the faster you can get to profitability, but you need the cash early to play with. We went with debt early. We had I think we had what? Wayflyer? >> Yeah, I mean yeah, it it was messy. I mean,

Regulation Shock And Pivot

15:24>> [laughter] >> it was it was messy, you know, but but you know, ultimately, you know, if I take a step back, like I think it would be it'd be important to kind of talk about, okay, so when when when you when you have a business that is doing $50 million of of revenue and you and you and you overnight have a change of regulation, right? That's that's extremely challenging because because you have to think about pivoting the business while while it's going. So, you know, you're effectively in a moving car.

15:52>> So so so for context, regulation. In November of this year, we may or may not lose the ability to sell our core product forever. That hit us last November. >> Exactly. Right. So, so there's there's there's when you when you deal in a reg- a regulated industry, right? In the case of Breeze, you know, cannabis and THC, it's you're you're you're sort you're sort of at the mercy of the regulatory structure, right? Which was working until it wasn't, right?

16:22And then, you know, when it wasn't, the car the car is already moving, right? So, you're you're kind of, you know, building building the car while it's while it's in while it's in motion, right? So to speak, right? So, it's it's it's taking a pause, right? And doing a real assessment of like, okay, what is the future of this business look like and how do I pivot it, right? And and I would say most of the time founders and operators, you know, are are constantly just, you know, focused on this is where we're going and they don't stop to take a deep breath and pause and say, okay, how do I need to re-pivot the business, right?

16:56You know, in the in the context of of of what we were working with, right? Breeze is a very successful business. It will continue to be successful, right? What what was challenging is is is is you literally had to change the business ultimately overnight, right? Because you don't know what's going to happen next November, right? Is is THC going to be allowed to be sold direct to consumer, you know, in retail or is it not, right?

17:18So, you know, you pause, you take a deep breath, you take an assessment of what does our cash flow look like, what does our business do today, right? And how do we change the capital structure to align with with with where we're with where we're going, right? So, that's why we always encourage founders and and owners early on once they and I and I can't emphasize this enough, once you find something that works, start talking to equity equity equity and investors who've done it before or very early, right? No capital ever comes into a business fast. This is always excruciatingly slow, right? And we're talking like months, right? You you may need it tomorrow, but no sophisticated investor is going to give you money tomorrow. It's going to take months, sometimes years of continuing to interact with them, communicate with them, share information.

18:06and and a lot of this may may sound like super obvious, but as you're focusing on so many things running a business, right? It's tough to lose sight of that. You have to bring people along for the journey. Right? So, you know, you know, I you know, the the one piece of feedback aside from the fact that like, you know, it you know, it when you're thinking about capital structure, is that you obviously want to have investors who've done it before because if things change, like in the context of Breeze, the regulatory regime changed, right?

18:38Having a long-term partner and investor who's done it before allows you the runway to really stop and think and say, "Okay, this is how we're going to pivot the business because that investor believed in the people that they invested in and are going to give the capital and the runway to allow the pivot, right? If you don't have those partners early, it becomes really really hard if something changes so substantial as a regulatory regime. >> Yeah.

19:05It's a lot. It's also heavy. Does anybody like anybody in has questions for Brent, myself on like what you're potentially going through, debt stack movements, and any changes. Obviously, personal and case-by-case. So, I don't think anyone's going to like jump and raise hands to ask questions on this. But, I just I wanted to have this conversation so that it kind of paints the picture of growth is incredible, especially if you know you can do it. And we we in this room have a very unique skill of growth. And a lot of other investors and partners don't get it necessarily what it is that we do.

19:34And it is leverage of when we're going to go find capital. Or it is that we do have leverage of when we're going to go and and potentially look for another partner, whether it's a manufacturer, whether it's a canning, whether what whatever we choose to do on the brewery side. But, it is something that we we definitely would have taken way more serious way earlier on. Anything from

When To Raise Capital

19:51So, like on the brands that are like 1 million to 5 million a year where like, "Oh something's starting to work." Where do you think about from a debt partner something because we we went immediately to these different type of partners Warby Parker, whatever it is. But, what what is the thought process for those that like they want growth capital, but they don't necessarily need to go debt? Or maybe they do. >> Right. So, that's It's It's always the circular question, right? But, in the early days, right? It's If If you're talking about sourcing capital and where it's going to come from, right? When you're a brand that's doing, you know, between zero to five million dollars of revenue, right? It's It's generally going to come from personal funds or friends and family, right? But, you know, these businesses are so variable and they and they turn on a dime, right?

20:33So, we we generally, you know, see and say, "Okay, if you're going from zero to five million dollars, again, it's yourself, it's your friends, it's your family who believe in you, right? Most of the time they believe that they're just, you know, giving it to you as a gift or, you know, they're never going to see it again." Okay? Once you hit that five million mark, right? That's when you need to really start thinking about, "Okay, I have something that's working. It's working generally pretty fast.

20:57You know, who do I want to partner with long-term to make sure that the business continues to work, right? Because again, these these businesses need endless amounts of capital. You know, I think most of the time you you see and you hear, you know, founders who think that they can just bootstrap these things and I'm not saying you can't. You can absolutely bootstrap. But, in general cases, you need to partner with somebody who's done it before who can help you get to the next level. So, $5 million you're you're going to be you're going to generally be looking at angel investors, high net worth individuals in the space who've had successful exits, right? But, you need to at that point be talking with the larger folks. You need to find a way to get in front of them, to network with them because once you start getting that $10 to $15 million mark of revenue, right? That's when the the large players are going to start being interested, right? And you need to have been in front of them. You need to been

21:46having those conversations. You'd been showing them data, right? Because for them to get under the hood, right? They're very bureaucratic. It takes a long time for money to come in. You need to be having those conversations. You need to get their attention early so that when you're there and you say, "Okay, we we're working. We're growing really fast. Now's the time for you to come in." Right? There's some sort of there's some sort of impetus for them to feel like they're going to miss the boat, right? Nobody likes to do anything because they feel like they're forced.

22:13They want to they they they you you want to be able as the founder, as the operator, you want to be able to have people chasing you, not the other way around. It's just like anything else in life, right? So, you know, generally, you know, zero to zero to five it's going to be your own money, your friends and family money. Five to 10, angels, high net worth individuals. And then over there, over $10 million, you it's again, it's going to be institutions, sophisticated investors, but you need to be having those conversations way before you hit those revenue targets.

M&A Market Read And Wrap

22:41>> So, you obviously saw Gruens have a pretty incredible outcome and there's been a handful of Huel and and other ones. What's your read in the market right now? I feel like more transactions have been happening and people's appetites are a little bit hungrier for this. What is your read? >> Well, you've had Well, it's it's it's kind of two things. I think in Gruens, I think that was a a second time founder, right? I think he'd done it before, right? So, he had the connectivity, he had the networks. He probably did all these things that, you know, I'm I'm talking to you about maybe naturally or unnaturally of he had the network, he was having the conversations, and that product specifically, you know, is amazing because it's almost like a supplement, right? It's really, you know, it's really cheap to ship it. Like, the fulfillment costs are low, you know, he he grew really fast. He everything he did everything everything correct, right? And you see that more so with repeat founders than first-time

23:31founders. First-time founders, it's it's it's much more challenging. As far as just general M&A and deals go, right? You know, we've had this whipsaw in, you know, in in geopolitics and and capital markets, right? And it's it's taken its toll specifically on small CPG businesses, right? Because >> Size like what small? >> I mean, it's small small is like anything under 100 million bucks, believe it or not. I mean, you know, >> Size does matter. >> mean, anything under 100 million anything under 100 million dollars is is is generally pretty small. I mean, you know, you can you can, you know, on your P&L show a profit, right? But is it really a cash profit? Because you have all this money now locked in working capital. You have all this money, you know, that you may, you know, now owe out in in in in in a number of things that we can go through in depth, but you know, when when capital markets change or inflation inflation dynamics change or the consumer changes, right? These all

24:28have a direct impact, you know, really on this specific industry because, you know, it's ultimately the people the the people the consumers who are who are supporting these businesses, and they're the most fickle of all, right? And I'm sure you guys can appreciate that. >> No, I feel that.

Final Thanks And Q&A

24:45Any other if if not, I'm going to send Brent upstairs. He's a whiz even just answer some questions just give you peace of mind. So, from bottom of my heart, I wasn't able to tell you this personally, but thank you for helping us through this. We're almost there, so thank you so much, brother. >> Thank you. >> [applause] >> Maybe it's me.