How Angel Investing has Changed in 2009

The New York Times recently had an extremely well-done article called "The New Rules of Angel Investing." I agree with everything in it as it accurately portrays what I am seeing in the market.

Here's are some snippets from the article:

Angels are still financing deals, but at lower valuations and with more specific milestones. They have grown more picky and less tolerant of risk.....There has been a sea change in risk sensitivity; the more self-sufficiency a company demonstrates, the less risky it appears.....Entrepreneurs should find ways to finance their own growth: working without salary, moonlighting, seeking grants, running lean operations and focusing on an aspect of the business that can generate revenue.

Over the past year, I have also noticed the changes the article points out. Angels will still invest, but more and more, only at realistic valuations and when they see a clear path to profitability. Many angels have been burned over the past year through the economic meltdown in their private company investments. Valuations went down; cram-down rounds occurred; VCs went pay-to-play...it got ugly at times. That said, many investments that were made are still good and above water. Capital efficient companies that have weathered the storm by conserving cash and/or getting to (or close) to profitability are doing well and are likely to be rewarded. And those that are still early-stage, loss-making companies can still get funded and are getting funded....but the rules (and valuations) are not what they were a year or two ago. Passive angels (what's the price?) are more and more becoming active (I'll tell you what the price and terms are). For angel returns, this is not a bad development. For companies, reality may not be a bad thing as well. We all know, that above everything, cash is king and capital is good.

Comprehesive One-Day Seminar on Financing Natural and Specialty Products Companies & Networking Event

Early Bird Reduced Rate expires on Oct. 27th

Royal River Associates and The Natural Products Consulting Institute have organized a comprehensive one-day seminar on Financing Your Natural or Specialty Products Company to be held on November 10, 2009 in Burlington, MA.

Getting your company capitalized is perhaps the most difficult, time-consuming and frustrating part of building a business. This full-day workshop will serve to demystify the terms and process, while providing insights and tips on how you can improve your odds of successfully obtaining financing.

You will hear directly from industry-leading entrepreneurs who raised venture capital and then grew and sold their companies, investment bankers, venture capital investors and other industry experts.

Topics include:

• Determining your financing needs;
• Expected presentation materials (PPT, model, business plan);
• Structuring deals and negotiation tactics;
• Understanding term sheets;
• Issues and trade offs with Friends and Family rounds, angel investors, debt and venture capital;
• Working with investment bankers;
• Building value in your company;
• Valuation methodologies;
• Exit stratiegies;
• and more....

The seminar Will be led by Bob Burke and Michael Burgmaier.

Bob Burke is co-author of The Natural Products Field Manual, and The Sales Manager's Handbook. Bob is a consultant in the natural and specialty products industry and former VP of Sales and Corporate Development at Stonyfield Farm. Michael Burgmaier is an investment banker in the food & beverage / Healthy Living sectors.

Special guest speakers will be:

• Pete Lescoe, Founder and CEO, FoodShouldTasteGood
• Nancy Rosenzweig, former CEO, The Natural Dentist
• Nicolas McCoy, CFA, Managing Director, Silverwood Partners Investment Bankers;
• David Thibodeau, Managing Director in Canaccord Adams' Investment Banking Group; and
• Andrew Whitman, Managing Partner, 2X CONSUMER PRODUCTS GROWTH PARTNERS.

The seminar will be help on November 10, 2009 at the Hilton Garden Inn in Burlington, MA.

The specialty introductory rate is $599.

• If you register by Oct. 27, 2009, take the early bird discount and save $100
• Additional discounts are available for additional people from the same company.

For more information, please visit: http://npcinstitute.com/Financing%20seminar.htm to see the registration form. You are also welcome to call 978-975-9902 or email Bob Burke.

Nutrition Capital Network next week in San Francisco

The pre-eminent bi-annual gathering of companies looking for capital in the nutrition/Health & Wellness field and investors (venture capital, private equity and strategic) is next week in San Francisco (Oct. 20/21). This is the fifth full Nutrition Capital Network Event (or "NCN V" in the shorthand); I've been to the previous four and the event is always well worth it. It's a fantastic networking opportunity for both the companies and investors. This fall's line-up looks outstanding:

Snapshots of Confirmed NCN V Presenters

• $80-100 mil natural & organic packaged, prepared foods and snacks
• $30-50 mil in natural packaged snacks
• $15-20 mil bar manufacturer and international brand
• $15-20 mil in green convenience restaurants
• $10-15 mil in acai juices, smoothies and shots
• $10-15 mil unique product delivering nutrients and flavors through straws
• $8-10 mil in calorie controlled meal delivery service and brand
• $8-10 mil in organic flour and gluten-free baking supplier
• $5-10 mil in branded meats preserving heritage breeds
• $5-10 mil in natural sauces and spreads
• $5-10 mil organic & vegan casual restaurants & catering
• $3-5 mil in gluten-free snacks and baking mixes
• $3-5 mil in premium organic coffee
• $3-5 mil in natural lo-cal soda
• $2-3 mil healthy lifestyle food and supplement brand for Hispanics
• $2-3 mil sports nutrition brand
• $2-3 mil in organic and artisan breads
• $1-2 mill in gluten free snacks and cookies
• $1 mil in patented sunscreen and skincare products
• Clinically proven supplement for atherosclerosis
• Herbal supplement targeted for immunity, energy & jetlag
• Technology for unique frozen fruit & vegetable confection

Expo East Reflections - My Winners

Last week was all Boston…a Board meeting on Tuesday, Canaccord Adams Healthy Living conference on Wednesday, and walking the floors of Expo East Thursday, Friday and Saturday. Today I thought I’d provide some reflections on what I saw at Canaccord and Expo. First, everyone was talking about how much smaller Expo was than previous years. Sustainable Food News reported today that traffic was down 20%, to 21,000 people and there were 1500 exhibiting booths. In March, Expo West reportedly had 53,000 attendees. Some companies said that they had great shows while others said that the show was a relative disappointment for them. Some of the notable missing companies included Hain Celestial Group, Nature’s Path, Amy’s Kitchen and Annie’s Homegrown. In fact, with Amy’s not there, one of my portfolio companies, Rustic Crust, seemed to become the de-facto in-house restaurant. While half the booths serve food, there’s only so many cookies, raw honey, chips and drinks you can sample, so as a VP of Marketing from Stonyfield Farm put it to me, “Rustic had the only food of sustenance” at the show. It showed….Rustic sampled over 650 pizzas – about twice the normal amount. Company President Brad Sterl reported “the show traffic was good in our aisle. We had a lot of independents come by but very few chain accounts seemed to be attending. Without Amy’s at the show, we were the feeders.” Let’s hope that those who survived on Rustic for a few days (which embarrassingly included me!), turn that into purchases. It’s really good pizza…

Here are some of my favorites from the show:

FoodShouldTasteGood -- The current rock star of the industry. Founder and CEO Pete Lescoe has a terrific product, an A team, amazing growth and has stayed real to boot. My family has been buying a bag of these chips each week for almost two years….I can see that we are not alone. The chips are great (all flavors too -- mean that), but my favorites are Multigrain, Sweet Potato and The Works. Forget the Everything Bagel, The Works FoodShouldTasteGood chip is the wave of my future. Sherbrooke Capital led the company's Series A round....a home-run in the making for John Giannuzzi.

Solixir – On Saturday, I spent about an hour talking with Solixir founder Scott Lerner. Solixir is a line of all-natural, sparkling botanical beverages. The three Solixir’s I tasted (awaken, relax and restore) had 50-60 calories/12 oz can and tasted great. Solixir started earlier this year with a national launch in Whole Foods Market. I like Scott’s approach to building this brand and company – keep an eye out for this one.

Red’s All Natural – while there was a lot of focus on the

star power of Brendan Synnot whose Burrito Investment Group acquired/invested in Phil’s Fresh Food to create a new frozen burrito company (Evol -- great branding, by the way), I think the best burrito on the floor belonged to Mike Adair’s Red’s All Natural. This was the first frozen burrito I ever had that could give joints in San Francisco’s Mission a run for their money. I can’t wait until they get some distribution near me (requested it this morning…). If I have to eat in the office five days a week, there better be five Red’s burritos in my freezer….

Cell-nique – The King of the Green Drinks: 95% organic; 31 superfoods and botanical herbs. Founder Dan Ratner has a winner here. Whole Foods Market is rolling out at $3.99 (I hear that big chains tend to be in the $3.39-3.99 range, with some smaller stores at $4.99) – at the-premium end, but so worth it....my wife and I are thinking about incorporating a daily dose of Cell-nique into our regimen and for our kids….time to start buying by the case... I didn’t realize that I drank around $40 worth of Cell-nique at the show…thanks Dan. Now to begin the payback….and which flavor to choose….there were all so good….

thinkThin – When I studied for the GMATs back in 1998, I remember that my bar of choice those days was Think (it may have been a subconscious self-threat – “think already…can’t you get this right?”) But for some reason, they disappeared from my diet….distribution? Packaging? New competitors? Well, I just happened to try the thinkThin bars at the show and was very impressed: great-taste, nice re-branding, low sugar….a stand out in the bar crowd.

Putney Pasta – The new Chicken Pomodoro skillet meal is amazing. All-natural, antibiotic-free chicken, bowtie pasta, mozzarella and broccoli in an incredible marinara sauce. Outstanding. And a complete value – Whole Foods sells these skillet meals for two for $8.99. That’s only $4.50 for a true, restaurant quality meal. I’d pay $20 for an adult serving of this easily at a restaurant….and come back. This stuff is great.

Blake's All Natural -- This to me is "the Amy's Kitchen with meat" (meaning how

most of the country eats). Blake's had some great new mac n' cheese and turkey products and Chris Licata also unveiled a strong new re-branding look. This is frozen comfort food done right.

Late July – I saw CEO Nicole Bernard Dawes present at the Canaccord Adams event – this is a great growth-company story and the products are terrific. You can see the passion for organic, healthy and tasty products for children in Nicole and the brand (nothing is better than Late July on Cape Cod…). These packages will continue to show up in the back seat of my minivan for years to come….

Sweetriot – I’ve seen sweetriot at shows for years, but this was the first time I really tasted the product. You could eat an endless amount of chocolate at a Expo show, but sweetriot stood out for me. They have great-tasting products and strong merchandising. I was a big fan of the "unbar."

Guru – As they say “100% Natural..100% Crap Free.” Nothing like telling it like it is. Guru is a mainstay in the all-natural energy drink market. Now they’ve created four new SKUs – and they are good-tasting with a nice look. I particularly liked the Green Tea Iced Tea.

One Day Seminar: Financing Your Natural or Specialty Products Company

Getting your company capitalized is perhaps the most difficult, time-consuming and frustrating part of building your business.

On November 10, Bob Burke and I will be leading an important one-day seminar on how to raise capital for your natural or specialty products company. It will be a packed, full-day seminar from 9am-4:30pm in Burlington, MA (easy shuttle from Logan Airport in Boston). We'll have a lot of important content to share and we're putting together an impressive group of speakers, including industry-leading entrepeneurs who raised venture captial and then grew and sold their companies, investment bankers, investos and other industry experts.

Confirmed speakers as of 9/22 include:

• Pete Lescoe, Founder and CEO, FoodShouldTasteGood (funded by Sherbrooke Capital)
• Nancy Rosenzweig, Former CEO, The Natural Dentist (funded by Burrill & Co., and others)
• Nicholas McCoy, CFA, Managing Director, Silverwood Partners Investment Bankers
• David Thibodeau, Managing Director in Canaccord Adams' Investment Banking Group.
• Andrew Whitman, Managing Partner, 2x CONSUMER PRODUCTS GROWTH PARTNERS

WITH MORE TO BE ANNOUNCED SOON….

To sign up, please go here.

Topics to be covered include:

• How do I determine my financing needs?
• What is the best source of capital to align with my needs?
• What’s the game plan for my business and my time horizon?
• Finding early-stage capital (Friends & Family; Banks/Loan; Angel Investors/Groups; What terms should I expect?)
• Demystifying valuation (Methodologies; Understanding equity; What matters/what doesn’t?
• VC Financing (Who do I approach? And how?; Anatomy of a term sheet; What to expect when working with a VC; Control, veto rights, dilution
• Other Private Equity…
• Do I go alone or get professional help?
• Role of the investment banker (Terms, fees; Materials (business plan, sample presentation, financials)
• Creating value (Distribution; Brand Building; Building out the team; Positioning for exit; Strategic buyer or financial buyer)

Led by industry veterans Bob Burke & Michael Burgmaier, the seminar will de-mystify the terms and the process and provide insights and tips on how you can improve your odds to successfully obtaining the financing you need.

Conference/Show Week; Expo East & Canaccord Adams' Healthy Living

This is a great week for the Natural Products/Healthy Living industry in Boston this week, and I'm excited to be there. This Wednesday, Canaccord Adams is hosting their annual "Healthy Living Conference," which consists of public and private company presentations. Putney Pasta President Rick McKelvey and I will be giving a presentation on The Natural Pasta Co. d/b/a/ Putney Pasta. We'll be talking about our market-leading all-natural skillet meals. The new Chicken Pomodoro item makes its debut at Expo East this week -- if you are there, try it at the booth. Last year, Putney won "Best New Product" from New England with their Chicken Alfredo Skillet (which is now the #1 all-natural skillet meal in the entire category!).

Thursday through Saturday is the Natural Products Expo East (Boston Convention Center). I'll be there with multiple hats on: representing CEI Community Ventures' companies The Rustic Crust & Putney Pasta and working on some current investment banking deals (sell side and private placement) with Silverwood Partners. The two Expo shows (East in the Fall and West in the Spring) are terrific shows - companies display their products for buyers, and every year, more and more industry consultants, bankers and investors also walk the show, looking for clients and the next big thing....

Here are some of the companies presenting at Canaccord Adams conference:

• Calavo Growers
• Diedrich Coffee
• Green Mountain Coffee Roasters
• Hain Celestial Group
• Health Fitness Corp.
• Herbalife
• Inventure Group
• Jamba Juice (I lived off of these when I lived in the Bay Area)
• REED's Microbrew
• Schiff Nutrition
• Smart Balance
• United Natural Foods (UNFI)
• Whole foods Market
• Attune Foods
• Charter Baking Company, Inc.
• Colorscience
• Corazonas Foods, Inc.
• FoodShouldTasteGood, Inc.
• Late July Snacks, LLC
• MonaVie
• Putney Pasta
• Sunflower Farmers Markets
• The Natural Dentist
• Van's Natural Foods, Inc.

I'll write about what I see at the show and conference in then next few weeks....

If you're going to be at Expo or the conference and you'd like to connect, drop me an email at "mike" followed by "@royalriverassociates.com" ....

How to Approach a VC

Everyone always wants to know how to access venture capital:

• Can I just call?
• Should I submit my plan through a website or via email?
• Should I use a banker?
• Should I get a referral?

Just cold-calling is unlikely to work. Most calls are screened and if the VC doesn't know who you are, they are unlikely to pick up. Just like you, VCs are stretched for time. Talking to Joe I Don't Know doesn't fit into the schedule unfortunately. And if you do get through, the VC (again, like almost anyone), will likely be looking for a good segue to end the call, referring you to someone/something else. Over the transom business plan submissions also rarely do anything. Referrals are very helpful (lawyers, portfolio CEOs, LinkedIn connections...) and bankers (see below in detail) can also be a good path. I rarely punt to other blogs, but Mark Suster from GRP Partners has a great post on how to approach VCs. I suggest reading it.

I have been a VC since 2004 with CEI Community Ventures. The fund was an extremely small fund -- $10MM. We could only invest up to $1MM in any one business -- and that was over the life of our investment. That meant that our initial investment was anywhere in the $300-600K range, with the balance reserved for potential follow-on investments. We invested in very early-stage companies (pre-revenue up to trailing twelve month sales of $1MM). We did nine deals and led eight of them. That means that we priced, structured and syndicated each company's Series A round. As many of these companies did not have expertise or experience in raising capital, we often got involved with putting together the materials:

• Investor Deck (Power Point)
• Business Plan
• Executive Summary
• Financial Pro-Forma Model

As any entrepreneur knows, this is a lot of work. Then when we had the materials ready, we went to work on syndication -- in some case looking for angel investors to invest alongside our fund and also looking for other, smaller funds to co-invest with us. As the companies grew and it came time for Series B, we would update the materials and head back to the market again. Depending on the company's growth, we'd be out again looking for angels/small funds or larger funds, if the growth and capital requirements warranted it. For a portfolio company, this is a no-cost huge value add. And at times, raising capital for portfolio companies became a full-time job (ask my wife, she knows...).

One of the most-overlooked paths is using an investment banker. As a VC, I often even over-looked this option. Although no one liks to pay fees, the value from those fees (getting capital, often at one of the best-possible valuations) is huge. As I am also now an investment banker (through Silverwood Partners -- no affiliation to this blog though), I can readily see how this makes raising capital much easier for companies. When I talk with companies, they typically may know 5-10 potential funds that fit their needs. Natural products companies know Greenmont Partners, Sherbrooke Capital, Encore Consumer Capital, VMG Partners and perhas a few more...then their well begins to run dry.

Over the past five years, I have developed a database that now has over 200 organized funds, family offices, and "pass-the-hat" investment groups that invest in consumer-based businesses; and when I work on private placements, the list often grows by another 10 or so... Of course the database has capital sources with many areas of focus: early-stage, late-stage, food & beverage, natural products, apparel, health services...so the first step is to widdle down the database to match the company's criteria and needs. But the point is that a banker will know vastly more potential sources of capital than the average entrepreneur.

Bankers also do a good job of making a market. Entrepreneurs are busy, and raising capital almost always falls into the lap of the CEO, who also has 75 other day-to-day responsibilities. As a result, raising capital can never receive the attention it requires to do the best job possible. I've seen too many capital raises take a very long time. Initial inquiries to various funds may stretch out over a two-to-four month period. But after time, any deal will start to look old -- and no VC likes an old deal...why is it old? Because no one likes it? What do others know that I don't know? Bankers will create a market. We'll first create the list of capital sources to contact and then we'll do it all at once -- everyone knows the pressure is on to respond and act, or the opportunity will pass the VC by. We also know how to talk to VCs ... many entrepeneurs will often say the wrong thing that could kill a deal from the outset (outragous valuation expectations....I will run the company no matter what....I don't want a partner, I just want money...).

Another important point is that relationships matter. As a VC and a banker, I talk with other VCs on a peer level. I've known many for years and have developed (I hope!) a good reputation in the market. VCs in this space are good friends of mine. I like calling them and seeing them. If I pitch a deal to them, I'm also catching up with an old friend -- or making new ones.

VCs or Angels? Sometimes early-stage entrepreneurs will ponder whether they should take capital from a VC (at a lower valuation) or from angels. One often overlooked reason to take money from a VC is the networks that open up for capital raising for the current rounds and future rounds. As a VC, I work for our fund's companies. I do whatever I need to do to make them succeed. And I can use my networks that I use in my banking work to help raise capital for portfolio companies.