sambaAssuming you read my blog with some regularity, and did not simply tune in read a post or two (wishful thinking I know), you will recall I recently, maybe slightly sardonically, predicted the demise of institutional beverage investing in the near term.  My thesis was the cost of garnering a threshold level of revenues required too much capital to meet target internal rate of return hurdles for venture investors.  Put more simply, the category has become too crowded driving marketing spend and elaborate costly packaging that made the business unattractive as an investment.

I stand by those comments.  However, two of my fine readers (and maybe my only two) were nice enough to point out that two beverage deals were announced in the  past 10 days.  Adina For Life announced the close of a $10.4 million financing led by Sherbrooke Capital.  Two days later, Sambazon announced an undisclosed amount of investment from a group led by Verlinvest S.A. (rumored to be $17.5 million, which included Bradmer Foods, also an investor in Adina, and RSF Social Finance, according to Dow Jones).

Eat crow? Not so.  Why not?

Because both of  these deals were well underway when I wrote my predictive post .  In the case of Adina for Life, this is actually the closing of a round raised in April 2008 led by Sherbrooke Capital, but left open for additional investors which turned out to be Pacific Community Ventures and Good Capital.  As for Sambazon, as a category leader in the better for you fruit beverage category, it was just a matter of picking a partner (though they did take their time).  Verlinvest is a perfect investor for them given their mission and extended time horizon.  It was never an “if” with Sambazon, but rather a “when”, “with whom” and “at what price”.

So why did these companies attract investment in these difficult climes, for companies in general, let alone the crowded beverage space?

First, Adina and Sambazon are playing on a number of hot company trends, namely sustainability, fair trade and natural and healthy.   In short, these are mission based organizations that adhere to a strict set of core values that they place ahead of financial success.   While they still strive to earn a profit, they not enact policies that erode their value system.  Based on what I know of each (more Sambazon, less Adina, thought they seem quite similar in their devotion to the mission) they did not come up these outlooks as a result of convenience, but rather fundamental belief.   Mission based organizations achieve an authenticity which attracts die hard customers, who will often times go to great lengths to purchase the product irrespective of the price.  Often times these organization are referred to as “triple bottom line”.  Financial success comes as a result of the core values.

For many years, I enjoyed a Sambazon acai smoothie to kick off my morning, much the way that someone might enjoy a Starbucks Frappachino (whatever that is, honestly I don’t even know).  As a result of this continuous consumption pattern these companies enjoy nice growth trajectories.  In combination with their core missions, they are able to attract a certain shade of capital.  While I have not seen a summary level statistic, capital flows into health and wellness funds from both traditional limited partners and family offices have been rather robust the past 3 years.  These funds tend to focus on investing in companies whose mission they support.  The companies in turn get capital that is symbiotic with their purpose and often times is structurally more attractive than traditional consumer venture funding.  Funds like Sherbrooke, Good and Verlinvest are well known within the category along with Inventages, Physic Ventures, Prolog Ventures, Greenmont Capital, DBL Capital, TBL Capital, I could go on, and on.

Second, both companies have solid management teams and boards.  In the case of Adina, while Margatte Wade-Marchand was the inspirational founder of the company, given that the core foundation of the beverage line came from her native land, Senegal, Greg Steltenpohl runs the show as CEO.  For those of you who are not familiar with George, he founded Odwalla, one of the alternative beverage founding fathers, so to speak.   While he was not there at exit, his credentials are, for the most part, beyond reproach.

As for Sambazon, while Ryan and Jeremy Black and Ed Nichols might not be a roster of “been there done that” executives, they are clearly a smart trio of entrepreneurs and come from strong leadership and team traditions.   Their strategy of controlling the source of a highly valued and scare resource is brilliant, while at the same time cultivating their mission.  Further, the Sambazon board is stacked — Steve Demos (Silk brand soy milk), John Elstrott (esteemed academic and Director at Whole Foods Markets) and Gary Hirshberg (Chairman, President, CE-Yo, Stonyfield Farms).

Third, and finally, Adina and Sambazon are more than just drink companies, they are emerging lifestyle brands.  In Senegalese (the native country from which the brands inspiration came), the word Adina means “life, in its holistic and spiritual dimension”.  No mention of making great beverages.  The company’s mission is to “create the magical experience of connecting people beyond borders by providing healthy, exotic and delicious beverages, original music and lifestyle products infused by the spirit of world cultures”.  Again, beverages is just one leg of the stool.  You can get international music information and free singles via the Adina website.

Sambazon uses acai as a vehicle to promote sustainable agriculture.  You often here people say Sambazon is a lifestyle, a sustainable lifestyle (the picture at the outset of this blog is Cameron Faist, Sambazon Event Coordinator).  Their beverages are a means of spreading that message and doing good for the people of the Amazon rain forest.  Samabazon has its own “team” (dubbed the “Sambazon Family”) of sponsored athletes, artists and musicians who are product users, by more importantly advocates of the mission and core values.  You can find Sambazon catering the athletes lounge at the X-Games or at any of the major music festivals.  People are attracted to the product because of the vibe it creates.

Do I expect more beverage companies to get institutional funding — yes, but they need to be special companies — like Adina or Sambazon.  Companies that mean more than great tasting beverages.  Companies that tap in to broader social themes which will enable them to be viewed as more than just drink companies.

/bryan

As the holidays approach my travel schedule will heat up and the deal closing calendar is crowded.  Hopefully I will get more content up by year end but I expect posting velocity to slow until the new year.

In April 2003, TSG Consumer Partners (which, at the time, was known as The Shansby Group) invested $40 million for a 30% stake in a company named Energy Brands, Inc. Energy Brands was the parent company of Glaceau, the maker and marketer of vitamin and herb infused waters.  At the time of the investment, flavored water, as a drink category was in its infancy, but TSG was on to something.   On August 23, 2006 TSG sold its stake in Energy Brands to Tata Group for a reported $677 million, or ~ 6.4x Trailing Twelve Months (TTM) Revenue.   TSG’s return amounted to over 17x after dividends.  Not bad for a lifetimes work, let alone three years.

The chapter has a second verse,  between August 2006 and May 2007, the value of Tata Group’s stake nearly doubled from $677 million to $1.2 billion, when Coca-Cola purchased the company for $4.1 billion.  The deal valued Glaceau at 11.9x TTM Revenue, an unprecedented multiple for a beverage company.  Despite the astronomical price Coca-Cola paid, it was hailed by industry analysts as a paradigm shifting move in the battle with Pepsico.

It turns out the Pepsico was not the only one listening to Coca-Cola.  Since that fateful date there have been hundreds of alternative beverage companies launched.  Most were thrust into the market in hopes of being bought by one of the big beverage conglomerates, who had been prolific acquirers over the past three years. Strategies have ranged from ready-to-drink beverages with super fruits, to tea based beverages, to energy drinks to affinity concepts.   At a 2007 beverage trade show I attended, there were literally hundreds of energy drinks being launched in hopes of being the next Red Bull, the homegrown parallel to Energy Brands.

Fast forward to today, I’m sitting in an office with an “A-list” consumer investor and a strong private beverage company.   Beverage company is interested in taking growth equity to launch a handful of new products and a moderate amount of recapitalization.  Very solid operating company meets very solid investor.  As I am watching the back and forth, it dawns upon me, beverage investing is dead, at least as we know it.

I came to this conclusion, not necessarily from the above meeting, but rather over the last 60 days as I have met with a number of beverage companies seeking capital.  What I have seen during my meetings can be summarized as follows — revenue ramps are not being met, marketing spend to realize those ramps has been 2x – 3x budget amounts, expensive packaging is a serious drag on profitability and value relative to invested capital is under water.  Long short, the beverage case at Whole Foods and other natural markets has become increasingly crowded.  Marketing spend to rise above the chafe has been much more costly than originally anticipated.  Grocery store cut-ins have exacerbating the problem, and will continue to do so.

The unstated reality, is also that Coca-Cola and Pepsico have slowed their pace of acquisition (see chart below).  The reality is a number of the bets these companies have made over the past 24-months are just not panning out at the expected rate.  As an example, Coca-Cola’s investment in Bassa Nova is often referred to as a “dog”.  As a corollary, deals that should have gotten done in relatively short order remain in the balance.  Sambazon, a leader in the acai based beverage category, has been actively raising money for more than six months, despite a threshold level of financial traction ($20+ million in revenue), a solid position in the marketplace, an asset goldmine locked up (they control much of the acai that flows from the Amazon rain forest) and what appeared to be well thought out valuation expectations.  The last major equity private placement into a beverage company was Oak Investment Partners minority investment in FRS on June 2007 (see chart below).

I’m not worried about financial investors, they are smart people they are paid to put money to work and benefit from the upside.  I fear for the angel investor who does not see the down stream reality, funding money into a company that faces increasingly dim near term prospects for capturing a threshold institutional equity investment.   As an example, the recent winner of an angel event I attended was a better-for-you beverage company.

Have a drink, but put it on ice, beverage investing is going into a period of deep freeze.  Smart investors will wait out the inevitable market rationalization.

/bryan