Wayne Cantwell is a Co-Founder and Managing Director of Decathlon Capital Partners, a revenue-based financing firm in the United States.
Even though the packaged food sector is dominated by giant global corporations, remarkable opportunities are blossoming for nimble entrepreneurs.
But to take full advantage of these opportunities, founders must pay close attention to their profit margins—even more than their sales figures—from the time they receive their very first orders. After all, thin margins mean a company struggles to generate sufficient cash to finance its growth. Without a solid history of profitable operations, young packaged food companies will find that potential investors are skeptical of funding low-margin businesses.
Without the capital to grow to the scale they need to thrive, startup packaged food companies find themselves stuck on a low-profit, low-growth road to nowhere.
Changing Consumers Creates Opportunities
Grandview Research expects the global food and beverage market, which totaled $7 billion in 2017, to top $12 billion in 2025. But while giant consumer brands dominate the market, Grandview notes shifting consumer demands for healthier foods, easier-to-eat offerings and private-label products as factors increasingly opening for entrepreneurial startups.
The sheer number of variables at play—increased interest in spicy-sweet global flavors, the demand for ingredients that are both nutritious and sustainable and the desire from consumers for exotic as well as comforting options, to name just three—means that nimble and creative entrepreneurs who adapt quickly can find and leverage market niches.
But even entrepreneurial companies that create the next great thing in packaged foods don’t necessarily have a clear path to sustained success. About 90% of the 15,000 new packaged food products introduced each year fail, according to a study at Kansas State University.
And survivors don’t have much room for error since after-tax operating margins among food processors run about 10%, according to a study by the NYU Stern School of Business. That ranks food manufacturing 63 among the 95 industries tracked by the NYU researchers.
Limited Funding Options
Even though the packaged foods category ranks third among the largest manufacturing sectors in the United States, I see relatively few venture capital firms wanting to invest in food-and-beverage deals.
The biggest challenge is that venture firms often cannot see an exit strategy for their equity investment. The giants of the packaged foods business are so big, for instance, that acquiring a small to mid-sized startup will hardly move the needle of sales and profitability for them.
Public stock offerings, another potential exit strategy, are very rare among food companies. The sector accounted for only four of the 154 IPOs in the U.S. market in 2023 as public investors sought better returns in other sectors.
With thin profit margins that don’t generate enough cash to fund growth organically, and with equity investment off the table as a source of growth capital, the only option for most growing food and beverage companies is debt financing.
But traditional debt as a tool to finance growth can also run into roadblocks, especially for manufacturers who have emphasized top-line growth in hopes of later profits. Bankers want to see a history of profits rather than a hope of profits. Asset-light food manufacturers, meanwhile, often don’t have buildings or equipment that can secure traditional lending.
The Revenue-Based Approach
Revenue-based financing provides another option for entrepreneurs. These loans are structured to require monthly payments that aren’t fixed. Instead, payments represent a specified portion of the borrower’s revenues. If revenues drop for one or two months, the required repayment drops, too. If revenues climb, the borrower can repay the entire amount more quickly without a prepayment penalty.
Because revenue-based financing is debt rather than equity investment, owners aren’t required to give up any equity, board seats or corporate control in a revenue-based transaction. Unlike equity investors who expect an exit strategy that promises a quick return, providers of revenue-based financing can be patient and aren’t driven to find a profitable exit.
Revenue-based financing packages generally do not require the borrower to personally guarantee the borrowing, and they generally do not require that the company pledge equipment or other hard assets as collateral.
Intense Focus On Margins
Despite their knowledge that good margins will provide the key to opening the door to growth capital, a remarkable number of packaged food entrepreneurs focus almost exclusively on sales growth. They figure that improved margins certainly will arrive in the future if they can just get sales to some number—$10 million or $50 million or $100 million. Too often, better margins never arrive.
From the very start, focusing on margins in the food and beverage industry requires clear-eyed financial reporting, improvement of inefficient processes, effective management of inventories, and relentless cost-reduction strategies.
By the time a packaged foods manufacturer needs outside funding to support growth plans, it should be able to show consistent and growing profitability across diversified distribution channels.
None of these attributes are developed quickly, and all of them need to be planted with the very first seeds of the company. Food-and-beverage entrepreneurs who wait until they need growth capital before they focus on margins are likely to find they have waited too long.
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