The majority of businesses fail not so much because their idea sucks but because they run out of cash. This is why every other sensible angel believes that “Cash is King.” Every decision an entrepreneur makes is a cash implication. You can have your lovely P&Ls all you want, but at the end of the day, cash in the bank is what matters. Good investors know this to be a fact and would rather have entrepreneurs raise less money fast than throw a lot of money away in expensive mistakes. Elliot Begoun discusses this along with a dozen other valuable pieces of entrepreneurial advice with Andrew Whitman, successful consumer products executive and investor and founder of 2x Consumer Products Growth Partners. Having been on both sides of the capital-raising equation, Andy also has a say in teaching founders on how they can refine their pitch. Listen in, and don’t miss out on these wonderful packets of information!

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Why Cash Is King (And How To Make Investors Say Yes) With Andrew Whitman

Before I get started and introduce our esteemed guest of the episode, just some light housekeeping. This is all about your questions, not mine, and you’re going to be far more interesting than I ever would be. The best way to ask those questions is either through the Q&A box or through our online community, and I will be monitoring both. I’ll be doing my best to make sure that your questions get asked and answered. I’m going to introduce a friend. Somebody who is one of the good people in this business, a champion of entrepreneurs and champion of this space. He puts his money behind that every day because he’s an investor. Let me introduce you to Andy Whitman. Andy, thanks for joining. I appreciate you being here. Why don’t you share with everybody, probably the people reading who don’t know you a little bit about you and a little bit about 2x Partners?

I’m glad to do it. Checks in the mail, the nice guy comment. I thought my daughter was the only one that thought I was a nice guy and that’s most days. I am a longtime CPG guy. I spent a bunch of years on the operating side and hit the twenty-year mark on the industry partner and investor side in 2020. We only partnered with branded CPG. I share this not because I need to do a commercial but the folks reading can understand the context of how they fit in to whatever it is we’re going to talk about. It’s a stage pass to the startup and pass to the pure Angel Investor stage before you get to needing, if you ever need, $15 million, $25 million, or $50 million of capital. It’s in that $2 million to $10 million capital. It’s the preponderance, some bigger and some smaller. The one sentence is industry help that happens to come with a bucket of cash. Enough for pre-mumble.

You are a nice guy and I know it’s killing the reputation, but you’re going to have to live up to it. I’m going to start with what is probably the most well-known statement attached to Andy Whitman, the man, which is Cash is King. You and I both have this conversation often. We talk a lot about it at Hirshberg Institute. Let’s talk about the importance of cash and the difference between evaluating a business on a P&L versus evaluating the business from a cashflow perspective.

Fundamentally, there are some businesses that are terrible ideas, but they are far and few between. The vast majority of businesses, if they don’t make it, don’t make it because they run out of cash. Not because they’re bad business ideas. We all have these lovely P&Ls and we have to have them. The bank probably wants them and your accountant certainly wants them. You have a version of them for tax returns. At the end of the day, cash in the bank is what matters. There are lots of great exercises. Gary Hirshberg and I often do a stand-up comedy routine around trying to project your cash. Gary’s upfront about having made every mistake in the book and some of them twice.

At the end of the day, projecting your cash and making sure that you don’t run out of it is a good thing. It’s probably the most important. I hate to see what’s happened to all of our businesses as we go through COVID. There, unfortunately, will be a small percentage of people that don’t make it through this, but for the vast majority of the businesses, and I hope the majority of folks reading here, will come out of what is admittedly a painful time for many people unless you’re maybe a hand sanitizer company. For most of us, it’s a challenging time, but I hope we come out of this better, stronger, more focused, and more disciplined business. That’s my wish for everybody.

It’s been a great teacher of the importance of being nimble, capital-efficient, and resilient. I say that all the time. When you look at cash and you think about the fact that every decision a brand makes and an entrepreneur makes has a cash implication. If you understand the implications as it relates to the cash of every decision that you make, you’re going to make better decisions. Sadly, not enough of our founders think that way. They think sometimes about just the top line because they’re trying to drive revenue and show that traction or drive velocity, but it’s cash.

Cash is going to do more than anything else to be the predictor of your long-term success. Let’s switch a little bit from that because a question that came in is about capital strategy. It’s a cool question. Since COVID, since the world tipped on its axis, “Do you think the days of brands raising a lot of money, let’s say, raising 20 to hit 20, are over and that there’s going to be less capital in the space? Do you think that the amount of capital will continue to be here and be available?”

Let me take that from a few angles. First of all, the company that raises 20 to hit 20 was always a bubble. That has nothing to do with COVID. The capital efficiency of that is not that interesting and the number of scenarios that happened unrelated to COVID was fairly minor. That said, the great businesses are raising successfully in the middle of whatever storm we went through and still going through will continue to raise successfully in a weird environment. The troubled businesses are going to have a lot of trouble, but they had trouble before.

The biggest impact is in the middle of the pack. I’m not picking on any space, but there are lots of interesting businesses in crowded categories that have raised a lot of investor capital. Beef jerky is an interesting space and a real consumer reason for being. Investors that before may have invested in the 7th or the 10th investor-backed businesses in the space may consider, “Do I want to be in the 7th or 10th investor-backed business? All those others are going to look for monetization long before my business is ready. Are there real monetization opportunities?”

There is a reality of an impact on the middle of the pack. The top is going to continue to raise with no issues and the bottom is going to continue to have challenges. It’s the half in between that is going to be a little bit more challenged. That’s where the businesses that have demonstrated real savvy in navigating through this will get a lot of investor credit. The businesses that have taken the opportunity to, for example, shoot some of the skews at the bottom of the ranking, optimize their cash cycle, and tighten down on parts of their supply chain that maybe we should have done a while ago. Also, optimize how we think about, go to market strategies, invest in eComm, and all the businesses that knew these were important priorities and now in this world, are even more important. They’re going to get the investor credit. That’s how you get out of that middle 50% of the pack.

There are a few things I want to unpack in that statement because it’s important. The first one is going to be a statement that I’m going to make, which I absolutely invite you to call bullshit on, which I know is tempting. It’s not, in my opinion, an outcome of COVID, but rather just a continuation of what had been changing. There has been a growing funding gap that a lot of funds have gotten bigger and moved up market. Earlier brands are going to have to make it further on less. They’re going to have to be smarter to get to that point that they can demonstrate the traction, both top line and throughout the business that is going to be interesting and enticing to an investor like you. Would you agree with that?

Yeah. That’s a good thing, not a bad thing. It’s a good thing because it sounds weird given what I do for a day job. I would rather entrepreneurs raise less money less fast until they get to a point where they figure out more stuff. By the way, that point, if you ask most entrepreneurs, is usually later than they initially thought it was. They came to the realization of, “I wasn’t ready when I did X, but I was ready 6, 12, or 18 months later.” The reason that’s important is if you raise a lot of money, the only thing I can feel relatively comfortable in saying as it relates to this one specific point is you’re going to make mistakes.

There are savvy entrepreneurs that are on their 2nd, 3rd, or 4th business and still make plenty of mistakes and they’re open about it. If you have a lot of money, you make expensive mistakes. If you don’t have a lot of money, you make cheap mistakes. I don’t want to see people raise $2 million or $5 million too early because all they do is blow through it and wish. Not every entrepreneur and not every situation, of course, but in general, they wish they had done some things differently. When you have a lot of money, those are expensive mistakes. When you have no money, they’re cheap mistakes.

Also, the reality is sometimes they don’t mind because they can’t see it they move too quickly. That’s great advice. The reality is, too often, brands grow too fast. You’re going to make the vast majority of your mistakes, the most painful mistakes in your first few years.

Let’s dimensionalize that. If you think about packaging, every entrepreneur I’ve ever met has said, “I didn’t get it right on the first go around.” I, as an early twenty-something kid in the beverage business, launched a product with 7/11 and we’re so proud of it. The first time I went to retail, I’m like, “The flavor designator was right behind the channel strip. You could see the branding, but you couldn’t tell what the flavors were.” That was a disaster and we had to fix it.

I was at a bigger company early in my career, so we could afford to fix that. If you’re a small company entrepreneur, that’s expensive to fix. Every entrepreneur has said, “I wish I did this differently on my packaging. I wish my pricing pack architecture was different.” A smaller number of ounces, higher price, or whatever it is. When you roll out to 5,000 doors right away, those are expensive to fix. You’re better off getting it right with a small number of highly successful doors.

That’s a great example, but I’ll also add to it, and I say this often. Those who read this blog regularly are now ready to roll their eyes, so go ahead and that is, “It’s a hell of a lot easier to get on the shelf than it is to get off the shelf.” When you grow too quickly, you’re getting on the shelf and you’re running through the front door, but through the back door, these people are coming in and taking your spot because you’re not generating the velocity. You’re not meeting thresholds and you don’t know why you’re not.

It behooves everyone to slow down, figure things out, make mistakes, and learn from them. Let the market tell you what you’re doing right and wrong and be able to make those adjustments. Michael has a good question here. “How much weight do you put into prior networking? Getting to know and having the sense of a brand versus being presented with a great investment on paper that’s new to you.”

I’ll caveat, it’s different if you got a $50 million or $100 million or $200 million business and a banker presenting it to you for a sale or an investment. That’s part of a big process, so let’s leave that out. In the world I live in and the majority of your readers live in, it’s unusual to get something over the transom that you don’t know anything about and be so fired up that you’re going to rush to do an investment. I won’t say it doesn’t happen, but it’s not the most common.

The vast majority of our partner companies, that’s what we refer to our portfolio companies because of the nature of how we work with them, we’ve gotten to know over a number of years not because we can’t move quickly. We’re moving quickly on something, but it’s more in nature of we meet them when they’re early, too early, or whatever. We try to be helpful to them and we get to know them. The entrepreneurs would share this point of view. It’s much more interesting to get to know somebody in half a dozen phone calls or meetings over a year or two, than slamming that into four weeks.

The entrepreneur should be focused on that, too. Remember, even if they’re taking in a minority investment and you’re taking in a partner legally, you have a fiduciary obligation to them as an entrepreneur that supersedes your own interests. Even if you’re technically in “control,” the obligation you have to an investor is quite significant. It’s the reality of life. This is a marriage in some ways. The entrepreneur should be more focused on this or as focused on this as anybody else, so get to know a prospective partner. The best time to be looking for money is when you don’t need it.

I say all the time, “Go to the well before you need the water,” and that’s an important message. This is a complicated relationship and you should be building your next relationship now. You should be having that conversation plus, there’s a lot of ways. Having a conversation with Andy or any member of the team, even if it doesn’t lead to an investment. Honestly, let’s be realistic, few conversations do. It’s the nature of the odds, but there’s a lot of learning to be involved in it.

There’s a lot of benefit from having somebody dispassionately looking at your business and telling you what they see. If you can be open to that, take those nuggets and learn from them, there are benefits. I would say my goal, and you already know this, is I would be establishing relationships along with the entire capital strategy that you have over the next five years now. Even though there’ll be some people that you’re building a relationship with that you won’t necessarily look to transact with for 2, 3, or 5 years.

Sequence it. First of all, do it when you’re not trying to raise capital because when you’re trying to raise capital, your time is limited. Maybe I’m a nice guy, but if you’re trying to raise $250,000, I’m probably not a good use of your time at that moment. Find a time when you’re not raising. The same goes for the funds that will write $20 million checks. There aren’t a ton of CPG businesses that need $20 million of growth capital someday. If you’re about to partner with me, maybe you should be looking ahead to that future and getting to know that crowd of investors.

If we’re partnered into your business, we’re going to introduce you to all of those people if there’s ever a time that there’s a need for that. Your point is right. Think ahead about who you need to meet and be thoughtful about it. We’ve now been doing this for twenty years in our little sliver of the world. We’ve been doing this three times as long as the next most tenured firm, but it’s an awesome thing for the ecosystem that there are so many people out there investing in emerging brands, so that’s important.

It’s an awesome thing and a dangerous thing simultaneously because what happens is that we celebrate sometimes based on those that raise a lot of money instead of celebrating just on the good businesses. Jenny has a great question. This one’s good. “How do you get to know investors and understanding of what they’re going to be like when the proverbial shit hits the fan? It’s great when everyone’s honeymooning, feeling good, and everything’s fine and going well, but when times get tough and things don’t happen like everyone hopes, how do you know that investor is going to be the one you want to be alongside?”

Getting to know them before you do a deal is a good way to judge how things are with them as people. One of the most valuable things is to talk to the other people they’ve invested in. Ask around the community bankers, lawyers, or whoever else. There are some people that have mixed reputations. That stuff’s out there. Everyone on my business is, we’ve always joked about and I’ve said this publicly, you’ve heard it before, “The only thing I can be 100% assured is the projections you show me are wrong. You might do better or you might do worse. Mathematically, I can tell you from how we’ve assessed this. The odds are you do worse than the projections you show me almost entirely that way. Not because people are trying to snow us and not because people are making stuff up, but shit happens.”

As Gary says, most entrepreneurs are pathological optimists in general.

You overestimate revenue, underestimate expenses and that’s a disaster. When I got into the emerging brand world many years ago, the retailer review cycle was X, and then it slowed down to Y, and then it slowed down to Z, and who the hell knows in COVID? It’ll go back to some semblance of Z. The point is a huge portion of the reason people’s projections are off is because retailer cycles are not what they thought it was or it took them longer to raise or any of a number of reasons.

Back to your question, Jenny. There are lots of businesses that have hit hard times. When you’ve got investors that step up and say, “Fine, I’ll put in some money. We’ve got a business that didn’t necessarily hit hard times but was going to add some capital to the tank as we were headed into COVID. That was a silly time to be trying to conclude something with new investors that weren’t insiders.” The other investor insider said, “Screw it. We’ll put in some money in friendly, favorable terms. Let’s not worry about it. Let’s focus on the business.” If you ask around, the market will tell you the person that’s known to be a screamer when things don’t go well. You want to know that before you get there. Ask around, not from the three references they give you.

I always say, “Do your due diligence,” and look at their portfolio. Think about who maybe have had tough times or maybe didn’t survive and talk to them. I will also tell you that having people who have investors who are in this space and who’ve been in this business, it’s obvious because they have connections and understanding that are beneficial. They also have more of an understanding of how damn hard it is and it’s not easy.

One of the surest ways that you can set your own self up for having more difficult conversations is to bullshit, set the bar too high, and be too unrealistic in your projections. Investors, for the most part, see through it. You probably have some percentage factor that you put on any projection that you get from an investor. You say, “They’re going to be at $20 million. I’m going to discount that by 25%,” and that type of thing. Be realistic. Don’t sandbag. Don’t try to create growth at a rate that you’re trying to do it to look sexy from an investment perspective.

It’s a double-edged sword, of course, because you don’t want to show something too low that it’s not interesting. There’s a business we absolutely love that’s based here in the Midwest and I saw some projections from the company. Over a 3 or 4-year period, they’ve got a 20% kegger, but yet, they’re talking about how this could be a $100 million business and that’s a huge disconnect. Either you’re going to be a $100 million business or you’re going to be a 20% kegger. There’s a Grand Canyon-sized chasm in between what the final year of the projections are versus $100 million.

It’s a double-edged sword because you don’t want to provide unrealistic expectations and yet, you also don’t want to be uninteresting. If you’re genuinely at the point where you don’t know, show the, “We know we can do this curve. Here are the three things that we have reasonably high confidence in and this is how it could turn out.” That’s okay. If I had the visual in front of me, “Here’s the solid line of what we know can happen. Here’s the dotted line of where it diverges.” You end up with a much more interesting outcome.

Somebody can probably realize and say, “Eighty percent they get to the solid line, and 50%, they get to the dotted line.” They’re being forthright and transparent and that’s a good thing. By the way, on this idea of being transparent, things don’t go well. It’s just the nature of small companies. Shit happens. I joke all the time saying, “In small companies, things go wrong and I don’t have a glorious expectation of perfection. I want many more things going right that is going wrong because I know a bunch of things will go wrong.”

When one of our companies had a category review that out of the blue went badly, I got a phone call two hours later from the CEO saying, “This did not go well. I’m not sure where it’s going to go, but I want you to know.” “Great. What should we do together to try and figure it out?” “I don’t know. I haven’t thought through that.” “Here’s a couple of things to think about.” By the way, it turned out to be a disaster in the reset decision, but it led the company to think about some interesting things and a potential whole subline which over time, could double the SKUs in the business on the shelf. From 3. something to 6 or 7. It might turn out to be good in the long-term, but that sucks in the short-term. That’s life.

There’s a whole bunch of points there that you made that I want to emphasize. Transparency and being honest is so important. I don’t mean that the opposite is that people are being purposely dishonest or maliciously dishonest. A good investor partner wants you to call them and say, “This did not go well.” In many cases, they can help you work it through and think about it differently. They know that’s going to happen. Nobody has a clear sailing line from start to finish. There are going to be bumps and challenges. The other important point, in general, is don’t start your projections from the top. Don’t solve for the number you want to be at.

Build your numbers on the bottom where you think you can drive your revenue, the outlets, location velocities, if it’s brick and mortar, the acquisition, if it’s D2C, and all of those things. Roll them all up and see where you wind up. You’re going to be a lot closer if you do that. If you are building your revenue bottoms up instead of just trying to solve for top-down. Too many brands say, “We’re at $1 million and I want to be at $20 million in three years. That’s what I’m going to put, and then I’ll solve for $20 million.” That’s not the best way. You could be certainly overstating where you can be but you could just as easily potentially be understating where you might be and build in the bottom.

There are a billion people in China. If we only get an X% thing, it doesn’t work very well.

The one I always see is the category is Y and we’re going to get Z of it.

Bob Burke would call those Excel hallucinations.

Burke has lots of hallucinations and stuff, but that’s a whole another episode.

The point is you can make the Excel say anything you want and build you from the bottom up. By the way, never ever PDF it when you send it to somebody. That’s frustrating.

That’s a perfect segue. We all love a good car crash. Let’s talk about some of the biggest bumbles and screw-ups that entrepreneurs make when coming to sit and have a chat with an investor. What drives you crazy? What do you want every founder reading to think about before they show up in front of you pitching their brand?

There’s a bunch of things. Over the years, we’ve taken the time to put together something called 10 Reasons Investors Pass. You could find it in the Resources section of the 2x Partners website. There’s also an audio recording of a webinar we did where there’s some commentary. Not just written. To add some specifics, at the end of the day, people are investing in the entrepreneur. If you have an entrepreneur that says things like, “I’m not so good with money,” somebody said that to me and the bubble over my head was, “And you want mine?”

My favorite is, “Our projections are conservative.” I know mathematically that is wrong. The vast preponderance, almost everybody, will not make their projections. Saying our projections are conservative immediately raises the ire of the antenna, the spidey senses tingling. That said, you deliver what you can. There are lots of quirks. Nobody’s going to throw somebody out of the room for PDF and Excel spreadsheet but there are some things you can do to enhance your odds and the biggest of them is building confidence.

If you’re sitting here and it was the week before Thanksgiving, you’re going to tell me, “I’m going to do $4.5 million for the year,” and then you finish at $3 million, my face will slid off. That’s bizarre. Who doesn’t know within some reasonable band of error how they’re going to finish the year? If you’re a traditional brick and mortar business, you’ve got half of your December orders in your hand. By the time you get to late November, you better have a good idea. If you’re off by $100,000, fine, that’s not a big deal, but if you’re off by 20%, let alone 50%, that’s bizarre. You need to build confidence.

One of our management teams, it’s almost eerie that even on a month-to-month basis, this team is plus 2%, minus 2% to their projections almost always. I don’t expect anybody to be that good, or this team is pretty damn amazing. If you tell me you’re going to do $4.5 million for the year and you do $3 million, there’s going to be a lot of discussion of questions. Quite frankly, it’s about credibility and confidence in the entrepreneur. There are plenty of people that you get to know over time and you say, “There’s no question. This person is going to be a winner. I believe in them. I believe what they’re saying. If there’s a problem, they’re the people that will figure it out.” Confidence is probably number one on my list, Elliot.

Ultimately, you’re investing in the person. The other thing I see, Andy, and I love your thought on this, is sometimes, entrepreneurs talk too much and they share too much. What is better is to allow you to ask your questions. Don’t spend a whole lot of time talking to an investor who’s in this space about space and teaching them about the space. That’s wasted time. I say this often, “Investors are going to invest. That’s what they do. Your job isn’t to get them to invest. Your job is to prove to them that the best place for them to put their money is in you and your brand.” Why? What’s the case that you’re trying to make as to why you represent the best bet that they can make? Step back and let them ask their questions. Spend some time before you ever go into an investor meeting and think about what questions are going to be asked and be prepared to answer them.

I’d add a couple of thoughts to that because you’re right on. Remember, as an entrepreneur pitching for investment, you are not trying to convince somebody to buy your business as a consumer and you’re not trying to convince a retailer to authorize their product. I have seen both decks. I’ve seen the deck that’s a retailer selling a story with a financial page stapled on the back and I’ve seen the post-consumer research, “Here’s why people will be interested in this consumer business,” and nothing else.

You’re selling securities and investments, so the story is different. There are a bunch of elements that are right. Guy Kawasaki does the ten things to share in the 10/20/30 Rule. Ten slides, last no more than twenty minutes, and contain no font smaller than thirty points. You can Google for the 10-20-30 Rule. That’s important. Explaining to somebody why this is an interesting investment is different than why it’s an interesting business.

Another one I’ll point out, by the way, if anyone hasn’t listened to the TED Talk called Death by PowerPoint, Google that one as well because it helps you think through your deck a little bit differently.

We haven’t talked about valuation yet, so let me throw it out for discussion. We are perfectly comfortable leaning forward to the high end of a range of reasonableness, but most investors aren’t going to fall off the edge of the branch. Shark Tank on TV jokes about this all the time. Their expectations sometimes are not exactly right for our companies. That said, it has to be in some range of reasonableness. There aren’t a lot of $100,000 trailing revenue companies that will get a $5 million or a $10 million valuation, so don’t ask for it. As you get to $1 million or $2 million of revenue, you start to have some real rules that apply and try to apply a ten times revenue valuation to the future one-year ahead revenue. That doesn’t fly well.

Try and be practical. There’s nothing wrong with a little bit of lean forward there within a range of reasonableness. Also, ask yourself. I’ll make up some numbers here on the spot. If you’re raising $2 and you think you should raise it at $6, somebody is going to own a quarter of the company or a group of somebodies. If that entrepreneur cut your valuation in half after you’ve gotten over all the four-letter expletives that come to mind. If the answer is raising it at $3 pre-money for the same and $2, you’re trying to raise and somebody owns 40% of the company or a contingent of people, I would honestly say the difference between 25% and 40%. If it’s a home run scenario, it doesn’t matter all that much. If it’s a train wreck, nobody cares. There are a small number of situations mathematically in between where it matters.

Think hard about, “Do you want to fight about that and do this for an extra six months or is that reasonable to put in the bank and move on?” There are caveats. If the investor gets a fair return, maybe you as an entrepreneur can get a catch up on some other things. Don’t get too cutesy. Don’t overthink valuation because in the example I gave, an entrepreneur gets half of the pre-money valuation they want and it’s not that big of a deal. It’s a huge deal if you’re raising $10 million, $20 million, or $50 million. When you’re raising $1 million, $2 million, or $5 million, in most of these situations, it’s manageable.

I want to add to that because this is one of the things that is so critical. As a founder and as an entrepreneur, you have to go in with the mindset that your investors should make money, and that’s okay. You should celebrate that. You should want them to make money by investing. Give them a tap to make money. That is it all about.

I would add to that, when you go to talk to a retailer, I hope you are doing the profitability analysis from their side. If you’re going to Amazon, I hope you’re doing the profitability analysis from their side because if they can’t make money, they’re not interested in carrying you. You need to do the same from the investor’s perspective. What does their return look like? You have to factor in the fact that the path to monetization, I use that phrase as opposed to exit because you don’t always have to sell a business to have an investor and get a good monetization, is usually longer than you think. It usually requires more capital, which may mean more dilution for the investor stake.

If you’re raising $1 million and you think you’re going to get to the promised land in two years, you probably need to extend the time horizon and you need to think about additional capital that dilutes that investor’s initial $1 million. When you do all that analysis, if the investor is making two times their capital and 9% IRR because you need to look at both, a multiple of capital and an IRR, you don’t have something that’s investable. If after you make all these adjustments and you plan for additional capital, the investor can make 3, 5, or 7times their money if things go well. If they can make 20, 30, 40 something IRR, you got something worth talking about but you got to build in reasonable assumptions.

One of the things we do here is we make sure to call out things that maybe are taken for granted that people understand that aren’t. Andy, explain IRR.

If you put in $1 into a business and you get back $3 someday, you can look at that as making three times your money. That’s an easy calculation. The challenge is if you use an Excel formula, there’s one called XIRR. You can put that into Google and it’ll explain to you how it works. It’s essentially a mathematical formula that talks about the return average per year. The important takeaway is to get to an average return. If you take ourselves out of the day-to-day world that we’re talking about, you think about the stock market has an X% return per year, and investors have a return expectation per year.

That’s what you’re talking about. Are you in the ballpark? The reality is institutional investors will have generally higher expectations of return than an individual, but not always. Some individuals are looking for high returns. By the way, to give a little bit of a benchmark, if you double somebody’s money in five years, that’s a 15% IRR. If you triple their money, it’s a 25% IRR over those five years, just to give a side of the barn expectation.

You can put this all into Excel and it’ll help you to calculate. If you think about, historically, the market returns mid to high single digits and if you’re offering somebody an 8% return IRR, given the risk profile of these businesses, that’s an uninteresting risk-return ratio. If you’re offering a 50% IRR, the immediate first question is, are you assuming too short a time frame or not enough capital or an irrational exit? If it’s real, that helps to adjust for the risk-return ratio.

You mentioned understanding and compressing your cash cycle. Can you explain to those reading what you mean by cash cycle? That’s important.

Let’s assume you’re using a co-packer. If you’re producing some product on day one, you’re probably having to pay for it at some point, often, not always, before you get paid by retailers. Let’s say you produce it on day one. Maybe you have to pay for it at the end of 30 days. Hopefully, you’re not in a pre-pay stage. Let’s assume you pay for it 30 days after it’s produced. You may not sell it for 2, 4, or 6 weeks. You hope that there are 30 days or less on that receivable. You could get to a situation where you’re producing it on day one, paying for it on day 31, selling it on day 45, and getting paid for it on day 90.

That means you got 60 days of holding your cash cycle. There are lots of things you can do to tighten that up. In no particular order, if you have longer terms with your supplier, that helps. If your retailers pay you quicker, that helps. If you have less inventory sitting on hand, that helps. Of course, there are risks. You’ll not be able to fulfill orders. By the way, mathematically, the difference between being able to fill 97% of your order rate and being able to sell 100% of your order rate, there’s no company I know including Craft or PMG could afford that.

It requires so much inventory that you don’t want ever to be able to fill 100% of your orders all the time, every day, every month, every week, but you do want to be dependable. Mathematically, there’s a big difference between 97% or 98% at 100%, but the cash cycle can be optimized. If you think about it in simplistic terms, the longer you have to pay your suppliers, the better. The quicker you get your money from your retailers, the better. Credit cards on your website are awesome because there are no receivables.

There are companies I know and I had one of them in our portfolio in a prior life that got paid from retailers before they paid their supplier. It was an inverted cash cycle, which meant the faster they grow, the more cash they’re generating. Not in profitability in the business, but it’s the spread between retailer and co-packer. It’s very unusual and not common. The goal is to squeeze that cash cycle because remember, what’s on your P&L doesn’t matter.

If you convert that to a cash version of your P&L, that’s one thing, but then you always need to think about, “How much cash is tied up in inventory, how much cash is tied up in your receivables coming in slower, etc.” Days of inventory on hand, days of payables, and days of receivables, that’s what I mean by squeezing the cash cycle a little bit. This is where there is some sophistication on the finance side, whether it be internal or a third party. There are a couple of great ones that can help to think about your cash cycle.

I want to add on that because this comes all the way back to talking about any sale point around cash being king. Often, we think of margin and margin only in decision making, but that shouldn’t be viewed in isolation. I’ll give an illustration of two different points. If you have a retailer who’s willing to pay you in five days and the retailer is going to pay you in 90 days, if you can afford to take fewer points on the margin on what the retailer is going to pay you in five. You’re going to get that cash to use in the business faster.

There are interplay there and understanding, That’s a simplistic version. It comes down to channel strategy, channel balance, and all of those things. If you make an effort to be as effective and as efficient in your cash conversion, you’re giving yourself more of your own cash to use to fund your growth. In this business, for the most part, growth is the most voracious consumer of your capital. The smarter you are about that cycle and the more that becomes a part of your decision matrix, the more efficient you’re going to be in its utilization.

There are trade-offs you can make within a reason. You don’t want to do everything to the extreme of what I’m going to talk about. For example, all of us know and we talked about it upfront in the example of packaging errors, early in your life, you’re going to update your packaging all the time. If you order small quantities, including in digital printing, you’re going to pay an upcharge per label, per bag, per box, per unit. I’m okay with that. Absorb the small increase because it’s much smaller out of pocket cash.

I’ll make this up. If you’re ordering 1,000 of something at $0.10, maybe you order 300 of them and you pay $0.12. In the grand scheme of life, just suck it up and move on, but it’s a much smaller impact on your cash. The other thing is there are lots of things that you can variablize, including taking your annual insurance and paying it monthly. You probably pay an upcharge. By the way, sometimes you don’t. Sometimes they’ll just split it into twelve payments. Anything you can variablize versus making a fixed cost is a good thing.

I got to ask this question and it’s a question that I’ve never asked you. What do you know now as an investor that you wish you knew then when you were an operator?

I didn’t appreciate the cost of capital because it’s easy to think about buying a machine or loading up on inventory. I didn’t understand until a good ten-plus years into my operating life how important that cash was. Remember, in the early days, I was working for a big company where you had this rich uncle. CapEx was not an issue and afforded inventory. By the way, instead of systems in big companies, don’t revolve around cash until you become senior. The appreciation for that is important. I didn’t understand that early in my career.

It translates to now. I have no issue with businesses that are self-manufactured if it’s the right solution for the business. If you’re in the dry, mix, and pack world, not a term that people talk about, if you’re making a powdered beverage, there are some cool natural hydration businesses emerging with some interesting stuff. If you think about stuff that’s dried, mixed, and packed, you put a bunch of dust in a bag, shake it up, and package it for consumers. I’m not being facetious, but there are lots of products, whether it be bread mixes, baking mixes, powdered beverages, good season salad dressing, and anything that’s dry in a pouch, a bag or a stick pack. There is so much capacity in dry, mix, and pack. It’s hard for me to understand why anybody would start a manufacturing facility for that.

The same in a few other places like bar soap and a few other things. There are tons of capacity. If there’s a magic secret sauce that you’re doing that nobody else can do, that’s easy. That’s why you do it. Starting a business is hard enough. Starting a business where you’re now running a plant and buying equipment, I’d much rather you build your brand and build your sales than put in some widget in your plants. There are a million exceptions and about 1/3 of our partner companies over history have been self-manufactured, but it’s not the best use of capital.

Andy, I know you have hundreds, but what pearls of wisdom do you want to impart on the readers?

I don’t think people have an appreciation for how hard it is to be an entrepreneur. Quite frankly, how lonely it can be. Entrepreneurs, depending on the situation, sometimes can’t talk to their spouses. Sometimes, they try and create a little bit of a wall there so that they don’t end up talking about the business in bed as they’re sitting there not being able to sleep. They sometimes feel like they can’t talk to their investors. They can’t talk to their employees because they’re dealing with stuff that either is none of their employee’s business or they don’t want to upset them.

Being an entrepreneur is lonely and it’s important to have folks that you can talk to, whether it’s YPO or a couple of the other forums that you have a group to talk to, or whether it’s people like Elliot. There are entrepreneurs that I talk to fairly regularly. Not because I’m likely to invest in them, but because I like them, I like what they’re doing, and I try to be helpful, including some of the people that have asked questions here in this group. I’ve had the privilege of getting to know a number of them over the years.

Some of them have had hard times. Sometimes, the way you come out of that hole is somebody building you back up. I’m glad to do that if I can be helpful. Sometimes, somebody has an idea to help you get that ladder out of the hole. Whatever you do, sometimes you need to have somebody tell you, “Stop digging.” That’s important, too. You’ve got to have people that you can talk to and that’s not as easy as it sounds.

One of the most important things you can do is it’s great to get help from us as advisors or people who see it, but the best is to be vulnerable with your other entrepreneurs and have real conversations because they’re in it. Talk to people and let them know when you’re worried, feeling isolated, and confronting doubt because I promise you, to a person, if they’re not there now, they’ve been there and if they haven’t been there, they will be.

You’ve got to be willing to listen. It’s hard and complicated, especially when somebody tells you that your shit stinks, but it’s important.

Andy, as always, thanks. I appreciate you being here. Thanks, everyone, for reading. Remember, if you would share a little bit about this show and give it a review. We’re trying to put out information that’s actionable and useful. This is a great example and a great episode. I appreciate you coming on, Andy. Have a great day.

Important Links

• 2x Partners

• Gary Hirshberg

• Bob Burke

• 10 Reasons Investors Pass

• 10/20/30 Rule

• Death by PowerPoint – TED Talk YouTube

About Andrew Whitman

Andy Whitman is a successful consumer products executive and investor who melds the experience of a Fortune 100 leader with the passion and resourcefulness of an entrepreneur. After a successful career with General Foods and Kraft Foods and recognizing that nurturing smaller businesses to achieve rapid growth was his passion, he focused on investing in and helping to operate small consumer products companies. Andy has been an active part of the emerging branded consumer products eco-system since founding 2x Consumer Products Growth Partners in 2001.

Andy began his career managing icons like Kool-Aid and Tang. After years of delivering results on big brands, he jumped at the opportunity to run small, autonomous businesses within Kraft in a shirtsleeves environment. Taking charge of brands as small as $10 million that Kraft had been unable to grow or run profitably, Andy’s entrepreneurial leadership produced outstanding results. His ability to grow businesses comes from his proven general management experience built upon a diverse breadth of prior functional assignments, including marketing, sales, operations planning and corporate development.

He currently or previously assisted pro bono by serving as a board member for the Jewish United Federation Foods & Hospitality Trade Sector, Marketing Executives Network Group (MENG), Venture Board of the Women’s Self-Employment Project and White Plains Child Day Care Association, a Head Start agency.

Andy received a B.B.A. from the University of Wisconsin and an M.B.A. from Northwestern University’s Kellogg School of Management. He is an outdoor adventure traveler, an active skier, an avid college basketball fan, a Culinary Institute of America-trained cooking enthusiast and a devoted Parrothead – as a result of traveling early in his career with singer Jimmy Buffett

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