There’s abundant capital out there, and lucrative exits in some startups’ futures, but the game has shifted in significant ways, according to BevNet Live panel assembled to assess new decade at conference earlier this month in Santa Monica, Calif. 

On the panel were megalawyer Nick Giannuzzi, who operates Giannuzzi Group LLP and also is avid investor, along with Nantucket Nectars cofounder Tom First, who currently operates TF Ventures investment vehicle and Janica Lane, managing dir at Piper Jaffray.

Giannuzzi, with tentacles into all aspects of bev biz, summed broader environment this way:  in 2019 his firm did more equity financings than ever before, tho exit market “has been a little tougher.”

There’s “enormous amount of capital out there” with “firms investing at all stages,” First believes.  Not just conventional private equity but family office money, high-net-worth money.  “I feel we’re in a bit of a bubble but I think there’s going to continue to be money available to founders, but maybe not as easy money.”

“Capital is definitely still there,” said Lane, speaking from perspective of co that shifted from M&A to capital raises a decade ago.  Range of strategic buyers is expanding: “Look at beer and spirits players – we’re at the tip of the iceberg” of their moves into NAs.  While some players are becoming more cautious, “there absolutely are deals to be done.”

That broad universe of potential investors includes “founders who’ve raised their own funds, smart people with money behind them who’ve been through the process before,” Nick said.  “A lot of funds slide in from tech and bring their ideas – sometimes helpful, sometimes not.”  Over past 4-5 years strategics have started taking small bets, he said.  Added Janica: “We’re seeing the hedge funds move in, huge pools that you’ve never heard the names of before,” including publicly traded vehicles like T Rowe Price, along with tech investors and the VC set.

The strategics’ own approaches have evolved in recent years.  These days, Lane said, they’re seeking indications of “long-term sustainable growth,” not just a big distribution ramp that may not prove sustainable.  And “the profitability component has become much stronger.”  As First noted, startups should work to “build a cost and retail structure that’s sustainable in multiple channels and doesn’t conflict in multiple channels.”   Further, it’s not like the old days when the playbook for health & wellness-oriented brands was simply to expand out of the natural channel.  “Now it’s turned on its head,” so that a new brand may start in a grocer like HEB or in ecommerce.  To lure a strategic, a brand should be able to demonstrate a couple of case histories that it’s working in Publix or in Target, Janica advised.  Such efforts are eased by the far greater influence of data analytics people, who at some cos are essentially running the sales team, she noted.   

The panelists had advice for entrepreneurs considering overtures from strategics.  For starters, said Lane, “know why you’re doing it.”  For instance, motive might be to crack university campuses, which is tough to do without being allied with strategic.  But attorney Giannuzzi cautioned that there should be binding agreement on such moves.  “Don’t do a handshake,” he warned.  “If it’s not on paper, it’s not on paper.”  Such scenarios, as First noted, are increasingly common now that strategic players are showing “more belief, even hubris, that they can take a fast-growing brand and put it into their system and make it more profitable.”  Such incubation efforts are more likely to succeed if commitments of each side are made explicit at outset.

If exits are a bit harder to come by, Giannuzzi noted that founders have the ability to do various rounds along the way where they can take money off the table.  He also pointed to Vita Coco as example of co that, rather than finding exit, has been built into “a sustainable company that’s profitable and growing and adding new brands and adding a lot of value.”

Priority Should Be ‘Good People’ as Partners, Not an Extra Few Mil Valuation, Giannuzzi Urges   “No matter where the money is coming from, it’s ultimately about efficiently using the capital,” First reminded.  “These people are looking for a return on their investment and they’re serious about that.”  That said, “you need to wake up in the morning and not want to dread talking on the phone to the person who is your partner, there’s nothing worse than that.”  That partner hopefully is “someone who understands the life cycle, the challenges, will roll up the sleeves with you.  That’s critically important, no matter how much capital is out there.”

Giannuzzi echoed that view, noting that it’s easy enough to do due diligence on prospective partners’ track record.  “This is a transparent industry,” he said.  Since Giannuzzi Group is so heavily involved in raising equity for its clients, it usually has another client who deals with that capital group.  Even if it takes more work than that, the due diligence shouldn’t be short-circuited.  “I caution clients so concerned about an extra $5 million valuation, that they should be focused on being with good people.  In all the years I’ve been doing this, there’s never been a brand that didn’t have a rainy day.  When stumbles happen, you want to be around people who’re caring and have heart.”

Austin-based Cuvee Coffee is launching a quartet of canned cold-brew extensions that include 2 that make concessions to more mainstream tastes – and 2 that happily go their own way exploring unusual flavor combos.  Coming along in 12-oz widget-based nitro line are Mocha and Vanilla entries echoing those found at numerous rivals, as well as Lemon Ginger and Banana that go places few others have trod.  During line reviews with store buyers, Banana has proved a particular fave, founder Mike McKim told us last week.  “Think chocolate-covered bananas,” he said by way of elucidation.  Joining existing Black and Horchata entries, they should be available for tasting in Mar at Expo West in Anaheim, Calif, marking Cuvee’s first presence at natural foods extravaganza. 

The roaster, café operator and CPG player whose motto is “always something brewing” has been a hive of activity lately, with several other innovations headed to market.  Also imminent is co’s first concentrate entry, a 3-liter bag-in-box offering with a year’s shelf life that’s meant to be mixed 50-50 with water.  McKim said he’s aiming to have that out by Jan if he can.  That finally puts him in key format wielded at outset by 2 local cold-brew rivals, Chameleon, now owned by Nestle, and Kohana.  And he’s adding single-serve filter bags, compostable pouches that eliminate the complexity and plastic waste of single-serve formats like K-Cups.   (We’ve profiled Bay Area co called Steeped that’s been popularizing the format – BBI, May 16 – but Mike said he’s sourcing his from Calif rival called NuZee.)  Mike offered updates during stop we made on Fri at Cuvee Coffee’s East Side café, whose beer list included its 9th and latest collab with Austin Beerworks on its seasonal Sputnik Russian Imperial Coffee Oatmeal Stout and a variation of that called El Sputniko that contains mole and ancho chili peppers.  Co has also launched whole-bean blend called Sputnik RICO Stout Blend, whose packaging bills it as “coffee for beer lovers.”  So, yes, there’s “always something brewing,” indeed.

Meanwhile, co is moving ahead with its nitro entries infused with 10 mg of hemp oil, which are line-priced with regular cold-brew cans and recently transitioned from isolate-based to broad spectrum.  Like others in space, McKim is reluctant to say much about retail partners given regulatory uncertainties surrounding RTD cannabevs, but he’s pushing extensions mainly in Denver and Portland, Ore, markets.  As some may recall from Mike’s cheeky run-in with Texas Alcoholic Beverage Commission a few years ago over his use of crowlers at store (he sent up the bureaucrats by repurposing “that man hates these cans” footage from Steve Martin’s The Jerk, to a less than rapturous reception from viewers at the ABC – BBI, Oct 25 2015), he’s not afraid to enter murky regulatory territory to build his now 21-year-old biz.  Recall also that Mike has received minority investment from Dallas PE shop Great Point Brands, which also is majority owner of cold-pressed juice co Daily Greens and Live Probiotic Soda, whose efforts to reignite growth we updated at Expo East last fall (BBI, Sep 13).  McKim declined to discuss his sibling brands within Great Point but said his own biz has been on strong growth track heading into new year.

It seemed like a stretch, and in the end a SF appeals court judge wasn’t having any of it: “no reasonable consumer would assume that Diet Dr Pepper’s use of the term ‘diet’ promises weight loss or management,” wrote Circuit Judge Jay Bybee in rejecting suit by consumer named Shana Becerra, who’s also gone after Coca-Cola on similar grounds after claiming to have long struggled with weight gain. As Reuters reported, Becerra argued that brand owned by Keurig Dr Pepper “misled consumers, including through ads featuring physically attractive models, and that its conduct violated California consumer fraud laws.” The 3-0 rejection by 9th US Circuit Court of Appeals “could doom a similar lawsuit over Diet Coke” if she chose to pursue it, wire service speculated. “We appreciate that the Ninth Circuit has allowed common sense to prevail and that it rejected the attempt to complicate something that is so simple,” KDP’s attorney, Evan Young, told Reuters in emailed comment. As Reuters reminded, a federal appeals court in Manhattan earlier this year upheld dismissals of similar suits vs KDP, Coca-Cola and PepsiCo under NY consumer fraud laws.

LA-based attorney at recent Cannabis Forum painted picture of what seems to be thin line between accommodating community requests and committing bribery in seeking cannabis licenses.  In presentation bluntly titled “How Companies Stay Out of Jail,” Allison Margolin of Margolin & Lawrence outlined that and other pitfalls in trying to navigate legally thru complex and evolving legal landscape.  She offered 6 rules of thumb for staying out of trouble.

To obtain license, developers generally lobby local govts, and that becomes an area where bribery and other criminality can occur, Margolin warned audience at Loews Santa Monica in event put on by BevNet.  In her own Calif backyard, in past 2 years the feds have indicted “quite a few mayor’s offices” along Hwy 10 corridor for engaging in bribes.  Just coupla weeks before her presentation, an assistant to LA City Council claimed to have been terminated for talking to FBI about potential illicit activities in cannabis arena.  LA has installed outright ban on developer lobbying efforts, said Margolin, a Harvard Law grad whose attorney dad Bruce Margolin led pioneering efforts to decriminalize marijuana.

One area where cannabis regulation differs from alcohol realm is that in cannabis you can operate as a cultivator, extractor and retailer, in contrast to alcohol segment where 3-tier regs dictate that you can’t be both a distributor and a retailer.  There’s an exclusion, tho: you can’t operate or invest in a testing lab, too.  So if any parties to cannabiz focused on those areas also have an interest in testing facility, prosecution may loom, Allison warned. 

First of Margolin’s recommendations were to be represented by an attorney rather than trying to navigate tricky arena yourself.  Second, she urged developers to be conscious of foreign money disclosure issues, given extent of foreign funding pouring into segment hemmed by domestic restrictions.  Her 3d observation was more encouraging: at state level in Calif, there’s been more pressure on city govts like Santa Barbara to go after people thru administrative process than criminal justice; that was route city took to take out 12 operations amounting to hundreds of acres of cultivation.  Fourth, beware of conflicts of interest: if somebody is involved in cannabis testing, then they can’t even have a share of a cannabis co.  Before partnering with someone, have them agree to LiveScan fingerprinting so you can perform due diligence on possible criminal record and do Lexis search to learn what their range of financial interests is in the space.  Fifth, be truthful in all your affadavits.  Finally, in contacts with city councils, always bring somebody with you so it’s not a private discussion and “talk about what you can bring to the community and what the community might want you to bring.”  But the moment it’s suggested that you should contribute to particular organization, “you should run, and come to me and we’ll figure out what to do.”

FDA issued final guidance on revamped labeling regs that require nearly all categories of bevs from soda to energy to bottled water to state on their packs that serving size is 12 oz, not the 8 oz size that many have employed that result in lower listed sugar and calorie counts.  By new guidance, any pack that contains less than 200% of the “reference amounts customarily consumed” (RACC) for that bev category needs to be labeled as containing just a single serving on Nutrition Facts or Supplement Facts label.  As related tables indicate, for carbonated and noncarb bevs, including wine coolers and all kinds of bottled water, it’s 12 oz – meaning that 23-oz can of AriZona Lemon Tea, for example, would meet requirement for being listed as single serving, requirement that will up stated calorie count from 24 g of sugar at 90 calories to nearly triple those amounts.  Separate category of flavored/sweetened coffee or tea likewise comes in at 12 oz RACC.  Dairy shakes come in at lesser 8 oz and juices/blends marketed to infants are 4 oz.  From what we can see, whether a particular pack is resealable or not plays no role in determination.

The revised regs go into effect on Wed for marketers doing $10 mil or more in annual sales, a year later for smaller cos.  But agency has assured producers it will play nice for first 6 months, working “cooperatively” to transition to new regs while reserving enforcement actions for later in year.  

The regs, which monitor range of edible products from chewing gum to pound cake, reflect process that began in 2016 with notice in Federal Register and resulted in regs issued in Nov 2018 that have now been finalized.  The RACC amounts are partly based on data compiled by National Health & Nutrition Examination Study (NHANES).

Among other issues, food items coming in at over 200% but less than 300% of RACC must employ dual-column panel that lists data for both serving size and full pack.  Under some circumstances, marketers of items falling below that range are allowed to use dual-column format, too.  Final guidance can be viewed here and RACCs can be found here.

CSD volume swung up from 0.6% decline to 0.9% gain as avg price increase was at +1.5% for last 4 wks thru Dec 14 in Nielsen mid-cycle all-channel data reported by Morgan Stanley’s Dara Mohsenian.  That’s down from avg price gains of +2.2% for 12 wks and +4.4% for 52 wks.  Coca-Cola CSDs outperformed with solid 2.9% increase (up from +1.4% for 12 wks) on avg price gain of 1.9% for 4 wks.  KO’s low cal brands were up 4.3% for 4 wks.  PepsiCo CSD volume decline was halved to -1.6% as avg price gain was at +0.8% for 4 wks compared to +2% for prior 12 wks.  Keurig Dr Pepper CSDs gained 1.4% (vs 0.4% decline for 12 wks) with avg price increase of 1.3% last 4 wks.  That’s down from price gains of +2.6% for 12 wks, +5.6% for 52 wks.  Private-label brands were off 3.1% with modest 0.5% price increase last 4 wks.

Energy Gain Accelerates on Lower Pricing  Energy drinks volume gain improved to +7.5% (up from +5.9% for 12 wks) with an avg price increase of 1% for 4 wks.  That’s compared to avg price gains of +2.3% for 12 wks and +3.8% for 52 wks.  Red Bull volume was up 4.9% on slightly higher avg price gain of 1.3% for 4 wks.  Monster Energy volume improved from 1.2% gain for 12 wks to +5.5% last 4 wks with lift from avg price decrease of 0.3%.  MNST prices had been up 2.4% for 12 wks.  (Note: there’s no breakout of fast-growing Bang Energy in this data set.)  Rockstar’s struggle continued.  Volume fell 7.2% despite avg price cut of 2.4% for 4 wks.  PEP energy brands improved from flat trend for 12 wks to 2.5% gain last 4 wks on avg price increase of 1.6%. 

Body Armor Still Rolling; Gatorade Gains  Sports drink volume rose 8.3% with solid avg price increase of 4.8% for 4 wks.  That’s nearly identical to category’s 12-wk trends in all-channel.  PEP’s Gatorade volume increase accelerated to +8.2% (up 2% from 12-wk trend) on an avg price gain of 2.2% for 4 wks.  KO’s Powerade, on the other hand, had 3.3% volume drop (vs -0.2% for 12 wks) despite avg price decrease of 1.5% for 4 wks.  Body Armor volume shot up 88.2% (up from +76% for 12 wks) with lift from avg price decrease of 4.1% last 4 wks.  Body Armor, like Powerade, moves thru KO system. 

Private-Label, KO Lead Water Gains   Bottled water volume rose 5.9% on small avg price decrease of 0.3% for 4 wks in all-channel.  That’s nearly identical to 12-wk trend.  Private-label waters gained just under 10% on modest price decrease of 0.7% for 4 wks.  Nestle water volume slipped 1.5% with avg price increase of 0.9% for 4 wks.  Coca-Cola water volume improved to +3% (up from +2.2% for 12 wks) on avg price increase of 2% for 4 wks.  PepsiCo water prices were up solid avg of 4.9% for 4 wks while volume slipped 2.2%. 

Privateer Holdings can claim to be first cannabis venture capital firm.  But as with so many other ventures in highly fluid space, that wasn’t the plan.  As managing partner Mike Blue and partner Christian Groh recalled at recent Cannabis Forum in Santa Monica, Calif, original strategy was to serve as private-equity shop.  But founding partners couldn’t find right investment targets, so they evolved to VC model with current focus on 4 verticals: data & distribution/online; medical/pharma, wellness/adult use, and brand/IP.  Their aim is no less than “to create a Coca-Cola, ABI or P&G of cannabis,” as Blue put it.  That means taking role “to shine a light on a still-shadowy industry with fully compliant, tested products.”  Given their role constantly evaluating pitch decks of prospective investment targets (not to mention selling ad space on Leafly platform), they also bring keen insight into trends bubbling up in fast-evolving space.  Hence invite to speak at event sponsored by BevNet.

Blue, Groh and a 3d partner, Brendan Kennedy, cofounded Privateer a decade or so ago, and have since raised about $200 mil in private capital and half-bil in public markets.  Its network of holdings employ over 5K people in 7 countries on 4 continents via such holdings as Tilray, Docklight (and its Marley Natural, Head Light, Goodship and Bloody Mary Jane brands), Leafly and Left Coast Ventures.   Their first and so far only acquisition was info source and retail platform Leafly in late 2011.  The rest have been self-created.  Tilray was founded in 2013 to serve medical/pharma space, and went public last year on Nasdaq as first cannabiz to trade on a US exchange.  Left Coast attempts  to serve wellness and adult use applications.  Docklight wields a brand and IP portfolio that’s focused on bevs, topicals, edibles with hemp-based CBD (HCBD) and other non-THC cannabinoids.

Tho Privateer had “virtually no competition” when it entered space, Blue and Groh professed not to be spooked by constant cascade of new entrants.  It’s “still a complete white space” with room for continued innovation, as new form factors emerge on almost a weekly basis, Mike argued.  Like alcohol, cannabis is a countercyclical industry highly immune to other macroeconomic trends.  And the opportunity is not limited to just US and Canada; there’s “global paradigm shift” under way, he believes.

From Capital Squeeze to Froth, Then Back to Squeeze   Blue recalled that at Privateer founding a decade ago, raising its first $7 mil took 2 years, “hardest round ever,” before things opened up.  As Groh noted, prior to this past summer, “there were no consequences to making an investment or acquisition,” with rollups happening for hundreds of millions of dollars, “all on the come . . .  18 months of a no-consequences situation.”  By contrast, “today the capital markets have changed drastically, people are spending more time doing diligence and digging in.”   There’s definitely a capital crunch, especially for cos at Series A or B stage, “tho it’s still not as difficult as 10 years ago,” Blue said.  Given uncertainties, it’s “difficult now for both sides to find a market clearing price to bring in dollars, but companies are continuing to close on capital today,” he said.  (Among Privateer’s holdings, Leafly, Docklight and Left Coast Ventures all are currently in capital raising mode.)  That said, if there’s a change in policy by the US administration, that “could flip back” to being wide open again, Groh believes. 

As with Coke or ABI, Privateer is orchestrating broad array of brands to serve varied oppties in segment.  It partnered with family of Bob Marley for wellness/adult use space but wields a host of in-house-created brands for other segments and form factors, from raw flower to refined products.  “Each brand is focused on one or a handful of these categories, we don’t believe one brand is capable of doing everything.”  Tho true branding wasn’t really happening 5 years ago, these days you can spot hundreds of brands in Calif dispensary, and Leafly sees total addressable market of potential ad clients as exceeding 10,000.

5 Key Trends   So what have the partners gleaned from their review of endless stream of pitch decks?  Groh outlined 5 trends.  First is commoditization and consolidation: at end of day, it’s an agricultural product.   So price per kilo of 99.9% pure cannabis has descended from $50-75K at time Privateer got into biz a decade ago to roughly $1,000 today.  (But CBC cannabinoid still very high per-kilo price above $40-50K.)  So-called MSOs (multistate operators) are building out their footprints as quickly as possible.  Privateer principals are seeing lotta venture capital going into other ways of creating cannabinoids than conventional extraction methods – say, out of yeast or e-coli or algae or even orange peel extract as a terpene, Christian noted.

Second trend has been emergence of products and brands as biz diversified from dry processed flower to approach total addressable market (TAM) that’s much bigger and more quickly scalable.  Third has been supply chain specialization.  As landmark state on legalization trail in 2012, Colorado required vertical integration “from seed to sale,” so many innovators had to play in all aspects from cultivation to retail.  Now the model in a state like Calif “is based off the 3-tier system,” with array of nuanced products and services entering market, say, tech co creating tax remittance app for distributors.  Fourth is increased professionalization and compliance, with the US increasingly viewed as leader despite head start of Canada over past coupla years.  “A lot of groups want to discredit the space, so it’s very important to be legal and compliant,” tracking chain of custody from seed to sale.  “We like to say we’re a compliant-driven organization,” Groh emphasized.

Fifth key trend is move beyond just THC and CBD to other cannabinoids.  With small base of scientific research into roughly 200 known cannabinoids, Tilray has been conducting clinical trials around world.  That should create new opportunities – say, for THC-V, for which clear indications have emerged that it’s an appetite suppressant.  Privateer views total rev oppty for non-THC CBD to be $16 bil by 2025.