Former founder Jon Sebastiani sold his popular beef jerky company, Krave, to Hershey's for $220 million in 2015. Since the sale, he’s kept busy, launching a dual venture fund and incubator last year to help nurture the next generation of consumer packaged goods (CPG) companies. Now a year into his new gig, he shares insights into what challenges new food companies face, what makes a young venture promising and which foods trends to watch for in 2017.
Natalie Sportelli: What’s the central lesson you took away from starting Krave that you’ve translated to your fund/incubator Sonoma Brands?
Jon Sebastiani: The product has to make sense to you and when it makes sense to you it’s an easier value proposition. There are a lot of different elements that go into a successful business, but a big part is filling a really easy-to-understand need.
Sportelli: How have investor-founder relationships in food evolved since you started Krave?
Sebastiani: It’s an overused word, but it’s a very important component: value-added capital. Long gone are the days when big scary private equity companies come to the firm and say this is how much we’re going to invest and these are the terms. The power in the relationships rests with the entrepreneurs.
Sportelli: What spurred this reversal of power?
Sebastiani: Enough significant returns. Institutional investors, corporate investors, everyone is trying to tap into early-stage companies with significant value creation. Having sold to Hershey's, I understand what big strategic companies can’t do. Big companies want to only invest in things they believe they can help. The appeal is because the returns are so astronomical. Most entrepreneurs are looking for capital and they are going to look for term sheets that are pro-founder and friendly. Seven years ago the general rule was if your company wasn’t doing $20 million you were too small. Because of the returns, Krave returned 19X our seed investor’s investment.
Sportelli: What are some common challenges CPG companies face as they get started?
Sebastiani: One of the biggest challenges right now is there’s so much money ready to come into the marketplace. To start, founders aren’t putting themselves into good partnerships and they’re not recognizing the negative impact if they don’t hit astronomical revenue targets and then we start to see founders have down rounds. They aren’t focusing on their partnerships, they’re chasing value too much.
Sportelli: What does Sonoma look for in companies it accepts to its incubator?
Sebastiani: We’re looking for categories with tremendous upsides. Unique ideas are rewarded heavily. We’re looking for scalable, repeatable business models. We’re looking at innovation in usage cases. Innovation in the product is hard, so we look at innovation in usage cases. One of the brands is Smashmallow, which is introducing flavors and is low fat, making that a new usage occasion situation for marshmallows. The other brand is Zupa. Souping is the new juicing, and a better way to get nutrients. Drinking soup on the go is reinventing a usage occasion.
Sportelli: At what point does Sonoma get involved in companies in its incubator?
Sebastiani: We’re engaging with other companies past the concept stage. We’re dealing with founders. They have enough data to suggest if their original hypothesis is in part true, we’re ready to scale the brand. We’re entering the fray at the point where the founder has reached a certain revenue threshold. We don’t invest in companies with less than a million in revenue. From there we’re helping them think through their promotional program, helping them with social marketing efforts and with demos to help build their story that way.
Sportelli: What was Dang’s appeal when choosing which companies to invest in?
Sebastiani: What we see in Dang is a plant-based snacking solution. They are on the cutting edge of moving away from potato, corn and flour. Plant-based snacking is looking for more fruits and vegetables and the chip category is competitive and huge. There are multiple potential buyers for Dang if we continue to prove our concept. The challenge is how do you draw consumers away from a corn chip to a coconut chip.
Sportelli: How are you looking to grow Sonoma this year?
Sebastiani: We’re looking for the continued success of our two brands and to launch two to four additional brands to invest in and looking to found number two.
Sportelli: What trends will we see in CPG this year?
Sebastiani: Plant-based, non-dairy snacking and meals. Fat is clearly back in, good fats especially. We also see this concept of a liquid feast, like bone broths, and that consumers are ready to drink their meal. By and large the very food category itself shows tremendous evolution to healthier, more ecologically friendly options and drinking nutrients for functionality. Beverage as an accompaniment as its strict function is getting replaced, to some degree by meal replacement.
