There’s one type of startup I never invest in: CPG companies. These startups were the darlings of the bubble as investors poured billions into companies like Peloton and Casper. But now, this category has become radioactive.
Here’s why…
Terrible Public Comps
Even the biggest winners in CPG are in the toilet.
Peloton is down over 95% from its peak. Allbirds has been left for dead, with a market cap under $60 million. Even Warby Parker is 60% off its peak.
When you invest in an early stage startup, you dream about an IPO. But in CPG, even if you get there, you still don’t make much money.
Difficulty Scaling
When I order a Peloton, Peloton has to take metal and wires and make a brand new bike. If I sign up for Notion, all Notion has to do is make me a log-in.
Software scales much more easily than a physical product. That’s why it’s easier for a software company to grow fast.
And since selling an additional seat for a SaaS product costs very little, the gross margins are great. The same can’t be said for Peloton.
Black Holes for Capital
A software company needs capital to hire engineers and sales/marketing people. A CPG startup needs those as well.
But it also needs a bunch of additional cash to build inventory.
If I order a pair of Allbirds shoes, Allbirds has to have a warehouse full of them ready to ship. This means they need to spend a fortune building up all that inventory.
That’s a cost a software company doesn’t have. And of course, no one knows if these items will even sell!
The China Problem
If a miracle happens and your CPG product is a hit, you have another problem. Someone in China will knock it off within days.
Expect to see items that look just like yours on Amazon and Temu. The price will be a fraction of what you charge.
Many CPG companies find themselves playing whack-a-mole, fighting one Chinese copycat after another. It’s a battle that’s hard, if not impossible, to win.
One Time Only
If you beat all the Chinese copycats and make that sale, you have yet another problem. Many sales in CPG are one-time only.
If I buy a Casper mattress, I’m probably not going to buy another for a long time, if ever. Meanwhile, software companies often have recurring revenue.
Some CPG companies like Peloton have found a way around this. Their bike comes with a software subscription. But many other CPG startups aren’t so lucky.
Wrap-Up
With so many headwinds, investors have mostly abandoned CPG as a category.
In a bubble where the cost of money is 0, investors threw cash at anything. Mattresses, toothbrushes, coffee shops, why not?
Those days are over.
CPG may be a tough category, but I’m still excited about investing in consumer software startups. Selling to consumers can be awesome, but only if you’re peddling the right thing.
What do you think of CPG startups?
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