Historic performance data shows that most Venture Capital (VC) and Private Equity (PE) firms that focus on technology ventures fail to provide positive returns, while investment cycles generally take more than 7 years to identify winners and losers. The hottest new fund today, will most likely never return its value to investors seven to ten years from now -This is based on data, not negativity.
VC and PE funds aim to provide equivalent annual returns of at least 12%. This is not a very high bar, especially on industries where startups can grow at least 30% CAGR. So why so many technology funds fail to provide profitability? The answer is simple. Technology Venture Funds rely on exit events that provide returns in the 10–100x multiplier, with one exit having to cover the whole fund in terms of returns. Quite often, a company that received $30M in funding will be discouraged by investors to consider a $100M acquisition (that would be ~2x return to investors).
Consumer Packaged Goods (CPG) focused VC and PE funds paint a very different picture. CPG Ventures aim to establish market-share, distribution, and brand value - Unlike technology ventures where the goal is world domination.
The different CPG focus enables plethora of benefits to investors. The main deciding factor in making Outroll Ventures a CPG focused fund was the lower capital risk. Lower capital risks mean that aggregate fund returns will be on average higher, greatly reducing the need for supersized exits. Let's say that on a fund with 10 investments, the worse investment loses 10% per annum, while the next 7 return 10% and the top 2 return 200%. This is a very oversimplified example, but this fund would most likely beat all industry benchmarks and definitely most VC peers.
Because CPG removes the need for unicorns and supersized exits, funds can actually on creating sustainable businesses. Such businesses can have much lower failure rates, as the goal is not all or nothing.
CPG Venture Funds can also help to add horizontal and vertical integrations that benefit all portfolio companies. This is very true at Outroll, where we invested in our own distribution and logistics company, our own ad agency, and our own e-commerce management company. All of our portfolio companies benefit from the infrastructure and reduced costs above.
The landscape for CPG is also bright beyond VC into PE. See's Candies were acquired by Warren Buffet in 2007 for $25M, and it now returns over $2B in pre-tax income since then, an 8000% return.
CPG ventures receive less attention from the media as over-leveraged, over-valued, over-funded technology counterparts. On the upside, CPG ventures return much better profitability without the competition from other funds.
CPG definitely deserve greater interest from corporate, institutional, and family offices looking for fantastic opportunities.