Are Investors Starting to See Dietary Supplement Dollar Signs?
Despite the vitamins, minerals, and supplements (VMS) being one of the fastest growing consumer packaged goods (CPG) categories in the world, you rarely see the flashy private investments, large strategic mergers and acquisition (M&A) activity, or even public market exits like you see in many other consumer product categories.
Why is this the case? Are dietary supplement businesses not investable?
To be honest, you probably haven’t pondered that question much unless you have founded, built and then tried to exit your nutritional supplement business. Regardless, if you’re a fan of the show Shark Tank, you might intuitively feel my above statement is valid. That is because Mark Cuban usually turns into the loudest “Shark” on the panel and makes it his quest to turn all other Sharks negative in explaining how these businesses are not investable…
…it’s usually memorable, but is he correct?
To start, I think its important to look at some areas that might be holding back dietary supplement businesses from attracting investors.
Product
The core of any investment decision surrounding consumable CPG categories is the physical product itself. You might believe in the leadership team, branding, or other elements, but its fundamental that you believe in the product(s)!
For me, I firstly look at a product’s importance in solving a consumer problem or pain point. This is a positive for dietary supplements, because like “all” functional CPG, it has an underlying intent behind the product’s creation that should be focused on solving a consumer solve a problem or pain point.
This is where the positives usually stop for me…
- Is it Proprietary? — for something to yield the returns that major investors seek, they need to have confidence that it can’t be easily copied by competitors quickly. With recent trends in transparent labeling, this creates less ability to create “special formulas” due to the market’s increased negative perception.
- Shortened Brand and Product Life Cycles — many of the most popular dietary supplement categories have become saturated and noisy, thus causing a more fickle consumer base. This is because the noise creates an environment where consumers see many variations of substitutes that draw them into switching. This hurts the longevity of the brand and/or product, due to emerging trends changing the purchase criteria.
- High Customer Acquisition Costs (CAC) and Low Lifetime Customer Value (LCV) — this is another problem that occurs with more saturation and noise in a competitive landscape. To attract more buyers, you have to drive up costs associated with the purchase funnel. After getting a purchase, the noise can create a recycle for the buyer to reassess the purchasing decision, which can create less loyalty even if the buyer is pleased with the product.
- Is Category is Easily “Amazoned”? — if you pay attention to my content you know that it’s well documented that the dietary supplement category is high on Amazon’s list of private label and exclusive brand creation.
Founder and Leadership Team
Depending on how early of the investment in the brand’s life cycle, an investor is looking at how confident they are with the leadership team to execute on ambitious plans within a highly competitive landscape.
I am going to be completely honest here and say that more times than not, this is a huge hurdle for the current crop of dietary supplement founders and leadership team. On one hand, you very passionate entrepreneurs that are above average usually in one of those three areas; science, branding/marketing, or sales. Having one of those skills at an above-average level and you can get your nutritional supplement brand up to maybe $5–10 million in annual revenue.
Problem is, rarely do you see many of these same businesses progress past that level because of the founders and/or leadership team does not posses the full complement of skills that also includes above-average operational and finance experience. The business grinds to a halt and the ability for the business to get over that revenue plateau and maintain a meaningful growth level needed for major investment is rare.
Corporate Assets or Processes
Admittedly, this is where I see the most movement happening to correct this “investable negative” and also where the most opportunity still lies for entrepreneurs in these spaces that are looking to build an exit worthy business.
Communication Innovation — going back to the point on high CAC and low LTV, this is where a huge opportunity lies with intent-driven CPG categories like nutritional supplements. Consumers are bombarded with information online, but even having it all at their fingertips, it still creates confusion on how to implement YOUR products into THEIR lives in a sustainable manner.
Technology is Non-Existent — I am an not an advocate of adding technology for the sake of technology. That being said, if it can automate or enhance the team’s ability to focus on core competencies and improve customer experience, its a welcome addition. If an investor is getting involved with a business, they expect these things to be set-up for success and not a hand holding experience to get the business up into 2019 standards.
No Assets — the dietary supplement CPG market is made up of marketing companies that sell XYZ (which most outsource partly or completely as well…). That means that most don’t own their manufacturing capabilities, they don’t own any proprietary marketing strategies, internal technology resources, or have vertical integration with distribution or retail (past direct to consumer)
Market
It was mentioned a few times above, but the competitive landscape is tough right now. Despite that, I actually think this is the biggest strength to the category being investable.
- Incumbents (legacy brands) are struggling because they don’t have direct relationship with their customers. They are not able to meet the fragmenting market demands.
- As stated above, the VMS category of CPG is growing in the high single-digits compounded annually. That means the market can be expandable and those solutions can be offered with fragmentation in mind to disrupt legacy brands.
- Gross margins have always been strong in this CPG category, but net margin pressure is strong in most cases due to over-saturation in the many parts of the market
…but could that be starting to change?
Supplement start-ups are gaining traction as investors spread hundreds of millions of dollars in cash to lucrative areas beyond apps and gadgets.
Nootrobox (re-branded now to HVMN) was used in the thumbnail image because it did not fair to well on Shark Tank, but it has now led investment rounds with Ex-Yahoo CEO Marissa Mayer and from famed venture capitalist firm Andreessen Horowitz.
Some of the other recent investments include…
- Ritual Vitamins — $25M (totaling $41.5M total)
- Care/of — $29M from Goldman Sachs
- Unilever buys Olly Nutrition
Why WILL this Continue to Change?
The short and sweet answer is yes. There is a multitude of reasons, but I think I’ll leave you guys with these two reasons…
- Product category lines are blurring with new consumers looking for “better for you” and “healthier for you” options, which demands larger CPG companies to fill their portfolio gaps with market-vetted businesses.
- Personalized Nutrition (1.0 and soon 2.0) is going to need major investment for it to become a reality. The entrepreneurs and businesses looking to solve this disruptive shift in consumer innovation will see money flowing their way.
