Chris Fenster - A Masterclass in CPG Finance

shelf help today we're speaking with Chris Fenster
founder and CEO of Propeller Industries
the embedded finance and accounting partner to
release some of the most iconic emerging
consumer brands in the last 18 years or so
Chris started propeller I think back in in 2008
after spending a good chunk of time in
13 years or so as a both a co owner
and a CFO of of a series of businesses
some of which exited to
to some significant category leaders
start to finish was
was one which is just the one that jumped out to me it's
was a leading independent bike shop chain
that was actually I think started in
my hometown in Marin
County California so that one immediately
jumped out to me yeah propeller team I think it's
a little over 250 people across three continents
they've served close to 15
venture and growth stage companies
including 24 unicorns so
Chris and the team has definitely seen a lot so very
excited to dive into it
yeah Chris maybe just kind of first off for listeners
maybe the for the ones that aren't that familiar
with propeller love it just get
quick lay of the land just in terms of kind of the
the origin story the why behind
starting propeller way back in 2008
and then maybe just kind of high level what the Kenna
team does actually does for
emerging consumer brands in terms of fractional CFO
controller accounting F P N a
trade spend all that kind of stuff and then
we'll go from there
sounds good first of all thanks for having me I'm a
yeah they say like you know big fan
long time listener I sort of
stumbled into this like I I did not set out to
start a company or be the
CEO I I'm kind of more of a working in the background
comfort level person and um so I was the
first finance hire at
four startups and the first one was the cycling
business that you talked about in San Francisco
that was I thought that was gonna be like a pit
stop on the way to sort of going back to business
school like I just was looking for something
entrepreneurial to do to talk about in interviews
and just really fell in love with the business
and I think part of it was just like
having impact in business building and you know I
spent a couple years before that in consulting
like my first job out of school was at a consulting
firm and and I Learned a lot but I
I didn't build anything that anybody would
notice you know nothing that would like outlast me and
and
so I just I had the bug and I I was was interested
in doing something more entrepreneurial
before B school and and sort of stumbled into this
cycling business
and just wound up falling in love with it
and and I love the impact that I could have and
it was really dynamic
and when I really started to think about it I'm not
much of a school person like
I was okay at it I wasn't great at school
just sort of felt like OK I'm gonna stay here and and
learn more and and see what we can do with it and so I
I scrounged up some money from friends and family
and and invested and became partners with
the guy that hired me and and we just we busted
our asses and made every mistake in the book and
but also wound up selling the company to Trek
a couple years later and
you know I was like 26 and we had this
you know wasn't a huge business but but it was solid
and and you know you'd heard about it you
like it was really well known in the
area I think it was the second largest
independent bicycle dealer in the country
at the time and
I just sort of felt like the man you know it was a
it was a cool thing to do and it was
you know it was sort of addictive
like it was like a dopamine hit I think to feel
like I could make a difference
somewhere especially after consulting
you know I was just like another kid in a suit
and you know wasn't like a life changing financial exit
uh but it was definitely
life changing in terms of like direction and and
passion so um
what I didn't know was how hard it is to actually
do what you know what we had done and so I I um
I partnered with another guy
who'd built in apparel business and um
you know we we spent six years trying to
do the same thing and just ultimately
couldn't do it we ended up selling the company but
you know I left with I left with debt and um
you know it was just it was
it was an unsatisfying outcome
yeah you know for me and for all of our investors
and sure
you know it was
I just I Learned a lot in the process right so
I after that I was the first finance
hire at two more startups and neither
one of those really amounted to anything but
you know I think what I sort of finally
figured out is that I
I really love the work and I can't help myself
like I love getting into early stage companies
and I love
the exercise of figuring stuff out and I'm nerdy
and I'm determined
and and I'm sort of stubborn and I'll I'll
stick with something until I really
get it right and that was it was a good role
for me but I was a little gun shy
and I didn't want I really didn't want to start a company
so I was looking for somebody else to hire me
to be like the startup CFO person
inside a bigger company
and I talked to a bunch of other
firms in San Francisco that had like part time
CFO people and
none of them focused on startups
which I just thought was really weird
and so I was I was just sort of like you know what I
I think I know how to do this and after that second
company
I had I was looking for a rebound job cause I
you know I needed a paycheck
cause I hadn't gotten a paycheck in a while and
and I stumbled into this nonprofit that handled
finance and accounting for 300 other nonprofits
it was it's still there it's down in the Presidio in San Francisco
and that turned out to be the perfect model for what
would eventually be propeller
and so when I started propeller in 2008
I had this crystal clear picture
of you know what it would look like
because I'd Learned it this non profit
like I'd done it and it turned out to be really timely
it was
you know it was a little bit of foresight and um
I had the right DNA for the job
cause I was I was really determined to do the job I was really passionate
about it and if those three companies
in a row hadn't failed I never would have
started it but
you know when when things everything went digital
everything
in the finance stack went from analog to digital and
everything went from on premise
to cloud and those were just both massive tailwinds and
you know today almost everybody does
things the way that you know we started to do them and
2008 so now the firm's a lot bigger
it's not a startup it's you know it's 18 years and
but it really it all came out of that first
experience working in the
bicycle business that you mentioned
CPG pitch deck
which I'm sure you see plenty of that says you know our gross
margin is 40% let's say
but then you know realistically
some of the promos
some of the deductions and Bill back slotting fees
that 40% ends up looking closer to I don't know 12 to
18 12 to 15% or so
assuming that you know resonates with you I guess like
when you walk into a new
CPG brand that Propeller's working with
and you ask for you know what the true contribution
margin is by skew and by channel
what do you kind of I don't know typically find versus
what the team thinks the number is
yeah it's a good question
and and the answer has evolved over time cause I think
if we're talking about Propeller
18 years ago or 15 years ago
we were working with really small companies
our incoming clients was was basically anybody
that would hire us
right totally and I mean seriously and you know we
and we didn't know what we didn't know I had worked at a CPG
company previously so I had some experience
you know working at one CPG company but like definitely
didn't have the reps that I do now and so
we would see all kinds of stuff and it would look a lot like what you're describing
companies come in and and they don't actually
know that all their trade deductions
are supposed to come out of revenue and so right
you know margins are overstated on sort of a gap level
you know the bottom line number is is
more or less right but the the gross profit number is
is wrong and
you know we could we could fix that pretty easily
it would shake out
more or less the way that you described it
these days the incoming clients are are just
bigger so now there are there are a lot of and
bookkeeping
firms have gotten a lot better so companies
don't really need us
at that stage and at this point the companies
that come to us are you know are often doing
five or 10 million in revenue and they've been working
with a capable
bookkeeping firm or maybe they've got a fractional
CFO person
so the the numbers are generally in good shape
I think um
there is an an evolution of margins over time um
and that's something that I think we've gotten a lot more
clarity on you know as as the business has grown
we've gotten more reps
and we've worked with larger and larger companies
um
so you know I think that's that's it maybe it's
it's a different question than one that you asked um
you know those those smallest companies with a
with a 12 to 18 margins
like a lot of them just aren't gonna make it sure sure
right like they they just never get funded
or they die before they get to propeller
um you know the the good ones will will
figure it out and then you know if we're lucky
enough to work with them um
you know there's a whole sort of evolution that happens
after that as they go into like these different stages
and they get you know different amounts of funding
so I'm happy to chat about that if it's helpful yeah
yeah go for it for sure that I think that definitely
that you can look at like between
five and 10 million and I've got you know we've got
we've got a lot of companies
in this data set like between five and 10 million
like typical margins in CPG
when they're accounted for properly are like 40 to
45 or maybe they they think they're 45
when we get the numbers
right they're really maybe 30 40
you know by the time we get like accruals
and slotting and everything sort of properly reported
the weird thing is that gross margins usually go down
before they go up
so I know that seems sort of counterintuitive
cause of like if you think they're at 12 and
you know 12 or 18 like well there's no
there's nowhere to go
you can't go down from there right and survive but
you know when the companies come in at like 35 to 40
like
they'll typically decrease
down to about 30% at like 80 million
and then they'll tick back up you know to maybe 40%
at 180 million and and and then they actually
start to accelerate a little bit so like 45% at 200 million is
is is
you know is pretty standard across the board
so the question is like why is that happening and
a lot of it is channel expansion
cause when you're in natural you just have
more pricing flexibility
a lot of companies
are starting out you know or a lot of our clients are starting out in the
natural channel
and you just have a little more pricing power there
but over time you get a funded right so so
you know at a certain point somebody
writes you a growth check and you've got 10 million
bucks in your bank
account and and a mandate to you know
go turn 10 million into
you know 50 million or whatever it's gonna be right um
so that drives a you know bunch of investment
like those dollars
are there to be spent and a lot of that
investment goes into
you know slotting and more competitive pricing
and you start to also see
channel expansion into grocery where
you know pricing is just a lot more competitive
and then you can also see category expansion
you know into new areas
where you know maybe you got a bunch of new products
but the volume is lower so the margins are lower
cause you haven't actually hit scale
yet so the combination of those three things like channel
expansion product expansion
and then just you know the more money you have the more money you're gonna spend
is part of what actually drives those margins down
trust me nobody puts this in their forecast
right nobody
comes in saying oh our margins are gonna go
you know from like
40 down to 35 but like that's what the data says yeah
so
that makes sense
interesting to be able to actually
see the data across a whole bunch of companies
yeah I'm sure cause
for a long time it was like wait I think this is what happens
but right I'm not really sure
yeah I'm sure as you guys got more of that data set
the more clients you get probably the more value
valuable you are to clients
cause you have that data set to say here's the patterns
we see we're gonna help you avoid it I imagine yeah
when it comes to cash conversion
I've seen some stat and you can
correct me if I'm wrong you're gonna know much better than
I do I've seen some stat that it said you know 85% of
new brands that fail in the first year
that they do fail in the first year and the reason it is
is just often because cash just kind of dries up
during that gap between when you're paying your co
packer
and actually getting paid back by the retailer um
assuming that from that you know assuming that you're
on the same page like from your seat what does the
I guess kind of want to call it working capital
death spiral actually look like and then
is there a certain revenue or kind of gross stage
where it typically hits like where you're just talking about where
you got up to that much larger size 80 million
where gross margin drops a bit I imagine
that's not where this happens but yeah where would you
is there kind of a pattern where you see
at what revenue or kind of gross stage
where this really starts to hit and where companies can
start to stumble and potentially fail
yeah so look let's let's call out like two different
failure modes for the death spiral there's an early
failure mode and a lot of that is unforced air
you know where founders
figure out how much capital to ask for by
looking at the losses that
show up on their financial projections
like on their PNL so they they
figure out like how much money are we gonna lose
over the next you know 18 months and and
of course they always sort of underestimate it uh
cause you know there's a bunch of costs
that aren't in there that should be in there
but a lot of them just completely forget to
think about the balance sheet it's just like it's
and it happens a little bit less frequently I think for our
you know our clients
now that we engage a little bit later but sure
you know inventory 60 days of inventory and you know
60 days of accounts receivable
you know minus maybe a little bit of accounts payable
like that's the number and in a lot of cases
whatever the number is on the PNL it's
it's double that is what you really need and so they just they wind up not raising
enough money
and running out of cash before they've sort of hit the
you know the proof point or or the the
threshold to be able to raise more money at a higher
valuation it's just completely because they weren't
you know properly forecasting they weren't thinking
about the working capital needs of the business so
so that's the
that's the first failure mode and you know that
and that's one that we it's it's preventable
you know but not if you don't have the right resources
around you and by the way like your bookkeeper is often
not thinking
about this or even if they are thinking about it
no they just may not have the sort of career
confidence to get in your face and tell you totally
right so
you know put people around you that will you know
have the hard conversation I think the middle failure
mode is a little bit different and this it's it relates
to what we were talking about before with margin
so you know you brought that up and I think it's a good point like
this is more about focus and
channel discipline product category like
I'll ask you so would you rather have
a 20 million dollar a year business
with a single product in a single channel
or a 30 million dollar a year business with
a dozen products in natural grocery
club and Shopify like 30 million or 20 million
skew cause it's a lot easier to manage
a lot less inventory risk
like you're not you're inevitably not gonna be sitting on
one skew that's selling slower than you thought
well you also that I think that's the right instinct
and this starts to get into
another piece of it which is sort of
what do what do you want
or what do you and I want
like what do our investors want what is the cap table
want twenty million dollar business
with a single product in a single channel is beautiful
it is and for the reasons you mentioned it's simple
and it's like that
it is um it's way more efficient
it's way more capital efficient
and at least as it relates to sort of working
capital failure mode like every time you expand
your product you've got to get
you know minimum order quantities for inventory
you've got to load up a channel yep
you know you've got to load up the distribution centers
and then you know you've got a bunch of receivables
and then you're ramping up
with the distribution in those new channels
and so what are you you're doing a ton of trade
spending so every
every invoice for a dollar actually
you know comes back with 50
cents on it because of all the trade deductions like
it's horrible for working
capital and and again like people just aren't
a lot of times they aren't thinking
about it and you know even if they are thinking
about it like some investor gives you
you know five million bucks to go expand your business
and
you know you get out there and start doing it if you underperform in any one of those
four areas
you know you might have several million dollars
in working capital
tied up in the in the channel and then one of them maybe doesn't
work and it's like okay 30 million
you know in across the higher risk factors in that
in that bigger business
just it creates a lot more ways to fail
and by the way you had to take a bunch of dilution to get that extra capital
true so like this you know the value of the equity
that you have in that 20 million dollar business
that hasn't had the dilution of a fundraise versus
the value of the equity
that you have in that 30 million dollar business
that had to take dilution like you know you're either
average or maybe slightly above average in a
in a couple channels
maybe not all of them or you're killing it in one like
stay focused you know what I mean yeah
when for let's just say
it's a two part question I think
for brands that are sitting on
you know they've got a brand
that you know the revenue is growing
the growth is looking good but like cash position is getting
what's like I don't know maybe just call out like two or
one to three like
top level things that's like they should
focus on that could have the biggest
impact in terms of getting them in a in a
better position whether this
second part is related or not I'm
to take off you know inventory or
yeah gotcha okay so let me
let me hit the the first part first so like perfect
if they're not related you can separate them
well they yeah they're definitely related but it's
there's some complexity in it
but I I think I can unpack this so like
you know when you're running low on cash obviously
this depends on your runway
so it depends on your runway and sort of your
like how resilient your business is
you know are you within
spitting distance of profitability is your are you um
I forget who
coined this thing but like
are you default alive or default dead
oh I think it was day I think it was sax yeah
yeah that sounds like a like sounds like a sax thing um
so you know if if if you can get to
some position of stable cash flow
and that buys you time to go execute even if your
revenue has to decrease a little bit right so
if you're spending a bunch of money on growth I mean this is sort of the lever
that a lot of companies have pulled
over the last couple years
like you're spending a ton of money on growth and you're doing it
inefficiently
and and maybe some of that was subsidized by
you know investors that that you know
back the truck up and put a bunch of money in your business
I've seen extraordinary things from companies
that just have like unhealthy inefficient
marketing spending like becoming
efficient because they just didn't have a choice
it's amazing what you can do when your back's
against the wall and sometimes it just makes you wonder like why don't I just keep my back mostly
against the wall all the time cause it's just
it is so much more consistently
you know efficient so you know obviously look if
if you can get to profitability get to profitability
there's all sorts of things that we could talk about that would probably get me in trouble in terms of you know
how do you get your vendor your
your vendors to be patient
because for a lot of companies
you know the the cost of goods sold is the
single business biggest expense you know
besides payroll or sometimes you know it's even
bigger than payroll and so
I've definitely seen people get creative
in terms of going back to
vendors like uh you know their manufacturers
and and being transparent with them
you know about the challenge
like if if you can see a pathway to get to a fundraise
you know you might be able to just negotiate
something with them maybe they'll take some equity
cause they're already investors
right they're they're just not getting upside like
right their investment is basically
the receivables that they're taking on
you know what I mean so it's like they're
stakeholders in your business and I've seen people
make really good partners
out of them but you gotta be transparent like you know
it's just high integrity approach usually
usually wins there on the on the debt like I think
the right answer on debt is almost always
debt and equity
because the reality is like a a healthy business hasn't
has a nice ratio
of these things like there is no substitute
for permanent capital
and operating losses almost always
need to be funded almost entirely with permanent
capital which just means equity it could be you know it
a safe note
convertible notes like all fall into that sort of
permanent capital bucket
you just need a certain amount to
it's like the lifeblood of the business basically
but then it's super healthy to have
some debt on top of that and the right ratio
will be different for
you know for each business
like in a really heavily working capital
dependent business
that you know has a fair amount of equity
80% of receivables
and and you know maybe 40 or 50% of inventory
um you know can often be um
leveraged into you know asset based lending
and sometimes it makes sense to layer on a little bit of
venture debt on top of that depending on a situation
generally speaking
you should you should think of
of this as like a healthy
ratio that you know will evolve
over time like across stages
and at a certain point you know you can
you can do a ton of debt there like private
private debt lenders
at your hundred million in revenue
you know probably
profitable at that point but you just need to fund
working capital right all sorts of options
on the table at
that point but I think it's it's obviously
trickier for the smaller businesses
especially the ones that aren't within spitting
distance of profitability yeah
it's it's totally
funny it's kind of off topic
but not to throw us off but you
you talked about why don't businesses just
always operate like their back is against the wall
and I think it was I can't remember which of his companies I'm pretty sure it was Tesla and I think it was their president or
CEO or something it would talk about in some story
that even at their level
where they were doing you know
tens or hundreds of billions of dollars of revenue Elon
still like forced the company
of cash in the bank at all times so you like forced
the company everyone on the team
even at that size to have that mindset of we actually
our back always is
against the wall which is I thought was crazy
at that size
yeah I mean there's there's
just nothing like not having a choice to like you know
force you to figure out how to be efficient
right totally
and it's interesting too cause I like most of our
clients are pretty well capitalized
but there's a decent number of them that
that bootstrapped or just raised a really small
amount of money and like I've seen some unbelievably
good efficiency out of those businesses and in
I think in probably most of those cases the founders
would tell you that like they just didn't
it never occurred to them to
that they could spend a bunch of money to sort of buy the revenue
right they just they just had to be clever
they had to be creative cause they they just they
didn't know people that were rich or
totally I mean it's and it's
you know it does I mean it gets to your point um
like I think keeping
companies a little bit hungry is usually a good idea
let's talk about this thing called the Billion Dollar
Beverage Blueprint
for a second I think you published
this piece on this like
Liquid Death have all kind of had in common
from a financial
your standpoint and it seemed kind of like the
I don't know if you want to call it the punchline
kind of seemed to be the all three transition from a
built trade spend systems at similar scale
hired finance teams a kind of predictable milestones
I'm not exactly sure what it is but
yeah can you kind of walk me through the
the blueprint of kind of the patterns
yeah sure I I think there's a couple components
here I think the to to give all the companies
credit and just sort of state the obvious um
like the product is the business market timing
reading the tea leaves and the trends and
you know certainly for Ollie Pop and Poppy
it was I would say that it's sort of less
like prebiotics or gut health and more just healthy
soda I mean that was the thing I think that the
you know the investors and
and you know probably even like Ben and David
at at ollypop were were most
excited about like yeah great gut health
you know adds this functional benefit to it but
you know in this case like
I don't know that those would be the
you know the market size
opportunities that they are if it wasn't
really appealing to somebody
that doesn't care that much about gut
health like it just tastes really good and yeah it does
you know it's not it's not full of sugar and so
the you know between Olly Pop and Poppy I think it was
it was a little different like
you know Ben and David at Olly Pop had literally
built a similar business before so and and you know
I don't think it was sort of a great outcome
for them so by the way it's super remarkable that that
those two decided to work together
again cause like that never happens like I don't
I don't know if you've had a like a business
with a co founder but like when my second company went
sideways it was like it's just it's really tough like
you know me and me and Tim are
really good friends today but like it's tough to stay together and let
alone to decide to start
you know within a couple years of similar business like
yeah I think you know that
they really knew what they wanted to build
they had real clarity around it um
you know in the case of of um Poppy
founders had started a it was a different business
you know it was a like a vinegar a like
apple cider vinegar yeah I remember
they went on Shark Tank it was like a
mother's something or yeah yeah yeah mother's exactly
yeah yeah and then yeah Rohan invested and like
you know they made a decision to sort of pivot
into the category and like and that was a
remarkably good decision
and you know for Liquid Death that's obviously
that is a just phenomenal brand and
so much just crazy creativity but it's also
it's just it's a giant market right and so I think
the the thing there about sort of like
you know market size and market timing
you know you wanna get a billion dollar outcome
you like you gotta pick a billion dollar market
and in the case of
prebiotic soda not a billion dollar market
right like that's it was probably a
five million dollar market
maybe not even that when they started these businesses
but you know that wasn't it like the market
I would say is just healthy
beverages it's healthy soda
so I think that was the first thing and
it's probably worth saying that like yeah you need to be properly capitalized
and you know the least of it is just getting
some level of of you know professional financial help
in there and and um you know we worked with both um
Ollie Pop
and Poppy and and so we don't we don't have anybody
on cash basis financials like cause
you just you can't sort of do the strategic
piece of the work that
you know we're really meant to do without clean data so
at least getting them on scalable systems
that are stage appropriate
is I think the important piece there
the other thing I would say is just like competition
as advantage
is probably worth calling out and especially in this case because
lolipop and and Poppy are direct competitors like
and as I'm sure has been said before like you know
nothing like a great rivalry to make
both companies better whether it's like pro sports or
I don't know even like you think about like Federer
and Nadal just like pushing each other constantly like
we could see that sort of between the two businesses
like there's a super healthy rivalry but like
the other piece of it is is
when customers walk into the store
it's not just one brand it's like an entire wall
you know or just like the big stack in the cooler
and you know now it's like wait what what are all these
probiotics it just it really helped
I think speed adoption I think each company
maybe without knowing it really pushed the other
yeah totally and um
and that for sure helped the category and look at it now I mean it's just it's
you know it's going nuts and then the
the I think the last thing is just financial support
or even you know this this is true of all the
operating disciplines like support that can scale
like I think the only thing you can be certain of
you know in in getting a company
to a unicorn valuation is that you are
you are gonna have to break and rebuild everything
over and over again
and you know it's hard
you kind of have to build for the stage that you're at
sure like in most cases you can't overbuild
or even if you could that would be a super bad idea
but it it just means that you have to build with
flexibility
in mind like you've got to know that hey the
the person that gets me to this stage
is not gonna get me to the next stage and and you
you just gotta be willing to do that honestly that's
that's an area where
you know having a partner that can sort of provide
continuity across the different stages
it just gives you a lot of flexibility
and and in each of these cases like
you know almost every company
we work with that's had great
success has gone through a bunch of people
except maybe groons which just did it so fast hahaha
that was really like remarkable
and but different story but like
you know there's there's some collateral damage
that comes from you know that level of dynamic
growth and you know the nice thing about
a hybrid team or a you know a
a team that's like a combination of W 2+
you know some partnership is that
the you know the partners can provide some continuity
through the
the change which in most cases is inevitable yeah
I think you told me when we chatted
a few weeks ago you told me that typically
those brands will go through
four different heads of finance kind of along the way
um what changes about that finance job where
different people different skill sets
need to come in it let's just say at that you know
I don't know two to 25 million and then you know
up to the next is like you know 25 to 50
50 to hundred and then you know
getting that larger stage hundred million
hundred million plus
yeah so that's a tricky one I mean there's
there's sort of um
I think there are are really four distinct stages
let's call it between zero and and 100 million and um
and it's really hard to skip one like you
kind of have to go through all of them
which is sort of frustrating um
but it kind of it creates this paradox where if you
the more you optimize for the stage that you're in
the less capable
that person or team is of surviving to the next stage
so and I might break it down with like the first
sort of higher
the first need let's like call it the earliest
sort of zero to 5 million
like you said 0 to 2 but I think this happens
you know across sort of a pretty broad window
like the first hire
needs to be a survivor
like it just needs to be somebody who can do everything
sort of a Swiss Army knife role and look
maybe you've got like a bookkeeping
firm and you've got a part time CFO and
you know a lot of companies are just
they're just surviving it
right and the reality is like
your finances aren't that important
right in that earliest stage like I know they're
probably pretty simple too yeah it's so simple
yeah and I I feel bad saying this because like
this is supposed to be the thing I care about most in the world but like
dude nobody wants to be
you know the company with unbelievable
bookkeeping and a mediocre product right
or like not great customers
and honestly the bookkeeping
is not gonna get you to the next stage so like
you know be cheap and you know don't be irresponsible
don't get thrown in jail but like survive
right you just get to the next stage so
that sort of describes the the you know the kind of
mindset that you need
if you assume that then the next stage is this sort of traction
stage so like let's call it 5 to 25 million like
you know it's a lot of breath but
you know it's clear that you need to professionalize
you know the the finance function and
and you know what does that mean
that's like you know it's it's
cash to a crew
and it's let's make sure that trade deductions
like your numbers
just need to be right and they need to be consistent
they need to tell a story
a lot of times the founders
need somebody who can kind of be a translator
like what are the numbers telling us uh huh
you know and
and what does it mean like what should we do differently
are we healthy or are we unhealthy
or or you know what are the nuances in there and and
you know you have a lot of Swiss Army
knife type people in that zone
and um
and that's relatively easy to hire
for like there are a lot of sort of finance directors
in that zone like
there's some finance vps but they're they're not
like a company that size doesn't really need a VP
and like even if it did need one it's hard to recruit
great talent because most people that are really vps
know
that the job kind of sucks at that stage it's just a
ton of controller ship so it's like
you know the conundrum in this stage is like
you know maybe you want a VP
but like the person that's gonna take the job is probably more of a director
right or maybe it's a controller and they get
sure so you wind up like the failure modes
for this are like over titling you hire somebody
in in that stage
you're gonna outgrow them really quickly
you know if you have any level of success
and then you're gonna be stuck with somebody
that has a title that they haven't yet
had a chance to grow into and
you know we see this a lot'cause we have a lot of companies
in that you know in that sort of traction stage yeah
the next one after that is sort of like an awkward
phase because you've you finally get things working
pretty well in the traction
stage and like maybe you're in Quickbooks and you
you know you've got your inventory tools
and you've got your EDI and your trade deductions
stuff is like going okay and now you know somebody
backs up a truck and puts
10 million bucks into your business
and now you're going into that margin
stuff we talked about before and you've got a whole bunch of
slotting like
slotting is like half a percent when you're
you know super small
but like you know in that sort of like
20 to 80 million range
there's a lot of dollars coming in your
you know your channels are expanding and
slotting goes up to like three and a half percent
and and
you know and that's part of what's driving that margin
down
like that's a that's a difficult
it usually it helps to have some pattern
recognition in there like is it working
cause cause you know three and a half percent of
of you know 50 or 80 million dollars is a big number
and
you know you hope that you have good people in your
you know in your sales
team but like it it's really helpful to have a finance
leader the finance leader at at
25 million like probably doesn't have that skill set
unless you could convince
somebody to come down from a much bigger business
but so few of the companies
actually make it from 5 million to 50 million
that like a lot of them aren't willing to take that job
so you see what I mean like there's this like
it it just gets so tricky to move from stage to stage
and then eventually like if you're lucky
enough to get into that you know
seventy five hundred million dollar range like okay
that's a business that's like you know
in most cases clearly exitible
you know if it has growth you can attract somebody
from a much bigger business
to kind of come down market
that person's gonna have the resources
to you know hire up
the like a head of F P N a and and like just
do the things that you can do at the bigger business
and so usually
that's kind of where you start to find people that
you know can actually survive
you know to 200 or 300 million
okay and we've definitely
seen that you know in our businesses
the founder and kind of finance leader or the founder
a healthy founder and CFO relationship looks like and
maybe it's
another way to answer it when the relationship
breaks like what's the most common reason yeah that
the question really resonates for me because in those
you know four roles where I was a CFO at a startup
I I felt like my job was to sort of fill in gaps
for the
founder for the CEO and you know in every case like
the founders I was working with were really
really smart and in many cases
just had a ton of creativity
and I'm sort of a structure
like I'm more of sort of a back office like I'd I'd
probably more comfortable
working in a windowless room than like
you know going on a podcast but
that made me a good partner for them
like you know they were out with you know selling
or figuring out product
and I was in the windowless room
trying to make one system
talk to a different system or
you know figure out what story the numbers were telling
so I feel like every founder should be hiring the
you know the finance relationship
for their gaps and like a founder that went to Wharton
you know or used to work at
you know Goldman Sachs is probably not gonna need
you know a high horsepower F P N a C F o
so you know that might free them up to hire for domain
experience and maybe they don't need a finance VP
maybe they need a controller and and
you know that is really the you just
it's an opportunity filling that you know finance
leadership role is an opportunity to create
like a healthy balance between the the leadership so
you know you want some overlap but not too much yeah
the most common break
is is just growth I think it goes back to that talent
paradox thing that I was talking about before like
success breaks things and
you know maybe one of the unforced errors
around this is just hiring too early so like we we see
we have a growth stage practice
area now that was sort of
you know we we built that like three years ago
cause we just had more and more companies
that were larger
and and you know they were sort of graduating
they would they would you know they'd get to
$30 million or something
you know we'd always told them like you'll get to a certain size
where you should just bring it in house and you hire W2 people and
you know companies were they were doing that
but then you know maybe the growth slows and and um
you know the business um
you know it it's not quite at a point
where it can get to the next level and then they're trying to save money and they're realizing
they're spending
too much so they would come back to us and
we you know we eventually realized that um
we were losing our healthiest
companies so we we built this um sort of a different
product it's like a different service
model for companies in like called 30 to 300 million
range and now we've you know we've got
like dozens of nine figure businesses
in that thing it's not really what we're known for but it's sort of
you know we're doing unsexy
right you know behind the scenes kind of work
you know part of what we were um
solving for there was the failure of early hires
so you know somebody brings in a director um
you know at 10 million they outgrow a bookkeeping firm
at 5 million and then they just assume well we
you know we should just hire a W2 so
who can we afford and who can we attract well it's a
director level person who comes from a good company
you know you get somebody in that business
but then the business
triples in size in 18 months and like
the person's not gonna make it and you're also not really at the point where
you know you can hire
for the talent that you need so some of those companies
would come back to us and that's a yeah
that is preventable cause I think
the thing is when you outgrow your bookkeeper
it's not that like you've outgrown
you know a a
um you know a fractional
model I don't wanna use that word
cause like we don't really call ourselves
fractional anymore cause it just
it you know it feels like a part time thing
build me a financial model and then bail
that's not what we do right
so we like we call ourselves embedded now like
you know we'll start early and some of these cases
like with good culture we've been in that business
almost as long as like Jesse the founder
you know so we think about it a little bit differently
but I think you know part of it is that failure mode
around hiring too early um
you know or like the talent paradox where you're
you have this conundrum about you know hiring
for the stage or hiring for scale
I think you just have to accept that like
you know sometimes
like breaks are just part of the deal and planning
for it is probably a good idea you know making
making sure that things are documented and
you know that
that the knowledge doesn't walk out of the room
you know when somebody
gets recruited by a different company
or you have to make a you know a leadership change
for the founders that are
now let's just say they have more of a brand
sales background lens versus ones that
you know had a finance
background maybe they went to Penn as an example
um especially for those founders that
their things are really starting to take off
they're starting to get to some level of scale
what's kind of the minimum financial
literacy that you feel like they need to have to
they want to be dangerous and to
the minimum they need to have to
not I don't have things blow up in their face
that's an interesting question
I think for a lot of people
you know it's weird like some folks are
takes it takes all takes all kinds right we work
with 14 Founder I probably work with like 100 founders
like closely enough to to feel like I got them and
everybody's just wired in a different way like some people
are really detail
oriented and really want to have an understanding
you know or like just
wired to ask questions
you know until they get to a comfort
level and then other people like really
don't wanna go there like
really don't wanna talk about the balance
sheet and really don't wanna talk about the cap table
do you know what I mean and and I think that
part of the job
you know it's funny
like I've been doing this for 18 years and so the
way that I show up today is a lot different than the way I showed up
18 years ago sure of course like
you know I think
part of the job is to um
if somebody doesn't ask me the question
but I think something's important like I I I will
you know prescriptively
ask the question or introduce it
so like I've I've had I can think of
I can think of a bunch of conversations I've had over
the last year where I just went to somebody
who wasn't asking for my advice
with something that I thought they should do that I thought was
important and
you know some of that has to do with career confidence
a lot of that has to do with like having not
made that observation or not made that comment
for a previous business
and then regretted it like seeing the consequences
of the action not taken and yeah feeling responsible
honestly like
there was a bunch of like really difficult
things that I could have prevented if I had spoken up
earlier right
I think it's important for founders to
find a person who will do that
and it doesn't necessarily need to be the
financial person
you might already have somebody like that it
you know could be somebody on your board
it could be your spouse like it's just somebody
who sort of understands the domains
that are important whether it's
you know it's finance or
strategy or marketing or whatever and is like
gonna get in your face a little bit
if there's something you should be doing that you're not doing
yeah that totally makes sense
and by the way sorry to interrupt
now you're good you're good okay one
super underutilized
way to do that is the independent board member
like I've
I've just come to believe that the independent board
member is a secret weapon but we don't have
you get somebody
with your Series a and then you get somebody
else with your you know
Series B or Series C and then you've kinda got like
you know two founders and a couple investors and
but at a certain point the later
stage companies always get an
independent right maybe it's at the Series C
the investors
you know they get a seat and then they you know they
negotiate for like an independent board member seat
I think doing it early is is a total secret weapon
like I I know a couple of folks that
have you know had early early independent board member
seats and I've seen it in our own board uh
you know for propeller
and it's great cause those
independent board members like the good
independent board members
it's it's I think they they
feel rightfully so that it's their mandate to
like get in there and
and you know tell you maybe what you
you know have the uncomfortable conversation
a lot of brands are raising
capital right now it seems like the market is definitely
been heating up lately
when we chatted a little while back
you basically said to me
quote once you've raised 100 million
there's really only one path forward at that point
what changes structurally about about the business
after the hundred million dollar raise
and in terms of what you mean by that
yeah so there's a um it's a it's a systemic
problem um a lot of things change
when you've put that much money into a business
and they're not that many that have raised
you know hundreds of millions in CPG I mean
the the three unicorns that we talked about before um
you know have have all raised I think they've all
yeah they've all raised well over hundred million
like every
every dollar that you put into a business has to
come out of the business before the founder see a dime
like unless the when the company goes public
like there's sort of a
different situation there cause it all gets converted
into common but like when when you take that money
it creates a
there's a systemic split that occurs because the
the the investors deploying the capital have a
different set of interests um than the founders
do they're gonna get paid
first their job is to actually
put other people's money to work um
and and their job is to return the fund
right you raise a hundred million dollar fund
like you're making a ten million dollar
investment you want you expect to be able to um
get a lot of money out of that
investment you might even put more in later right so
once you've got a hundred million dollars into a brand
it it's not enough to have you know
100 million dollar exit
like nobody makes money in that right
and even a 200 million dollar exit is like
not what the investors were
looking for in most cases
right in in in private equity
like that's you know that's probably a decent outcome
you know if it happens in six months
it's a great outcome
but if it happens in six years it's like really
not great that's gonna drag your numbers down so
what's happening around
those decisions is I think where things become
problematic so there there's this sort of systemic
misalignment that occurs
sometimes between the common stockholders the founders
and the institutional investors you know who
who need to get a big exit they need you to take risks
in order to be able to get that outcome
if you're a first time founder like
every
every time you set the bar higher it just creates
more risk like it is
objectively much more difficult to build
a hundred and fifty million dollar
business than a hundred million dollar business
right or or a 300 million dollar exit
you know when you get to the point where
where you've got a
you're talking about the Tam and the market size
it's just adding a ton of risk
it's often true that the founders
just don't fully appreciate that in the moment
you know I'm I'm
running out of money and I need to get this
investment and this investor came to me and they
gave me a term sheet
for a bunch of money and it's a great valuation
you're not thinking in that moment that if you
take that money at that valuation
you're obligated to
spend that money to create a business that
you know has a much higher valuation
than it would if you didn't take that money or if you took that same money to lower valuation
so right there's
you know we can call that sort of the risk ratchet
like every time you take more money
the risk ratchets up it creates pressure
on you to build an extraordinary business
just to get your money back
versus like maybe a really good business
that could do really well for you and
this stuff just happens it happens slowly
you know you're you're chasing
this higher risk profile and you're hiring
new people and you're spending a lot more money in the complexity
that business increases and next thing you know like
you're just over your skis
you're over your skis as a leader a business
that you might have been perfectly capable of building
you know with a small amount of money
you know without a lot of institutional
support is now really hard you know you're you're
using all that capital to launch new skews
into new channels and now your working capital is
you know ratcheting up and you've got to hire a new CFO
and it's like all this is incremental complexity versus
you know what you might have had to do if you were just building a really good business
with a lot less money
so I think that's sort of the conundrum um
and we've seen some examples of that um
you know I think that
like one of the best known ones which has been talked
about a lot so I won't
you know I won't feel badly talking about is Casper
the mattress company yeah you're
yeah I'm sure you're familiar with them like
very familiar e commerce darling
right they were early after Warby Parker and
you know it was
and they're credited I think with like inventing
the mattress in a box category but yeah
you know that was a
that was a it was an amazing business I mean and and we
you know we got in pretty early
I didn't know then what I knew now for sure
so we got to see it from its earliest days and it was
you know they did like a million bucks in revenue
their first month and they did it
again their second month and again all this has been
like publicly disclosed so um
and it was a really healthy business
they raised a couple million dollars in a seed round
and and like didn't spend that much of it cause their
working capital situation was really good you know
consumer direct business so they get paid
right away and then they had terms from their suppliers
so like they didn't even
spend that much of the money that they had raised
and they did like a I think it was a 13 million dollar
Series a maybe five or six months after they launched
business was really healthy
up to that point and and they continued to grow like
crazy for another
year or so and then they did I think it was a
like a 50 million dollar series B
and I forget who came in in that round but they really
started investing heavily in growth at that point
you know what I don't think we knew then that we know now is that like direct to
consumer businesses sort of can reach a threshold
pretty early you're only gonna reach so many people
and it looks really healthy
and it looks like it's got you know tech growth and
and so they were getting
tech multiples and then all of a sudden like you
kinda reach this glass
ceiling where it's like hey there you've
you've got all the online
customers and by the way like people aren't
there's no sort of LTV on a mattress like
people buy a mattress and then that's kind of it
and if you don't have first order profitability
you know it's like you can really get yourself
into trouble like yep totally you know
we can know all those things in hindsight
because of what happened there but like
you know the footnote in that story is they wound up
raising like $350 million and then you know eventually
managed to IPO I think they just barely got out yeah
and even at the IPO price
like the IPO price was basically
the amount of capital they raised a memory
yeah it's like you know
investing 350 million bucks into a company
in order to get 350 million bucks out of it
right you know is not a great outcome
the early investors
probably did fine because that's the scenario where
you know in an IPO everybody
converts to common and the early investors you know
probably got like a decent return
but you know these guys had turned down
an offer from target for almost $1 billion
and and you know I think this shows you
and by the way these are some of the smartest
entrepreneurs
I've ever worked with like I want to say Neil was like
building like rockets for NASA or something
he's building robots for NASA and you know Philip had
built a similar business
before an exit like really really smart guys so like
my point is this can happen to anybody and
it's like this sort of systemic problem
um and you know we have the benefit obvious of having
Learned from their experience but
you know I still see this happening inside
businesses like
the investors wanna put capital to work and you know
smart founders
get you know
caught up in it and and you know nobody
wants to be the person to say like hey you're not worth
this valuation right and
you know but you can see how that would would lead
to like it's almost like it's like boiling a frog
right you make a series of decisions that
you know individually
don't kill you but which collectively you know compound
and and create a situation where a business actually
can't afford to be good any longer
and it's only option is to chase this sort of unicorn
outcome and
and you know I think that's an example of what happens
we all in the community I think have some obligation
now to just
talk about it so I'm sure I'm yeah you know it's
and again it's a thing that I
I wouldn't have felt comfortable doing
you know
you know probably even five years ago but yeah
you know now I just feel like okay it's it's
you know I'm I'm sort of too old to not say anything
about it like and I'm I'm not the CEO anymore
like I recruited a great
CEO a couple years ago and so now I'm a chairman and I
kind of yeah
I just feel like I have a little more flexibility to
shoot from the hip a little more yeah a little bit
you know I've got enough gray hair now where I
you know it's like okay what's gonna happen you know
totally totally
well yeah Chris this has been uh
this has been awesome I think this is gonna be incredibly valuable
for a lot of up and coming founders
that are building brands and other finance and ops
leaders that are listening to so
really appreciate the time
what's the best place for people to kind of follow
along with you I think you've got like a blog or website or something
and you're on LinkedIn too what's the best place for people to follow
along with you and call all your expertise
yeah I'd like LinkedIn
I think LinkedIn is probably good I've got a substack
I've written a couple things on Substack
that didn't feel quite right for propeller
so those are those are probably the two places perfect
awesome Chris I appreciate the time I think
I think that's the pod awesome
there's a couple different sectors
yeah it is it's sort of just how it is it's just
yeah it's exactly right
tighter
AR financing versus just raising more equity
to only be operating with like a few weeks of
that you've seen across those
what have you found
we just don't see that many of them you kinda

‍