Like many of us at Atland Ventures, the first time you learned about venture capital was probably from watching Shark Tank. If you haven’t seen the show, I highly recommend it – you might start to recognize some of the brands featured on your next Target run. Shark Tank tends to showcase many consumer packaged goods (CPG) companies, which initially led me to believe that was where most venture capital money went before joining Atland. However, recent trends indicate a shift in investor preferences, as funding moves away from brands like Scrub Daddy towards B2B SaaS and AI companies.
Between 2009 and 2021, investors were pouring capital into CPG companies, but a report by Pitchbook shows that the total early-stage venture capital funding for CPG was down 60 percent by the end of 2023 compared to 2021. What’s caused this shift? The big factors at play were high inflation costs and a slowdown in IPOs. According to Inc., “Interest rates began to climb in 2022 and inflation spiked. By the beginning of 2023, tourist money fled for safer ground.” Even investors with portfolios consisting entirely of CPG companies began deploying their capital elsewhere (TechCrunch). Additionally, AlphaSense reports that IPO activity at the beginning of 2024 was at its lowest point since 2016. Under those economic conditions, it made sense for investors to seek out companies that could grow their sales faster and provide higher returns.
CPG companies face challenges that tech companies don’t. Grocery store shelf space is finite, with lots of competition and overcrowding, making it tough for products to stand out. Scaling these companies is difficult because the products take up physical space, whereas tech companies have the advantage of scaling digitally. CPG companies also have higher production costs and lower margins, and their sales rely heavily on constantly evolving consumer preferences. Software and AI companies, on the other hand, often have recurring revenue models and contracts. They tend to have higher exit valuations and greater return potential, making them more appealing to venture capitalists than CPG companies.
So, what’s next for CPG investing? Inc. says that “experts are divided on when to expect the market to return to normal, but most give it one to three years.” However, everyone agrees that the high level of CPG funding seen between 2009-2021 is unlikely to return.
We’ve been talking about what CPG investing looks like in the broader venture capital space, so now I’d like to share my personal experience with this as an analyst in Atland. Since joining last February, I have yet to see us invest in a CPG company – or even have one presented to the fund. Our investment process requires 80% of members to vote yes on a company. To gain that level of conviction, nearly everyone would need to test and have confidence in the product. We also like to see traction proving that there’s consumer demand for the product, which is difficult because we invest at a very early stage.
Recently, we evaluated the performance of our 28 portfolio companies, only one of which is a CPG company. While it’s still early for some investments, most of the top performers are software-based, target a unique niche, and show strong signs of customer retention. As a fund investing in solutions for the digitally native generation, it’s no surprise that our investments are tech-heavy. We still source and perform diligence on CPG companies, but picking winners in this space is harder with ever-changing consumer trends.
