Taking an idea from concept to the consumer’s mouth takes more than good taste buds. Local food and beverage industry professionals discussed topics ranging from product development to exit strategy at an event Tuesday hosted by Connect at Pirch in UTC.
Dwight Detter, a buyer at Whole Foods Market, said it’s important for those interested in the food and beverage industry to know the marketplace and to be able to answer who the consumer is, where the product is going to be sold and how much income is needed.
Categories trending up include beverages — water, fruit and vegetable juices — while traditional sugar beverages are declining, Detter said.
When pitching a product to a buyer, Detter suggested not saying, “I’ve got a product for you,” but instead proving it by having the packaging ready and knowing the product’s market value.
San Diego may be a good market for food products, but Los Angeles, Chicago and San Francisco are better, the group agreed.
Manufacturing and distribution is limited in San Diego, bordered by Mexico, the ocean, the desert and Camp Pendleton, and doesn’t have the population density of L.A., Chicago or New York, said Jeffrey Grad, co-founder of Naked Juice and Evolution Fresh.
But San Diego was voted one of the top places to have a startup, said Keith Mullin, the founder of Biosilo Foods, which is building a portfolio of new food and beverages.
“As an entrepreneur, it’s more about the lifestyle choice,” said Mullin, who said he enjoys surfing. “Entrepreneurs are busy and stressed, and having an hour to jump in the water is a good thing.”
Mullin has a 15-year product development background, including his first product in the food industry: Gamer Grub, a snack for gamers to eat while playing without getting grease or crumbs on keyboards. BioSilo Foods’ new product, Zippy’s Salad Bites, is expected to launch in the fourth quarter of this year or early 2015, Mullin said.
Zippy’s Salad Bites has cost about $150,000 to develop so far, he said, adding that a product’s cost is “always eight times more than you think it’s going to be.”
He broke down the average cost of each phase: the programming phase can run from $10,000 to $15,000, the prototype formulation from $5,000 to $100,000, and the pre-production phase of packaging from $5,000 to $15,000.
Mullin started Gamer Grub with two Small Business Administration loans, which enabled him to develop the concepts and prototypes. After that, he relied on friends and angel investors.
Many food entrepreneurs start with an idea, take it to a farmers market, ask friends for money, cash out their 401(k)s, and then look for angel investors. Then they find themselves growing to the point where they can’t take an order because they don’t have the money to buy the product. That’s where venture capital can help, said Douglas Raggio, managing director at Gastronome Ventures, which invests in food and beverage companies.
A food or beverage product is easier to explain than a technology innovation, Raggio said.
“It tastes good, has margin and has sales — sign me up,” Raggio said.
He said he has about 100 deals per quarter without advertising — businesses come to him through word-of-mouth, LinkedIn and events like Connect’s. Gastronome Ventures invests about $250,000 to $3 million on average per investment round, he said.
He aims for Gastronome to be out of a business in four to five years — whether through a management buyout, sale or private equity coming in — and he said his goal is to make three to five times his investment.
Having an exit strategy isn’t as important as having a passion for the product, Grad said. Naked Juice didn’t have an exit strategy when it was founded, he said.
“What we had was a passion for the product,” fresh-pressed juice, Grad said. When entrepreneurs focus on the exit rather than the product, people and customers, then they’re “focusing on the wrong thing and may never get to exit,” he said.
Grad said he learned the hard way the importance of finding a partner with similar values.
He was contacted by the son of the CEO of Chiquita Banana, who expressed interest in buying Naked Juice, although the company wasn’t for sale, Grad said.
Thinking he found someone with a similar passion for the product and who could make an investment in exchange for a juice design, Grad and Naked Juice agreed to a strategic partnership with Chiquita Banana — not knowing that once he signed the dotted line, he would never hear from the CEO of Chiquita Banana’s son again.
“We were so passionate about fresh juice, about nourishing the world,” Grad said, but Chiquita Banana didn’t have the same values. They came into the company and wanted to change the ingredients and the quality of the juice, Grad said.
The very things that distinguished Naked Juice at the time — like taking the meat out of whole coconuts and using the ingredients that make a smoothie a smoothie — was considered by Chiquita Banana to be expensive, dangerous and a liability, Grad said.
Grad stressed the importance of hiring legal counsel and performing due diligence to make sure partners have similar values.
He went on to co-found Evolution Fresh, which features cold-pressed juices and smoothies and was acquired by Starbucks about two-and-a-half years ago. The deal made the product better, and introduced money and technology that wouldn’t have been available without Starbucks’ involvement, Grad said.
“Neither of our sales brought us the pot of gold that everybody thinks comes with every single sale,” Grad said, but the relationship with Starbucks allowed Evolution Fresh to take the brand national overnight.
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July 11, 2012 -- George Chamberlin speaks with David Hale, CEO of Hale BioPharmaVentures, and Duane Roth, CEO of Connect, about San Diego's biotech industry and innovations that come from this region.