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Investment Climate Podcast
On Why Execution-First Models Beat Capex-Heavy Tech - Alberto Criado, Cardumen Capital
00:27:06
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- [00:00]
A
In areas where funding is scarce, the opportunity needs to be massive and technology massively differential too. That's why when we think about portfolio construction, we are making a lot of investments in companies that have a very high growth year on year, very high margin profile, good part to path to profitability so they can be bankable quickly that respond to certain customer trends and industrial bottlenecks that go beyond a technological risk. Hey Alex, my name is Alberto. I'm really, really happy to be here sharing a little bit of what we do at Cardumen in the agri food tech space. I am a principal, I've been with the company now for almost six years, joined assembly in number six and help the company grow from 50 million to almost 400 in asset talent management. And currently I'm leading this strategy in agfood deploying tickets between typically 0.5 to a million euros across Europe and across the entire food value chain. Happy to double click a little bit later on on what we see today as this is that said, we have a very opportunistic and flexible nature in this business.
- [01:06]
B
Amazing. Well excited to have this conversation with you. I follow you guys very closely. Also huge fan of one of your portfolio companies. Oshi. So excited to double click with you on this. You recently made a bet, maybe take us through what the bet was and the thinking behind that bet.
- [01:22]
A
Yes. So we recently invested in a company called Incapto that we're very excited about. Not only because the company and the founders are, but it's also because I am Spanish. It's one of the first Spanish companies that we have invested in. Not the first, but the first is still not public and not that we have any particular bias towards Spain as we have 40 portfolio companies and these are the first two that we have invested in. But everything just stick with us and make sense from the very beginning. What the company does today is sell coffee under a subscription service in a bin to cap model. Right. So what they do is, what they're trying to do now is get the specialty coffee at the hand of every consumer and every business and in a way more affordable way of what people typically can do. And that manifests through two vectors. One is the equipment that is actually used to brew that coffee and the second one is the coffee itself. And what they do there is they cut down many parts of the supply chain to make sure that the client has access to a high grade specialty coffee at the lowest cost possible.
- [02:25]
B
So, so if I would say the value propos of the service is lower price point and Higher quality.
- [02:32]
A
Correct.
- [02:32]
B
And the technology that drives that is, is the machinery that. Are they also selling hardware as well to the consumer or is it just the beans?
- [02:41]
A
Yes, they sell both. At the end of the day they have developed their own proprietary machinery and they also sell some third party machinery too. What is very important, and it's one of the key reasons as to why we invested, is that when they think about designing new machines, they look at attending an untapped part of the market that still cannot use yet. So reserve yet specialty coffee. But it will be unlocked by this. Examples of this, for example, can be think of Penco Tidienne or think of any airport or any university that has certain peaks when it comes to attendance of customers. Currently, if you want a specialty coffee, you need to go buy a La Marzocco 25-40k machine, get a barista, train it, hopefully retain him to an server coffee, which typically takes between like 15 seconds to one minute, which is something that you cannot afford really in a high throughput environment. And we're very excited. One of the key levers of growth upon this round will be precisely one of these machines that will be deployed mostly across the hospitality segment, the ST one.
- [03:45]
B
Okay, so there. So I'm not a, A specialty coffee drinker, so I think, I'm sure, I'm sure all of our listeners are, but for those who are not, is Nespresso a specialty coff. Yes or no?
- [03:58]
A
Absolutely not. Nespresso is a great business, but it's not a specialty coffee. At the end of the day, what defines a specialty coffee? It's a, let's say a consortium, international consortium that defines what is and what is not based on certain characteristics.
- [04:12]
B
Okay, good. And so understood. So there's essentially when I'm thinking about an espresso machine where I just put a capsule and. Or Keurig. Right. So whatever it is, and I put a capsule and I pay 30 cents and I put some frost, some milk. That is not the target market that we're going after, correct?
- [04:28]
A
In some cases, yes. And that is also why from a consumer standpoint, we think, and maybe it's not so much in the US but this is something that pains me as, as punishment and is the way that we treat our coffee. Right. We are lucky and have been blessed to have some of the best produce on the planet, some of the best, if not the best cuisine, in my opinion. But we have never been able to actually do coffee well. I think that that is a key value proposition for consumers and consumers and also for Restaurants, right? At the end of the day, the marginal increase in serving coffee, specialty coffee can be 3 to 4 cents per cup and you can charge the end customer 30 to 50%, sorry, cents per cup more or even more. And at the end of the day, the perception of the consumer when it comes to specialty coffee is often affordable, luxury and something that they're willing to take on a day to day basis. So as you can imagine, recurrence both in Consumer and B2B are very, very high.
- [05:22]
B
So if I'm thinking about what existed, I wanted to have a specialty coffee before. I'll just go to ADHD tenders for a second. I just came back from Spain, I was in Barcelona, Madrid and I have to tell you, probably the best I, I have a very strict diet. I keep kosher. So the bet, one of the best kosher restaurants in the world was in Madrid. So there you have it. So I, even for the kosher consumer, I have to say that Spain is betting above their.
- [05:47]
A
Which one did you go to?
- [05:49]
B
That's.
- [05:50]
A
Yeah, I won last weekend too. It's great.
- [05:52]
B
Well, there you have it. So that it's, it's awesome, right? So, so if I take the next step and just guide me through like, okay, let's take that restaurant for example, right? Are they serving specialty coffee right now?
- [06:04]
A
To be honest, I finally drunk wine when I went to that restaurant, so I cannot tell you.
- [06:08]
B
But what is the gap, right? If somebody wants a specialty coffee before the solution, what did they have to do? Like what done for specialty coffee, right?
- [06:16]
A
So let's think two things. First of all, if you want to have it at a coffee store, you're gonna have to pay around 3 to €4 per coffee. When the differential to conventional coffee that is in Spain is typically like 1.5 to €2 per coffee, right? So it's double the price. And why is that? As I was saying before, you have two things. One is the machine that you have to buy State of the Artist La Marzocco and it's an extremely expensive machine, right? We're talking north of 25k, right? Per machine. And you need a barista that is trained and that is specialized in doing it. And he's going to make this beautiful heart when he's doing the coffee. But the reality is that that makes the coffee very expensive. It makes adoption in many restaurants not an option really, because they need to find the barista and they need to retain it. And what happens if they're used to serving, if their clients are used to being served? Specialty coffee on one day they don't have the barista. Right. Like they decide not to do it directly. And that is something that we got in our references and again like we do see clearly and this is a matter of the double digit growth of the specialty coffee category that there is a high willingness to on behalf of consumers and many points of consumption of coffee. Again, think of these big chains or restaurants or hospitals and so on. Cannot serve it because they, the economics will not work for them.
- [07:39]
B
Yeah. So as you're talking like my pattern recognition goes to my visit to San Francisco and there's this weird thing called Coffee X which is essentially a robotic arm like a robot that replaces a barista. Right. And they, you know, and they make it for you. And I'm like, I was like, I don't know. It never resonated with me. Is this what we're, we're not talking about this? Correct. We're, we're talking about something else entirely with this?
- [08:04]
A
Yeah, yeah. It's completely different. And I think that it also kind of serves as a good example of how we think about investing in food now. Right. When you think about this is more like a super, super automatic machine. Right. That just has an ability to do high throughput with consistency and a high level of quality of coffee. When it comes to how we think about deploying in the current state of food, we look at companies precisely like Incapto that have a very high margin profile, high recurrence in their customer base, making sales actually scalable and a clear differential in the market and a strong and quick path to profitability. Because as you know, funding in this category is extremely scarce. And if we want to make bets in areas where funding is scarce, the opportunity needs to be massive and technology massively differential too. That's why when we think about portfolio construction, we are making a lot of investments in companies that have a very high growth year on year, very high margin profile, good part to pass to profitability so they can be bankable quickly that respond to certain customer trends and industrial bottlenecks that go beyond a technological risk.
- [09:15]
B
Yeah, it's, it's very. To our listeners now, I think there was a debate with the previous. One of the previous guests is like why so many people are willing to invest in data centers but they were not willing to invest in precision fermentation facilities. Right. So you know, the reality is when you don't have follow on rounds, you have to get through profitability faster. Right. The benefit of that means you often need less money invested and Then you can still get an exit that's favorable. Right. With even a half a billion dollar valuation, you exit, you could still do quite well with it. And with your, with your machinery. With that, Sorry, with that machinery, like how do you make it affordable and the consumer can actually like can a private consumer purchase it as well or is design specifically for you feel like for businesses as a B2B?
- [09:55]
A
Yeah. So the machine that the customer can buy that the end user, let's say if you're a consumer in your house, is cheaper still that existing solution and the bean, the beans that in capital sales are also cheaper when it comes again to specialty coffee, not mass market coffee, than existing solutions in the current markets that they operate in. The difference I guess here is that when you think about end user, the end user will need to pay for the machine, whereas the, the restaurant that chooses to partner with Encapto in this case will go under more of a coffee as a service model. Right. Where they both make a study, they assess how many coffee coffees they will be serving and based on the economics and payback estimated in foreign capital, they will decide to move forward or not. Right.
- [10:44]
B
And then I'm guessing that these beans can also integrate into existing high end machines as well. Right. Meaning that 25,000 machine can take these beans and therefore you could just be the bean supplier rather than just the machinery supplier as well.
- [10:56]
A
Correct.
- [10:57]
B
Okay, I love that. So, so what, what comes to mind is. Well, and this is probably something I ask a lot is where's the defensibility here? Like sourcing is very rarely defensible. Right. You're, you don't grow, you're not, you're not backwards integrated into the farms. Right. I mean you're not owning the supply chain by owning the farms. You're still a broker in between. So why can't one of these bigger players do exactly the same thing and cut you guys out?
- [11:21]
A
Yes. So the reality is that currently the players that are in the market, they are selling their equipment for far more than what Incaptio proposes to sell. So there is a difference when it comes to what approach are you taking to the market. Right. And certainly there are different paths. Right. Like one is more super automatic as this is the case, more let's say industrially orientated. And other solutions are focused more on the feel and the experience of getting a manually, a coffee manually done in front of you. Right. At the end of the day we still don't believe even if there, there is a lot of protection around these designs that the key here is this industrial design and any other type of IP as the key differential. We think that this is mostly an execution play, being able to have your customer being happy to let them know that they're having a high quality coffee with a fair trade with a local grower, which is the case within Capto, that they are, that they're having less waste along the value chain too because of the packaging. When you think about the BIM to cap model and how it compares to the traditional capsule model, that is so wasteful. Right. And then mostly what is critical is what kind of service can you actually give your clients. Right. And that is something that is non negotiable and that has to be there in any geography that they operate in. And if the customer at the end of the day sees that because of your value proposition, they're able to make more money on their existing client base and you have a cheaper proposition to. I mean there they have literally no reason to change.
- [12:53]
B
Yeah. And you mentioned also speed and expertise. This operate, this tool could be operated with a less training than say, meaning no training. Okay, so, so the, the training, there's high limits and at the same time it preserves quality and experience. You might not get the heart at the end of it, but do you get the heart as well?
- [13:13]
A
I don't think you get the heart in many of this, but in some, in some others you is a. There is a very wide catalog within the company. Right. But in these new super automatic machines you don't get the heart. But you're not targeting people that go for the heart. Right. You're targeting again like high throughput, high traffic areas that want to sell the specialty coffee but cannot do it with existing solutions. Okay.
- [13:36]
B
And I'm going to ask a last dumb question because this is super fascinating to me, but, and this is quite interesting. Okay. And it's going to embarrass me very deeply. Is Starbucks a specialty coffee?
- [13:47]
A
No.
- [13:48]
B
Okay. Okay. Right. Okay, good. I'm so sorry. It's. I don't mind.
- [13:53]
A
Listen, I think it's an amazing business though. And I still have Starbucks obviously, but,
- [13:58]
B
but they do have the speed. So I mean can you essentially is the promise here you can get the speed of Starbucks experience, but the quality of, of a premium specialty bean. Yeah, I love that. Okay, excellent. Great. So transitioning now to like the next stage, are you guys usually leading or following? Like what typically is your position and when you're putting half a million to a million, is that usually seen as a lead and you want to Put another pre seed or are you seeing as a follow? I speak with founders raising every day and they're all telling me the same thing. It's harder than ever to find investors who are actually deploying and getting access to those leads takes time. Foundries just don't have Every month fundraising is a month burning Runway. This is why we created FTW plus, a community of founders actively fundraising the world's most accurate agri food tech investor database. Plus connecting you directly to ideal target investors and a community of support and accountability. Guaranteed results or your money back. Applied to today at www.joinftw.com hub.
- [15:09]
A
It really depends. At the end of the day we invest in very wide ranging types of businesses, right? We were talking about this in capto deals, right? We have also made some some other deals that are more akin to biotech plays, right? So depending on where we sit in the validation and type of business, we decide to enter earlier or later and as a result we have one or another position. That said, we typ in these deals which doesn't change the mentality and our approach to portfolio management by the way, something that we continuously say is that we try to be the most active investor in the cap table, right? And we go beyond words, which is it's obviously a great marketing slogan, right? But it's also not original, right? Probably any other VC will tell you the same thing. But what we try to do is to put our value creation team. We also have an M and A team at our portfolio company Service. We think of ourselves as a matter of fact as a service company. We offer a service to our LPs and we offer a service to our entrepreneurs and ultimately helping them is what builds our brand.
- [16:13]
B
I want to say to our listeners, to be fully transparent, I've consulted and advised some of their portfolio companies and that's the truth. So I know quite close through the portfolio companies I advised and they're excellent. They're very good at what they do from a value creation. Not just in words but indeed for our listeners who are, you know, our entrepreneur startups, let's say. Okay, so they're European based, right? They're in Europe, fine. They are in that precede, say seed stage. Like what solutions are you looking at right now? Like what I'm hearing from you. Look, we need, we need a path to profitability that doesn't require a lot of capex investments. It sounds like we're thinking about something that you know is deep tech but at the same time really focused on execution. Right. So you Know that these are some of the markers that you're looking at the moment because of the fundraising market. Anything else is like, kind of like the driving points of your thesis that are important for our listeners to understand. And then maybe you can give us an eye into like here's some of the categories that we've looked at recently that are interesting to us.
- [17:12]
A
Yes, absolutely. So I think there is a couple of things. Again, we invest across the entire food value chain. What we also do, we keep saying to ourselves that we don't have a very strict thesis on what we do. We're more opportunistic. Obviously when you are focusing a single value chain, you do see certain problems, certain bottlenecks and certain trends and that's what you ultimately invest. But we reevaluate what we invest in every year. Okay. So if you look at the market with that kind of preamble today and you see, for example, we were mentioning the funding environment before and how scarce is in certain categories, I think it only makes sense to have a, to have an adequate risk management profile of the portfolio to build, at least at this point, a core part of the portfolio around these kind of companies that can have access to multiple sources of financing and already have a strong base of revenue and that respond to some of the consumer trends that we see that also the large corporates are focusing on now as we believe that those will be prime acquisition targets in the future for us, exit analysis is a core part of the portfolio. So if we go to a next level of detail on this, let's say only from a consumer angle. Right. Which again I think will be a core part of our portfolio. We look at fast growth, high margin opportunities in trends such as food as health. Right. And in food as health we look at things from supplements where we are being very active and looking at many different deals currently in parallel. We look at noble ingredients at certain time as part of this or noble compounds that can support treatment. We look at post GLP1 treatment too. We would like to see and we see some companies doing it natural solutions for as an alternative to GLP1 or as a let's say post treatment alternative to make sure that people can get off the hook, if you will, other trends that we see in consumer that we think that are very relevant. For example, are is pet food. Right. At the end of the day, supply chain is very similar consumer extremely, I mean user, let's say extremely different Consumer can also be similar. Right. And here for example, what we see is continuously decreasing. I don't know if you have a pet or not. I do have a dog. But what you see is continuously decreasing sizes of dogs in western societies and an increasing humanization of them. Right.
- [19:28]
B
So what do you have a dog? I do have a dog. I never thought I would, but I love this dog, I really do.
- [19:37]
A
No. Yeah, and I love my dog too. I come from a very conservative area in Spain where if I tell them that I feed them fresh food, they would probably kill me and think that I'm a, I'm a madman. I'm actually doing that now with a mix of kibble because you can and you can and you just love your dog and you want them to live for longer. Right. So these things, they also make sense. There are many examples of how big companies are being acquisitive in this space. Right.
- [20:02]
B
And then can, can you take us through a little bit of the exit scenarios? Because I think it's really interesting, I'm hearing more and more that the VC's in our space are looking at there, there, there are plenty of exit scenarios around say 250 to 500 million dollars exit. And they run their math backwards. I mean that's the level of dilution that they need to like how much more dilution I need to get in order to get that exit in place so I can get still VC style returns. Is that kind of the thought process when you do the math on the paper napkin or is it a little different?
- [20:31]
A
It's a little different. And I think I'm going to with the group of companies that we're evaluating now in consumer. Because again, we're talking about businesses already, right?
- [20:40]
B
Yeah.
- [20:40]
A
So what we do basically is establish three different scenarios based on the company's business model. What we believe are actionable, actionable levers of growth based on their current funding and the past success growing to establish how can the company evolve in the next three to five years. Right. Based on that and their profitability and cash flow needs, we then explore, hey, will the company need more money based on that? We estimate dilution in again, different scenarios. And that leaves us to, let's say a distribution of scenarios with different types of probabilities that we assign to each of them. And in that way we think, okay, so we believe that it's reasonable that the company within three years will make X and this will be at least five, six times multiple on our initial investment with a relatively high degree of confidence.
- [21:32]
B
Okay, that's, that, that's kind of the process you're taking.
- [21:35]
A
Yeah. And not only that like that's how the math works. But then is will this actually take place with some level of certainty? And what we do is for what we look for is present in transactions not only in a success based scenario, but also as this was the case, for example, within capital. We look at many, we saw many financial sponsors buying companies that's in the mid range between their current size and the largest acquisitions that happen. Right. That also fills us with confidence. Right. That we will have some liquidity on that side of the portfolio. And then also thinking about the buyers, we try to assess in which part of the cycle they're at. Are they building cash? Are they developing their own brands? Have they acquired other companies already? Is there proof that they're trying to consolidate? We try to make these rates and based on that we have a scorecard. A scorecard to assess whether we believe that there is a higher, lower chance of exit.
- [22:28]
B
It's a really fascinating process. And to me one of the feedback we've seen from startup founders is say that we see VCs in agri food tech behave more like private equity. Like you know, they're looking for brands that may be already profitable, very close to profitability. They can just basically, you know, scale up with better operations. Is that your mindset as well through the analysis that you took, especially with a focus on maybe closer to the consumer brands or consumer experiences that you know that the level of risk that Agri Food Tech VCs are willing to take is very different from the one they used to take in 21 or 22. It's the thesis has changed.
- [23:01]
A
Yes, I think so. I think that's why like a core part of your portfolio at least these days. And this can change, should be in this kind of place. That's how we read it. Of course we may be right, maybe wrong. Only time will tell. We believe that we have made other kind of investments too. Right. That are more binary and conventional than the VC model. But we do look for certain other things that can help us de risk, at least in our eyes, that opportunity. Right. Let's go for a couple of examples here. Right. We invested also last year in a company called Comstellar. They're building a satellite constellation in space that has the highest accuracy and precision to measure temperature. Right. When we look at the company, we were first of all enamored by the team and what they were able to do at the time, the logos that they managed to work with. Still we understand that is a super high risk kind of deal, right. There will not be many winners many competitors because of the sheer infrastructure that needs to be deployed. So here what we were looking at is in which which other the risk factors can we find Right. And we saw that thermal imagery could be of great use for public institutions, defense players, infrastructure players and many other individuals and even governments that do have the willingness to pay now and kind of the risk capex and milestone achievement in the meantime. Also when we look at aggregate we don't have many investments in ag, we want to make more investments in ag. We have one company called Biographic out of the UK stellar team that have built a computational model to kind of establish the relationship between the genotype and phenotype of plants to accelerate breeding or gene editing. And what is key here is to understand what kind of level of involvement do strategics have already with the company. They need to be binding, they need to have several orders of magnitude of conviction on the usefulness of this technology. And looking forward into the future we would ideally like to see them involved in the cap table too as they are key drivers of follow on rounds and R and D spend.
- [25:01]
B
Yeah, love both of the insights you just shared and we see that as May 29th. Just this week there was an acquiring of an acquisition of an Israeli AgFu tech company, AG Tucker Ekta Co. In autonomous driving. Right. But that was an acquisition dual use. Right. So Albert, which is a weapons manufacturer, bought that. Right. So you can see a lot of the AG players looking at dual use so using different applications to differentiate themselves in the market.
- [25:29]
A
Yes. And I think it's our job as VCS to kind of understand what kind of headwinds and tailwinds are there currently in the market and how the companies within our scope and thesis can benefit from them to the risk portfolio as much as possible.
- [25:42]
B
Amazing. Well Alberto, like I said in the call I There's a few VCs I truly respect and like having seen what you guys do and for your portfolio companies it's it's, it's clear that you guys create a lot of value. So really grateful for this conversation. Learned a lot from you and wishing you guys success and hope this this conversation leads to a lot more clarity to our listeners.
- [26:01]
A
No, the pleasure was mine. Alex, as usual it's great to see you and happy to help you with anything else. Please if just a couple of words. If you are building in the food space, reach out to anyone in our team. We will be happy to speak Amaz.
- [26:16]
B
Thank you so much over there. One more thing, don't close this episode yet. If you got value from this conversation. Here's what I need from you. A five star rating. One comment, 20 seconds of your time. That's the deal. A five star rating means more founders find this content. And every time a founder raises, all boats are elevated. Every week I pick one random comment and send that person a complimentary copy of Investment climate. The book 50 sales playbooks from founders who actually raise money during the fundraising winter. Real strategies, real closes, Real numbers, not theory. So if you want a copy, comment below. And if you haven't followed the show yet, do that too. And if there's a guest you want us to bring on the show, just drop us a note or send us an email. We'll read each and every one. Until then, keep on raising.