CPG startups entered 2025 with optimism – on the prospect of a better year for venture capital (VC) funding – but soured heading into Q2 as the Trump administration’s tariff plans upended global supply chains, adding pressure to early-stage companies.
Despite these challenges, the fundamentals of running a CPG company remain the same, including delivering on business metrics, food and beverage thought leaders shared during episodes of the Founders’ Fundamentals podcast that aired in Q1 2025.
Will funding green shoots disappear amid trade tensions?
Q1 2025 kicked off with a series of marquee CPG acquisitions, including Flower Foods acquiring baked goods brand Simple Mills, PepsiCo acquiring modern soda brand Poppi for $1.95 billion and energy drink brand Celsius buying competitor Alani Nu.
These acquisitions return capital to venture capitalists, who then invest in more CPG companies.
CPG startups seeking venture funding this year must demonstrate that they can deliver on gross margins – the percentage of a sale that is profit – and address a consumer demand in the market. A gross margin of 35% is the benchmark for VC firm Habitat Partners to invest in a brand, Daniel Faierman, partner at the firm, shared on the Founders’ Fundamentals podcast.
“While we expect businesses in the early days to be bottom-line unprofitable because even with great gross margins, managing that equation is just almost impossible, we do expect businesses from day one to have great gross margins, and our confidence level is a lot higher that eventually this business will grow into being bottom-line profitable if the gross margin is intact from day one,” he elaborated.
Despite recent acquisition activity, venture capitalists are demanding more out of startups – demanding growth and profitability measured by EBITDA – beverage veteran Danny Stepper, CEO and co-founder of beverage company L.A. Libations, shared on the Founders’ Fundamentals podcast.
“What is very challenging to navigate is the fundamental shift that has happened over the last three years, where three years ago – and for the 20 years before that – it was all about growing the top line. It was not about making money. It was about growth,” Stepper elaborated.
“There has now been a shift to investors wanting EBITDA. Investors want growth and EBITDA. Well, here is a deep, dark secret – there is no such thing,” he added.
Trade tensions and tariffs also are throwing cold water on the CPG acquisition spree, as investors and companies brace for more market uncertainty and conserve capital. Global M&A deals dropped 13% in the first quarter, according to Dealogic data shared with Reuters.
Understanding metrics is crucial to retail success
Beyond gross margins, CPG startups must understand other metrics like velocities – how quickly a product flies off the shelf – Andrew Henkel, president of retail at Spins, shared during a Natural Products Expo West edition of the Founders’ Fundamentals podcast.
“Early-stage, a brand can get a significant amount of revenue by gaining a significant amount of distribution, but that does not tell you if consumers are actually taking the product off the shelf and buying the product, and that is the key thing about velocity,” Henkel elaborated.
Additionally, channel metrics can indicate whether a brand is ready to expand, Caroline Grace, CEO and co-founder of Product & Prosper, pointed out. Some first-time founders assume getting on retail shelves will be the solution to their direct-to-consumer (DTC) business, but that is seldom the case, she explained.
Emerging brands “will think retail is a ‘hail Mary’ for their sales,” Grace elaborated. “That is not how it goes. If you are not seeing natural traction on the DTC side, then it is going to be doubly as expensive and doubly as hard within the retail channel.”
Revisit Q1 of the Founders’ Fundamentals podcast series
FoodNavigator’s Founders’ Fundamentals podcast is a series dedicated to building and growing successful CPG companies. Revisit Q1 2025 episodes with the links below:
