I’m not a financial advisor; this is just a personal and unprofessional opinion. Comments in this article should not be taken as financial advice, and I recommend you seek professional advice before making any investment decision.
Steeped Coffee has done a lot of things right; innovated a new way to brew with a patented designed bag, considered sustainability from day one, established credible roasting partners like Cat & Cloud, Bold & Gritty, and Caravan, and put themselves through B-Corp certification.
Yet financially, the company’s performance isn’t knocking it out of the park, with sales growth underperforming what I would expect for a company at this stage and a debt burden that is building. The company’s latest fundraising is unlikely to be its last, but I wonder if CEO Josh Wilbur should consider a different direction to take the company to the next level.
Running a startup is hard, and critics love to take jabs at founders when they have never had the courage to start their own business. I admire entrepreneurs, and I hope this article doesn’t come across as personal or critical. Starting a business and growing one takes different skills. Wilbur has done a great job of establishing a brand, building credibility and some impressive revenues from scratch.
Taking this up to the next level will probably require significantly more cash than the company has currently raised, however. I also wonder if their sales team is performing and what they can do to improve their operating margin to become more profitable with the sales they’re making.
The company has intellectual property and is innovating in a space with huge market potential, yet is attracting less investor love than traditional coffee chain – Reborn Coffee, which raised $7.2m through a public listing on the NASDAQ recently. Public listings aren’t for everybody, and I know that CEO Wilbour is driven in part by a desire to build an ethical business. But perhaps Steeped Coffee could review its story and approach to financing with a view to attracting much larger inward investment and putting the company on a firmer financial footing to give it the space it needs to fulfil its potential.
It’s OK for Steeped Coffee to be lossmaking to date, as it’s invested in building operations and a brand. But the company’s sales, according to their financial disclosure, are below what you would expect of a company like this at this stage – see figure 1. Sales increased by 30% between 2020 and 2021, while the sales and marketing costs almost doubled from $870,592 to $1,564,520. That doesn’t look like a good return on the sales and marketing spend.
In addition, the company is carrying a lot of debt, and convertible stock, which puts a burden on the business and investors.
Steeped Coffee has a mix of different kinds of loans as well as convertible debt. Convertible debt is a favourite investment instrument for early-stage investors who want the security of having debt (debt holders are paid before equity holders in the case the company goes under) but the flexibility to convert that debt into equity at a value agreed at the time the debt was taken out – often at a discount to the current share price.
The company has circa $4.6m in overall debt that it must furnish, which is not a small amount when the company’s total net revenue in 2021 was circa $2.9m, and it made a loss of circa $2.8m with a growth of around 30%.
The Company received a thirty-year SBA disaster loan in the amount of $141,500 during the year ending December 31, 2020. The Company received a loan modification on September 2, 2021, increasing the loan amount by an additional $298,500, to $440,000. This loan bears interest at a rate of 3.75%, has monthly payments of $2,233 beginning thirty months from the date of the note and matures in thirty years.1349 (republic.com)
How the Funds will be Used
Investors want to know how their money will be used, and it’s noted a reasonable chunk (25%) is allocated to sales and marketing, although a bigger amount (40%) is earmarked for working capital, i.e. to keep the lights on.
Valuations have Always Improved
A positive sign of investor confidence, however, is that at each round of funding, Steeped Coffee has increased its valuation – something that is of critical importance. A ‘Down Round’, as famously happened to finance company Klarna (a buy now pay later company) last month, sends alarm bells to investors.
Hopefully, the business can start to see some accelerated growth from the new funds being allocated for Sales and Marketing and keep a tight reign on costs to boost margins. The time of easy capital raises has passed, and businesses can no longer rely on investors to fund loss-making businesses with the promise of future growth.
SANTA CRUZ, Calif., Aug. 16, 2022 /PRNewswire/ — Steeped Coffee, a Certified B Corp, announced today it has been added to the annual Inc. 5000 list of the fastest-growing private companies in America. The disruptive single-serve coffee company is ranked 572 nationally, 88th in California, and 18th on the list for all of Food and Beverage, after experiencing three-year revenue growth of 1,107%. As an impact-driven company using business for change, Steeped Coffee now joins companies like Patagonia, Chobani, and Under Armour who have also gained national exposure as honorees on the Inc. 5000 list.
The Steeped Coffee team is proud to stand alongside the nation’s most successful independent brands, recognized by Inc. for what we’ve accomplished. It highlights just how important it is for our industry to reimagine single-serve coffee as a sustainable daily ritual that avoids long-term impact on the planet, instead delivering fresh coffee in minutes with no machines required.Josh Wilbour, Founder and CEO, Steeped Coffee
The company has now partnered with more than 400 of the nation’s top coffee roasters and brands, new standard for single-serve coffee. Prepared similar to tea, Steeped is making specialty coffee more accessible to coffee lovers everywhere and delivers 100% freshly roasted, precision ground, and nitro-sealed premium craft coffee that is pre-portioned for a delicious cup. Steeped Coffee’s proprietary brewing method and certified compostable packaging was awarded ‘Best New Product’ honors at the 2021 NEXTY Awards. Steeped Coffee also completed a successful $5M Republic crowdfunding campaign, attracting more than 4,500 investors and selling out in less than 48 hours.
The accomplishment of building one of the fastest-growing companies in the U.S., in light of recent economic roadblocks, cannot be overstated. Inc. is thrilled to honor the companies that have established themselves through innovation, hard work, and rising to the challenges of today.Scott Omelianuk, editor-in-chief of Inc.
More information about Steeped Coffee’s additional Republic investment campaign, open for accredited investors, can be found at https://republic.com/steepedcoffee-regd.