So we were off to Brazil, to meet personally with the two potential suppliers that we had learned about and tested at the University of Florida.
The Samba Supply Dance
At the time there were no “fair trade” or “organic” or other eco-certified coconut producers in Brazil, or in other countries for that matter. We’d have to design our own quality, social, and environmental audits. So before visiting Brazil, Juan Carlos and I worked up our agenda to find out as much as we could: We wanted to tour the plants and meet the quality assurance and production teams, the plant manager, and the head of human resources. We also wanted to go to the plantations to see where and how the coconuts were grown and harvested.
Brazil is almost as big as the U.S., and is a world away from little Central America. Juan Carlos flew from Costa Rica and I from San Salvador, arriving into Belém, a city of 1.5 million people, in the north of Brazil where Amacoco was based. The morning after we arrived, we were driven to the plant and had a sit-down meeting with the general manager, the head of export, and the plant manager. During that day, we met with the quality control manager, head of human resources, and various scientists and agronomists on their staff. We spent hours grilling the plant manager and quality control personnel about every step of their process. How often did they sample and test their product? Did they do it in-house or have outside auditors? I took it as a positive sign that the plant manager would leave us alone for discussions with his key staff members. At lunch we were given permission to dine in the company cafeteria along with the rank-and-file workers. Another good sign.
We learned that the lowest-level employees received a starting pay significantly above the minimum wage and what locally was a livable wage. Most of the jobs, however, required technical skills and were paid well above that. Just as important, the company kept close track of inflation rates and costs of basic-living goods and services in town so they could adjust wages in relationship with the sometimes erratic inflation rates. In addition, all employees shared in a bonus pool based on company profits. Other programs impressed me as well, such as the scholarship program they had for kids of employees to help them finish high school and attend college.
The next day Gerardo Lara, the plantation manager, picked us up at our hotel. On our drive to the company plantation, he told us how they had been growing coconuts on several thousand acres for twenty years and that it had likely been cattle pasture for decades before that. “And rain forest before that?” I asked. Likely so, he admitted, but that was probably over a hundred years ago. He said we would see a number of sections of the farm that they were reforesting. I certainly wanted to make sure no virgin or even secondary rain forest was cut to produce Zico, and that was clearly not the case.
When we arrived at his small office on the plantation, Lara showed us an aerial photo of the land on a wall. In the image I could see the distinctive tops of coconut trees in perfect rows separated by wide, dense green swaths in between. Lara said these were reforested biological corridors some one hundred to two hundred meters wide to allow wildlife to migrate between forested areas. Zoologists from a local university who studied the land, he said, had measured an increasing presence of wildlife every year, especially native birds, which he was particularly happy about because they helped naturally control bug populations that could harm his crops. Water came from a small tributary from the Guamá River and was diverted throughout the plantation. A local environmental organization measured water quality when it came onto the property and when it ran back into the river and discovered that it was often cleaner after than before. He gave us copies of several published studies and reports to back up his claims. When we asked about safety training we were shown the accident log, which didn’t have a report of a major incident in the past year.
In the afternoon, we walked the property with an agronomist who told us all about coconut trees. Coconut palms, depending on variety, take three to five years to begin to produce usable fruit. At that point, they can yield upward of one hundred coconuts per year and remain productive for fifteen to twenty years. With each coconut producing roughly 330 milliliters of water, each tree could give 30 liters, or 8 gallons, per year for decades. To avoid potential plagues that can decimate monocultural crops, they planted a half-dozen different varieties on the property. They also were experimenting with mixing in banana plants, plantains, sugar cane, and other crops in the same area.
I had worried on the flight that no producer would meet the quality, environmental, and social standards we hoped for. But what we found were professional operators doing much more on each of these fronts than I ever expected, and in fact a better job than I probably could have done with $10 million and ten years to get it done. They were also surprisingly transparent and the sort of partners with whom I wanted to work.
Make It Personal
The following morning, while Juan Carlos stayed on to work with the plant manager on production details, I flew 2,000 kilometers to the south to Belo Horizonte to meet Luis Otavio, one of the main owners of Amacoco. Otavio didn’t usually meet with prospective clients, but I worked every connection I had to get an audience. When I arrived at his beautiful old plantation-style home, it was clear that Luis was a very wealthy man. During lunch on a large veranda with Jeronymo, one of his key deputies, I told him of my impressions of his factory and factory farm.
I asked him about his vision for his coconut water business. He said he worried that Brazilian kids were adopting the U.S. preference of high-sugar sodas and sports drinks. He hoped to change that in Brazil and the rest of the world while providing good jobs and development to rural areas of the country—a familiar-sounding message. Coconuts were also very sustainable, he believed. Jeronymo jumped into the conversation to tell me that they had researched launching in the U.S. themselves but, without a clear plan to crack the market, had abandoned the project. He revealed that they’d recently been approached by other U.S. brands looking for a supplier. Had I ever heard of a company called Vita Coco? I nodded my head to indicate, Of course, know all about them, while the fact was I was desperate for information about this nascent competitor. All I knew of Vita Coco to that point was still the “coming soon” website.
“So they’ve approached you as well?” I asked offhandedly. “What was your impression?”
Jeronymo said they were young and not particularly knowledgeable but very aggressive and confident. He said Amacoco would sell to both us and them, unless one was willing to step up and make a major commitment.
Mentally, I was prepared for potential competitors coming to market. You can bet that no matter how far out you see the cultural swell that your product can ride on, you will not be the only one paddling to catch the wave. Yet for some reason I was still surprised to see it was happening so fast. Now I knew that there were a number of Americans running around with a similar idea. That meant we needed to move fast.
Driving away from the meeting, I felt encouraged and excited to work with Amacoco. For due diligence, however, we spent the next few days visiting a second producer. The experience couldn’t have been more different. We were granted a meeting with one junior sales executive and he declined to let us tour their plant. We weren’t allowed to meet the quality control manager, human resources, or visit the plantation and anyway, we were told, their supply came from a variety of farms. How did they ensure consistent quality? Oh, the quality was no problem, he said, it was always excellent.
Their lack of transparency and overconfidence didn’t exactly leave me with a warm fuzzy feeling. The only potential good news was the price they quoted for production was cheaper than Amacoco. But they didn’t pass the criteria we had established at the outset, particularly the transparency test, and we felt like we didn’t know much more than before we visited. After meeting them face-to-face, I didn’t want to do business with them.
Within a few weeks we had agreed that Amacoco would supply Zico for our New York l
aunch. Juan Carlos would fly back to supervise the first production. If that went well we’d be ready to sign a long-term contract.
Early Investors: More Than Just a Check
So that took care of identifying our source of supply. We now had a chance, but no guarantee, that we’d have product for the Fancy Food Show. And it was time to bring in more cash from investors. In April of 2004, with the Fancy Food Show just two months away, I gathered my early investors along with my team of consultants to El Salvador for a meeting. One of the investors was a senior executive at a large hotel group and had graciously volunteered a free meeting room at the InterContinental Hotel in San Salvador with a patio overlooking the pool.
I walked everyone through what we had learned, the plan of how we proposed to launch Zico, and then outlined the capital requirements, proposed business structure, and timing to go to market. My projection was that it would take us three years to be profitable, and we needed $1 million to launch and have eighteen to twenty-four months before we needed to raise more capital. I made it clear that if we were going to launch this year, we needed to walk out of this room with an agreement on two main things: the investment amount and term and my ownership and compensation.
The investors had lots of questions. Were we confident we could get what we needed, and what sort of supply contract could we sign with the producer? Who did we think would enter the market, and what would happen if an established beverage company decided to come out with their own coconut water? In answering all these questions, I didn’t spin or try to reassure anyone. These were all the right questions to ask; all I could assure them was that I would dig into every one and address them as best as possible.
I then got into the details of how we would structure their investment. I proposed a $2 million pre-money (before the investment) valuation for Zico. I suggested to the nine early investors that they each contribute $100,000 in addition to the $20,000 that they already gave me as seed money. With that investment in Zico’s coffers, the company would be worth about $3 million (called a post-money valuation) and we would have the $1 million I projected we needed to launch. For that $120,000 total investment they would each own 4 percent of the company. After I laid out my offer, there were a few moments of silence. A few people nodded their heads slightly as they considered, which I took as a good sign. But as people began to speak, I quickly realized I was in for an intense negotiation.
My friend Mike was one of the first to speak. He had been an investor in a few family businesses, and they always based ownership on capital contributed. “Mark, if the total investment in Zico would be a million dollars, shouldn’t a $120,000 contribution purchase 12 percent of Zico? Maybe you would get something for your work to date, but 4 percent just sounds way too low.” I was thinking, “What the hell, old buddy of mine? You’re killing my deal!” But I realized if he’s writing a check, then he’s got the right to voice his opinion and decide like any other investor. (I also realized I should not have been negotiating with all of them at once, a mistake I would not make next time.) Other voices at the table chimed in with equally significant questions. Everyone agreed that the $2 million valuation was just too high for a company that was basically just one guy, some market research, and what was perhaps a good idea. Hernan added that my sales projections were optimistic: “I think you’ll run out of money much sooner than you’re projecting. I’m out.”
Going into this meeting I knew that if I were an experienced entrepreneur raising money in Silicon Valley, no one would have blinked at a two-million-dollar valuation. But I wasn’t a seasoned entrepreneur and this wasn’t Silicon Valley, so I began to lay out other “walk away” scenarios that I had prepared.
I uncapped a dry-erase marker, cleaned the whiteboard, and started to write out some different options. Two hours later, we settled on a structure that we could all live with. We reduced the pre-money value of the company to $1 million, and therefore $1 million invested would own 50 percent of the company, and every investor who put in $120,000 would own 6 percent. Because I was selling significantly more of the company than I had planned, I got them to agree to a few concessions. The first was that I would draw a modest salary to increase when the business was cash flow positive. Though significantly less than I was making at the time, I knew it might be high given we had zero revenue; if only I had known that in the near future I wouldn’t draw any salary at all for many months.
Second, I insisted that 50 percent of the investors’ shares would be voting and 100 percent of mine would be. I might give up control on a true percentage ownership, but I wasn’t ready to give it on a voting basis. Third, all involved agreed to contribute 1 percent of their equity stake to a social contribution fund or foundation, the objective of which I would determine at a later date.
Finally, I would have some additional upside in options or something that would allow me to earn more if they earned a good return on their investment.
Five from the group gave me a verbal commitment that day and the others seemed enthusiastic. In hindsight, I was offering an incredible deal. But, needless to say, no one gets to negotiate in hindsight. Like any long shot, the risk of losing it all was high, as was the pressure. I also realized that I probably could have held out, spent a few months finding other investors, and obtained a higher valuation. But with the cost of preparing for the Fancy Food Show already on the books, that wasn’t an option and I was happy where I stood: I’d have investors whom I knew and trusted, and we’d be in the market within a few months.
The critical question was Hernan Bravo’s: had I really raised enough money to launch a new brand properly? Now I can undoubtedly say no. As it turned out, Hernan’s dire prediction would prove to be overly optimistic. I would end up burning through that first round of money in less than eight months after launch, forcing me to come back to this same group of investors three times over the next three years for additional capital.
Even if I had known at the time that I would need much more money to get Zico up and running, I’m not sure it would have mattered. The hallway outside that meeting room at the InterContinental wasn’t filled with other investors banging on the door to get in on the deal. The truth was, I was raising as much money as I had access to, and I’d simply have to make do. Timing matters, and it’s important to know where you are relative to the market for your type of company.
In reality, the early investment needs and structure of every start-up is unique. Sara Blakely started Spanx with $5,000 of her own money, never raised another dime from outside investors, and owns 100 percent of her billion-dollar brand. Doug Evans, founder of Juicero, raised $70 million before even launching his in-home fresh-pressed juice company. He said, “I wanted to have 60 months of cash and never have to ask for money again.” And there are thousands of scenarios in-between. But no matter what, you can’t avoid the fact that raising money is a royal pain in the you-know-what, both stressful and time consuming. But unless you’re a trust-fund baby or the next Sara Blakely, here are a few suggestions based on both my successes and my mistakes, and on what I’ve seen other companies go through.
Be clear about what you need: Strive to estimate what you really need to execute your plan, or at least the first (or next) phase of growth and development. Generally speaking you should build an overly conservative cash flow model for twelve months. Whatever total capital you calculate you’ll need, at least double it. It’s always better to have a longer runway.
Control your destiny as long as possible: Try to sell no more than 30 percent of the company in any one round. This will keep you in control, protect your stake, and give you more to sell down the road if you need it. It’s also hard to ensure your business will achieve your goals and maintain your values, especially in the first few years, if you’re not captain of the ship. You will also determine what you ultimately own of the company based on what you sell in the early stages.
Choose your early partners carefully: All mone
y may be green, but not all investors are the same. If you don’t already personally know your early investors, spend time with them and vet them carefully before allowing them to invest. They should be aligned with your values and goals and be willing to support the mission of the company beyond just writing a check.
Raise what you can, when you can: Once you are clear on what you need, you feel like you have the right partners, are still in control, and can live with the terms of the deal, raise as much money as possible. Cash is king, and given the ups and downs of start-ups, it will inevitably run out sooner than expected so you want to have more cash in reserve. This is also a momentum game: once you have some investors interested, others will probably follow. There is no better time to raise money than when you don’t need it.
IT WILL NOT BE THIS WAY
With the New York launch just a couple of months away, I thought things were going as well as could be expected on both the business and personal fronts. Each team member was coming through on their tasks, and it looked more and more likely that we would make it to the food show with actual product to hand out. Six of my early investors gave me a verbal commitment to contribute an additional $100,000 each, and Maura agreed we’d drain my 401(k) to invest as well.
The International Paper division I ran was also having a record year. Personally, I was a machine. I was incredibly productive, even more so since I was constantly prioritizing what was important. I ran or worked out regularly, ate well, meditated in the mornings, and believe it or not got a fair amount of sleep or at least filled in with naps. Even more critically, Maura and I seemed to be aligned, and she was intimately involved in every major decision about Zico and was committed to the vision and positive impact we hoped to make.
High-Hanging Fruit Page 8