Is Nitro Beverages running out of cash? ⏰

The collapse of crowdfunded darling NowRx is a strong reminder of the risks involved with startup investing

Each week, I scan every new startup deal that launches across StartEngine, Wefunder, Republic, and more.

I tend to focus on the startups that excite me as potential winners - it’s not as much fun to dump on a startup that I don’t believe in. After all, these aren’t faceless corporations - they’re real people, often with their financial situation on the line

But so are crowdfunding investors, and that’s who I care about the most with Crowdscale.

And that is why in today’s newsletter I am profiling a startup that I believe will fail.

I’m always interested by startups that I’ve seen in the wild prior to them raising capital

I’ve seen Nitro Beverages stocked in my local Whole Foods - and although I’ve never purchased/consumed the product, I did appreciate the packaging design

Nitro produces a variety of Ready-to-Drink coffee that’s infused with nitrogen gas. The nitrogen is reportedly added to improve the beverage’s taste + texture (where my ‘mouthfeel’ weirdos at??)

My familiarity with the brand led me to dig in to their most recent fundraising round on StartEngine. Nitro is seeking investment at an $11.4M valuation, with a minimum investment amount of $250.

The company boasts a presence in 1,500 stores and revenues topped $814,000 in 2021. After launching their flagship cold brew, Nitro has added additional cold brew flavors, an Espresso, Latte, and a lineup of Kombucha drinks.

Revenues grew 24% YoY in 2021, and the company blames production issues for hindering their ability to grow further. I wish more recent figures were available - reading through comments in the discussion it appears that revenues contracted in 2022 as the company sought to achieve profitability

I commend the hard decision to sacrifice revenues for profits, but it might be too late.

Here’s why I passed on investing in Nitro Beverages

Nitro’s profit margin is just 18% - and that’s simply not enough to sustain operations

Under 2021 revenue, this yielded $151k to fund the business, which would have been fine except the company recorded $1.2M in operating expenses.

All things considered, this left the company with a net loss of $1M+ in 2021. At this rate, the company would likely need to 10x revenues just to break even.

But as we learned, revenues are expecting to decline for the year of 2022 as the company focuses more on profitability

Will cost-savings measures be enough?

We don’t have 2022 figures available, but we can piece together some information to understand where the business is now. The company laid off 2 sales employees, which should bring expenses down by $160k/year.

I asked the founders and they believe that operating expenses for 2022 should ultimately come in at around half the operating expenses as 2021.

So let’s say their revenues dip to $700k, and operating expenses shrink to $600k. Maintaining a profit margin of 18%, Nitro would then be looking at a net loss of -$474,000

The hope is that as they scale upward, they can take advantage of efficiencies of scale to increase their profit margin. The problem is, I don’t think they’ll be able to turn that corner before running out of money

Nitro is literally running on fumes, as they reported just $6,138 of cash on hand as of 10/27/22.

Even if they’re able to raise a considerable amount in this raise (currently at $141k at the time of this writing), they will need additional financing in a matter of months to continue operations

What went wrong?

I actually came close to launching my own beverage (a bottled horchata), so I’ve done a good amount of research into the beverage space and its costs. Nitro’s beverages are shipped cold and stored cold. They also have the added process of infusing with nitrogen gas.

That translates to a more expensive cost structure, and the shelf life is also greatly reduced.

Compare Nitro to Kombucha Town, another startup raising via equity crowdfunding, and you can see that the profit margins are drastically different

So they’re operating in a tough space, but they’ve also had some self-inflicted wounds

Cost of Goods can be out of one’s control, but blowing $1M+ on operating expenses is mismanagement on their part. I think a lot of this has to do with the amount of skews they released

Rather than building a sustainable business around their flagship products, they raced to introduce a total of 12 different beverages skews

Each of these require R&D, tasting, design, marketing, and new skew costs with the manufacturer. I also suspect that Nitro invested too heavily in promotions to juice revenues and show YoY growth

Now it’s not to say that a large brand could swoop in to acquire Nitro Beverages. But I want to base my investments around potential profitability, not longshot acquisition chances.

I wish the best to the team behind Nitro Beverages, but I will be sitting on the sidelines for this investment opportunity.