0 → 1,400 stores in under 1 year

Welcome to this week’s edition of CROWDSCALE - we’re putting a fast-growing startup on the scale and seeing if it’s worth an investment. In today’s issue:

• 🐮 Yogurt Growth Spurt: 0 → 1,400 stores in 1 year

• 🥛 Lactose (and profit) free: Thin margins threaten profitability

• 📝 Distribution Decision: Will I invest at a $15M valuation?

YOGURT GROWTH SPURT

I typically don’t invest often in the food & beverage space, but the pace at which this company is growing revenues was enough to pique my interest.

The Painterland Sisters are 4th generation farmers based in Pennsylvania - and they’re using the milk from their family’s farm to create a lactose-free type of Icelandic yogurt known as Skyr yogurt.

Cute, probably does a few thousand in sales right? 

Wrong.

In just their 4th quarter of operation the sister duo sold $631k of Skyr yogurt, a $2.5M annualized run rate.

The duo claims to be on track to hit $3.5M in sales for 2023, which would be an impressive feat for such a new product.

Their yogurt is drafting on the momentum of a few key trends in consumption:

• Organic product consumption is on the rise

• Lactose-free consumption is at an all time high

• Probiotics + Protein are as important as ever

I believe that they have a strong product that is unique enough to stand out, and their brand marketing is doing an effective job of showcasing the product.

It’s fairly difficult to get a foothold in grocery aisles, but that’s not proved to be a challenge for the Painterland Sisters - in less than a year they’ve managed to seed distribution to 1,400+ stores across the US.

They’ve done so with relatively little marketing spend, and the product appears to be selling effectively on a volume basis in comparison to competing yogurts.

Painterland Sisters is raising on a SAFE with a $15M valuation cap, which is reasonable for a company demonstrating high revenue growth and traction early on.

LACTOSE (AND PROFIT) FREE

A good product, strong marketing, consumption tailwinds, and high revenue growth…what could possibly go wrong?

While all rosy on the surface, I do have some concerns about this business. Chief among my concerns is their razor thin margins, which currently stand at 13%.

Painterland sold over $653k of product in 2022, however that only translated to $88k in gross profit 😢 

That’s before you take out salaries, legal expenses, marketing, etc. After all those are included, Painterland lost a staggering $813,000 in 2022.

Now it’s not all bad, marketing spend only amounted to $126k - this is good because it reaffirms that their rapid revenue growth wasn’t purely a result of flooding the market with ads.

But Painterland is getting killed in the General & Administrative costs (mainly salaries, but also miscellaneous costs like supplies/equipment/software).

In 2022 their G&A costs towered high at $747,000. Based on their current profit margin, Painterland would need to reel in $5.5M in revenue just to offset these specific costs.

Now I do expect profit margins to increase slightly as they scale and unlock volume efficiencies. But even at 20% margins (+6.5 from now), my back of the napkin math still doesn’t place them in profitability until they hit $9M in sales.

That’s a big ‘if’ on profit margins and perhaps an even bigger ‘if’ on whether they can achieve $9M in sales within the next 5 years. That’s because the Skyr yogurt market is really small.

Painterland quotes the market size to be at $177M, which really doesn’t get me excited about the upside potential. Toyota is a household name and they only command ~14% of the US auto-market.

I’m not trying to draw similarities between the auto & yogurt industries, but I want to make the point that even ‘dominant’ brands barely scratch double-digit market share.

So when the overall Skyr market is so low, and the company’s profit margins are so thin, it makes me nervous that they can reach the scale required to hit profitability.

THE DISTRIBUTION DECISION

Painterland Sisters is an absolute racecar when it comes to revenue growth.

However, I have concerns that their thin margins are going to require them to 4x revenues before they begin to see a cent of profits (more if they don’t improve their current margins)

And there’s no guarantee that their high revenue growth will be sustainable, given the small market they’re operating in.

For me, it comes to how the deal is structured and their plan to return capital to investors.

They’re raising on a $15M SAFE, which basically means that the next time they raise money, your investment will convert into equity at a $15M valuation.

So there’s a bit of a risk involved knowing they’ll need to successfully raise $$$ in the future in order for your investment to materialize into equity.

Once that happens, Painterland has claimed that investors will see a return through profit distributions. I’m not certain that Painterland can turn a profit within the next 5 years (or ever), and so I imagine it will be a long time before any sort of return can be generated.

If the distributions do start coming in, it’s my opinion that they won’t amount to much - a $100k distribution of profits would roughly result in $6.67 for an investor that put in $1,000.

Now a $10 million distribution would net that same investor $667, but I don’t think Painterland is going to be generating that kind of cash flow.

While these potential distributions would live in perpetuity, I don’t believe they’ll come quickly enough, or large enough to generate a strong annualized return.

I’ve decided to pass on investing in Painterland Sisters, but wish them the best!