Inside the Finance and Ops of Emerging Brands with Russell Kohn

Russell Kohn is the founder of Pale Blue Dot, a finance and ops consulting group for CPG startups.  Russell and his team are hired by growing brands to act as fractional CFO and/or COOs. His clients range from pre-revenue CPG brands to +$20M in revenue. Russell sat down with us to chat about his experience in the CPG industry and what it’s like working with multiple brands at various stages of growth.  

What type of revenue do you consider emerging? 

It all depends on your mindset. For example, a billion-dollar brand would look at a $20M brand as emerging, while a pre-revenue brand sees a $20M company and thinks they made it! 

I typically think of it less in terms of revenue and more in terms of the mentality of the business and the brand.

Emerging implies a certain level of acceleration, agility, and risk. I view all of the brands we work with as emerging because they’re growing at a fast pace and targeting something bigger. 

On the finance side, what are the different challenges your clients face? 

New challenges emerge at every revenue milestone. The challenges a pre-revenue brand faces are very different from a brand that is generating revenue. 

Brands over $10 million in revenue annually tend to be focused on profitability and sustainable long-term growth. Whereas if you're a pre-revenue brand, you’re likely focused on getting a product in front of consumers. You may have no idea how you’re going to get to profitability.

Overall, the biggest challenge that nearly every brand faces is access to capital, regardless of company size. The only way around this is to be profitable, so you aren’t dependent on your next capital raise. Profitable companies have a much freer hand to control their own destiny 

You always have to know your runway, especially if you’re not profitable. You need to ask yourself questions like: How many months of cash do I have on hand? What levers do I have to extend my runway, either on the expense side or the revenue side? Do I have a plan if we run out of money?

How do you recommend brands get access to capital? 

The answer changes depending on the size of the company. Larger companies have options that smaller companies do not. For example, a company that’s generating $20M in revenue can borrow against their inventory or borrow against their cash flows. They have access to non-dilutive debt capital from a variety of working capital funding sources.

Pre-revenue companies don't have a balance sheet that enables them to borrow, so they're reliant on investors. Today, the smaller companies are usually reliant on angel investors because institutions don’t invest as early as they used to.

That being said, limited capital leads to leaner companies. There’s a reason why historically some of the biggest companies are founded in recessions. When you don’t have access to free-flowing capital, founders must be more disciplined and careful. 

Is this lack of institutional investment good or bad for small companies? 

In many cases, I think it’s a blessing because most of these small businesses shouldn't be taking institutional capital. Institutional investors look for expected growth and returns that most CPG brands struggle to deliver. However, it’s stressful for brands that must rely on funding from their personal network. Access to capital often ends up being driven by the strength of the founder’s relationships rather than the quality of the business.It isn’t fair or equitable, but it’s the unfortunate truth today.

On the other extreme, there’s also such a thing as raising too much money, which may sound crazy to a struggling founder. 

What are the risks of raising too much money? 

I spoke with a founder last week who asked me if they should raise more money.  Given their situation, I advised them not to. If you have enough money to execute and achieve your goals, be very judicious about the decision to accept more capital. You're better off focusing on proving the company’s viability and product-market-fit and then going out to raise capital at a higher valuation. 

I've seen too many founders who have raised millions from investors and that money ends up burning a hole in their pocket because they feel a need to grow at all costs. If my company raises $5 million, people are going to expect $5 million worth of growth, whether or not that’s right for the business. If I take the path of slow-and-steady growth, I might have pissed off investors. But if I raise $500,000, investors are going to expect a much lower level of growth, which may be more appropriate given my business and the stage of my brand. 

What are the impacts of growing too fast? 

It puts pressure on the supply chain. For example, your partners may not be able to support such sudden growth, which forces you to work with a partner that isn’t ideal or to cut corners on production and compromise on quality. Volatility also makes it difficult for supply chain partners to plan ahead.  If you go to your co-packer and say I need to produce 20,000 cases of my new beverage next week, they're going to tell you that you have to wait six weeks. Maybe they’ll make an exception to be a good partner once, but if you keep coming back to them needing more capacity than you expected, they won’t always be able to accommodate you.

Here’s another scenario: Imagine you’re a small brand and get into Walmart nationally. You're going to generate a lot of revenue, but at what cost?  Often when small brands grow quickly like this, they’re sacrificing margin to do so by investing in partnerships with retailers or investing in trade spend and other promotional activities, often at an unsustainable rate. 

At the extreme, there are smaller companies out there that are losing money on every unit they sell, at least in the near term, in the name of growth. But if they don’t have a clear plan to achieve profitable growth, they’re setting themselves up for failure.

How do you suggest that your clients find the right supply chain partners?

You can think about it in terms of upstream and downstream partners.

Upstream is the ingredient suppliers, packaging suppliers, co-packers, and 3PL. 

Downstream is people you’re selling to so your distributors, retailers, and consumers. 

When choosing the right downstream partners, it’s most important to think about the final consumer. Who are you selling to and how do you want to reach them?  Who is the right distributor depends on who is the right retailer. Who is the right retailer depends on who is the right customer. Also, depending on the product & category, retailers will often dictate what distributor you use.

For the upstream side, speaking with peers who have more experience in your category is really valuable, especially when it comes to finding a co-packer. 

There's a wonderful community in CPG and people are usually willing to help each other. I love how supportive and positive the CPG community can be. I’ve found that founders can feel embarrassed to ask for help because they think they’ll look stupid or they don’t want to reveal their idea. But once they reach out and open up, they find cheerleaders, mentors and partners that want to help them succeed.

How do you advise clients to handle chargebacks and trade spend? 

Go in with eyes wide open. When you're projecting what your sales are going to be for the year, you have to realistically account for chargebacks and trade spend. When you’re calculating your store margin, you need to factor this in. 

This is the most common mistake we see founders make. They don’t factor it in and then are shocked by the added costs and the unexpected hit to margin.   

Unfortunately, trade spend is a necessary evil. If you have a good product, a good story and consumers want it, that gives you some leverage with retailers, but you’ll still have trade spend and chargebacks. 

Managing chargebacks requires constant attention, and that’s why it’s crucial to have the right partners who can help you stay on top of tracking and managing your finances. As a founder, you need to prioritize where you invest your time and expertise — you may decide that becoming an expert on chargebacks is not why you started a CPG brand, so you’d prefer to outsource that function to enable you to focus on what matters more. 

Chargebacks can become a huge and costly headache for brands if you don’t deal with them as they come in. There’s a dispute process for a reason — oftentimes the charges are wrong,

Has anything recently caught your eye or surprised you about emerging brands? 

I wouldn’t call it surprising, but more brands are realizing that working with fractional teams can be more cost-effective and valuable than hiring full-time employees, especially for early-stage companies. These brands need flexibility to grow, and they’re starting to see that getting 25% of a top expert’s time can be far more beneficial than having 100% of an average performer.

Many brands are now running with just one to three full-time employees, managing tens of millions in revenue, while relying on fractional team members who are fully embedded in their operations. We're not just consultants; we become part of the team, adopting their communication systems and collaborating with their suppliers and partners.

Additionally, brands are increasingly turning to technology—whether for order processing or marketing automation—to create efficiencies. Those who leverage tech strategically can amplify their impact across the board, achieving efficient results with less spend.

Thanks for chatting with us!