An Exit

The Journey Isn't Over

In 2014 I invested in Simple Mills. Yesterday, they announced that they were being acquired by Flowers Foods. Katlin Smith was the CEO and founder. To be honest, I wasn’t excited about investing in a consumer products company. I hadn’t had very good experiences investing in that category.

My first few experiences in consumer products were Shuffletech, Win Products, Tallgrass Beef, Dabble, and a couple of others. All went bankrupt except Shuffletech which had an exit on a patent lawsuit due to the resourcefulness and intense effort by the entrepreneur, Rick Schultz, who led the company.

But, there was something special about Katlin you couldn’t put your finger on.

Her professors at Chicago Booth raved about her. It wasn’t fake. It wasn’t to pump her up. It was real and you could tell. Her products tasted good, and they were not filled with all the crap you see in other products.

At the first financing round of startups, you bet on the person. They call it betting on the jockey, not the horse. Katlin Smith is an amazing jockey.

The arc of Simple Mills is a great lesson in how to build a company. Someone ought to do a business school case on it. It’s rare and Katlin put it all together.

A lot of times, people do market research looking for problems to solve. That’s fine, but I think when entrepreneurs solve problems they are personally confronted with, they do better. That’s where the true passion emerges. It’s personal to them.

Some background. She was having trouble eating. She tried a lot of things and finally settled on a gluten-free diet. The problem was when she went to the gluten-free section of the grocery store, all the products were pumped up with sugar or some other kind of additives to make them palatable.

She wanted to be gluten-free, but she didn’t want to consume a lot of other junk in the process. After all, this quest was about health and feeling better.

She started making a muffin mix in her apartment. She experimented and finally got it to her liking. Some of her friends tried it and started buying the mix from her. Eventually, it overwhelmed her apartment kitchen.

Her parents took out a second mortgage to finance the expansion of the business. Credit to them. Would you take out a second mortgage on your house to finance your kid on some idea? She decided to go to Chicago Booth to learn about how to build and manage a business. She entered the New Venture Challenge and that’s where the initial investors made first contact with her.

She was the #1 gluten-free muffin mix on Amazon, and she had distribution in some North Carolina health food stores.

We did the first round of investment with her. It was the only term sheet I have ever seen done this way. Instead of naming a price for the round, it was dependent on Simple Mills's top-line revenue. The more revenue they had in a certain period, the higher the price of the round.

Sure, it’s adverse in some ways because as an investor you are trying to get the most value you can. Hence, you’d root against sales growing too fast. At the same time, you’d want to see good numbers because it gave you confidence the business was growing and could become something.

One of the most magnificent things Katlin did was having a totally aligned message and culture for her company. Simple Mills isn’t separate from Katlin. It is her. The message has not changed from the first time I ever heard her pitch. Not only that, but the labeling on the packages reflects that first pitch and the ethos in it. The way Simple Mills social media speaks about the brand, and the category, and interacts with customers exemplifies that same ethos. The employees that Katlin hired, and she hired plenty of great ones, also reflect and instill that same initial culture that she talked about in that first pitch I heard. I have never seen anything like it and it is amazing.

I’d urge you to go online to their webpage and peruse it. Go to the store and buy some products. You will see there is a connection between the web, the box the product comes in, and the end product.

In the past couple of years, Simple Mills has helped regenerative farmers grow their crops and provided a safety net for them. Regenerative farming has some risk, and Simple Mills assumed a lot of that risk. I think that will continue with the acquisition.

The other facet of the company that no one talks about is the way Simple Mills took on finance. I mentioned the innovative wrinkle in the initial term sheet. Simple Mills was the most capital-efficient consumer products company I have ever seen.

I can’t remember how many rounds of capital they actually raised. It was two or three and she never went to the outside to raise it since all initial investors were excited to write another check. But, she only did it when she had to.

Because of the way they built their business, they were able to access venture debt markets and pay the debt back. Debt is a double-edged sword. It can help you cut through a lot of stuff but when that sword strikes back, the blade is sharp. Entrepreneurs often go to venture capitalists for new cash because “it’s the way we always have done it” and they don’t have the kinds of businesses that can withstand a debt load. Simple Mills was able to go to venture debt and pay it off. That meant they did not sell off any equity. Existing investors didn’t get diluted which was good for us. The founder and employees didn’t get diluted either, which was good for them. Venture debt is cheaper than venture equity. But, as I said above, it will be the Grim Reaper if you can’t pay it back.

When it came time, Simple Mills sold some of the company to a private equity firm that not only knew the consumer products business but aligned with the company values. Simple Mills didn’t have to virtue signal and be a “B Corporation”. They lived great values and exemplified them in their community. The PE firm helped propel them to the next level and also made money on the sale of the company.

I don’t think the journey for Simple Mills is over but it will be a new path.

Katlin put together a great board of directors. She knew how to use them. She put together a top-flight executive team who instilled her vision into the people they hired. They won’t be there anymore and Simple Mills will have to figure out how to work inside a larger corporate entity.

Full credit goes to Katlin for what she has built. It was her vision and while she made it look easy, there were bumps along the way. Truly a great story to have been a passenger on the plane for. 10 years from initial investment to exit. A bit longer than that from the start of the company.

Usually, when I am invested in a company that exits there is a bit of chagrin that the run is over. The chase is fun. Sort of like putting on a successful trade over a period of time and getting out of it. In this case, no chagrin. Just exceptionally happy for Katlin and the Simple Mills team.

What a great run.