Porter Road was to herd the meat industry in a new direction

Down a two lane road on the outskirts of Princeton, Ky., next to a cemetery and past the Light of Truth Church is the Porter Road Butcher Meat Co. facility — a staging ground for what the Nashville-based startup Porter Road hopes will be a revolution in the American meatpacking industry. For the company’s co-founders, […]

Down a two lane road on the outskirts of Princeton, Ky., next to a cemetery and past the Light of Truth Church is the Porter Road Butcher Meat Co. facility — a staging ground for what the Nashville-based startup Porter Road hopes will be a revolution in the American meatpacking industry.

For the company’s co-founders, James Peisker and Chris Carter, the refashioning of the meat business in America is the next step in a nearly decade-long journey since the former chefs first met working in the restaurant of Nashville’s historic Hermitage Hotel. 

The two men started their butcher business, selling locally sourced meat from the East Nashville Farmer’s Market in 2010 and eventually moved to a storefront in the same neighborhood a year later.

“We ended up going around and raising funds and opened the brick and mortar shop in 2011,” Peisker said. “Chris worked a job at a friend of ours’ deli in the morning and I worked at a restaurant at night.”

But from the beginning the two men had bigger ambitions, and as the business became increasingly successful, they began thinking about how to bring their approach to the meat industry to the entire country.

“What we see the future is is being able to reach as many people as we can in the country and offer them the best quality most sustainably raised products,” said Carter in an interview. 

As they began building the business in earnest, the two men realized that there was a critical part of the process over which they had no control — the meat processing itself.

“I would love to be Omaha Steaks,” said Carter. “But I would love to bring change to the system that Omaha Steaks buys into.” To do that meant not just sourcing from sustainable farms, but making sure that their slaughterhouse and processing facility was operating to standards that the two co-founders set for themselves.

“They put up the curtain to hide what’s happening,” said Peisker of the meat industry — although the dirty side of industrial animal husbandry is well known. “99% of the meat is coming from these really disgusting places where the animals are near death and kept alive with injections… Tyson can say they get their chickens from family farm but] they sell the farmers feed, and chicks… small family farms are raising these animals but are doing it in a way that harms the animal. And our beef is born in the same matter. It’s how they spend the end of their lives. They’re force fed chickenshit, chicken feathers, scrap and harvested in a manner that’s doing 60,000 head a day.”

Peisker and Carter envision a different path, one that’s decentralizing the commodity meat industry. Instead of industrial farms producing thousands of head, smaller sustainable farms could raise livestock in the hundreds. Those sustainably raised animals could then be sent to local processing plants and slaughtered in facilities that are better for workers and (more) humane for animals.

“One of the first things we did was to take away the electric prod sticks and cattle paddles,” said Peisker. Ultimately the men recognize that there’s only so much that can be done to make the industry operate more efficiently and humanely, but every little bit helps.

The alternative is continuing to operate at scales that are toxic for the entire country. For example, earlier this month a jury in North Carolina awarded residents near a Smithfield Farms hog farm $470 million to address their complaints about the stench and the industrial pollution coming from the farm.

In all, industrial animal farms operated by just four companies produce 80% of the meat U.S. consumers eat. And the environmental impact of these industrial farms is well understood.

For Ryan Darnell, a managing partner of Max Ventures (and childhood friend of Carter’s), the Porter Road business makes good business sense beyond its social and environmental benefits.

“In this category there’s roughly $55 billion of revenue tied up in the traditional supply chain,” Darnell wrote in an email. “Porter Road isn’t just selling meat online. They are rearchitecting the back-end system to eliminate a lot of the things we don’t like (and aren’t good for us). They are building an entirely new meat company from the ground up.”

Companies like CrowdCow and ButcherBox offer organic meat for sale, but Darnell said that the vertical integration that Porter Road has built makes it a fundamentally different company from those startups.

“Most of the competitors in this space have a digital storefront (for distribution) and buy out of the existing supply chain. A few will try to backwards integrate, but it’s difficult to learn how to accurately evaluate farmers and implement best practices in a processing facility,” Darnell wrote.

All of this attention to detail in the process is also reflected in the price of Porter Road’s meats (they aren’t cheap). But the notion for Peisker is that people can eat fewer, higher quality meat meals with Porter Road products (which may also be better for the environment too).

You should eat less meat but better meat,” said Peisker. “There’s a movement across the country of people who want flavor back in their food…. And people who want to make a choice with their dollar about what they buy.”

Porter Road’s evolution — which culminated in the company launching an online presence in 2017 — is coming at a time when shifting consumption patterns are changing the ways Americans shop and eat.

The Amazon acquisition of Whole Foods has changed the organic market as the once-mighty grocery chain becomes more incorporated into the Seattle e-commerce giant’s commercial operations. That’s opened the doors for direct to consumer competitors to come in — including companies like Thrive Market, Crowd Cow and Porter Road.

“Whole Foods, post-Amazon is just another grocery store now,” said Peisker. 

And Americans continue to love organic foods. Sales of organic food products hit a record $45.2 billion in 2017, according to the Organic Trade Association. While growth slowed to 6.7% from 9% in 2016, the overall numbers are still surpassing the anemic 1% growth of the U.S. food business overall, according to the report.

Porter Road’s founders say those numbers are reflected in its own business. “We get busier every day,” said Carter. Over the summer the company was averaging 60 boxes shipped per-day with roughly 5-8 pounds of meat in a box.

With the boost from the $3.7 million in venture funding it received earlier in the year backed by investors including Max Ventures, Slow Ventures, BoxGroup, Tribeca Venture Partners, Collaborative Fund, and Great Oaks VC, Porter Road is hoping to expand its operations.

“Our plan is to build,” Carter said. “We’ve built this amazing model in this location. We have a year or two before we see ourselves busting at the seams here. And we will move to communities across the country.”

The co-founders of Porter Road see opportunities to open a similar processing facility to the one already operating in Princeton — and ideally will be able to build a network of abattoirs around the country. “If we can make a better life for the animals that go into our food system and better food for consumers why wouldn’t we do it?” said Peisker. 

What every startup founder should know about exits

Benjamin Joffe Contributor Benjamin Joffe is a partner at HAX. More posts by this contributor 70 years of VC innovation 2017 crowdfunding guide The dream of a startup founder can often be summarized by the following, well-intentioned, and mostly delusional quote, “We’ll raise a few rounds and in a few years we’ll IPO on Nasdaq.” […]

The dream of a startup founder can often be summarized by the following, well-intentioned, and mostly delusional quote, “We’ll raise a few rounds and in a few years we’ll IPO on Nasdaq.”

But a more likely scenario looks something like this.:

You invest a few years of hard work to build something of value. One day you receive an acquisition offer out of the blue. You’re elated. And you’re not prepared. You drop everything to focus on this opportunity. Exclusive due diligence starts. Your company is a mess (IP, contracts, burn). Days become weeks; weeks become months. You’ve neglected business and fundraising. You’re running out of money. M&A is now your one and only option. The buyer says they found a bunch of cockroaches in the walls and drops the price. Now what?

Sounds unlikely?

This is still a favorable situation: you had an offer! Think about how much time you invested in your various funding rounds. The hundreds of names and Google spreadsheet or Streak-powered quasi-CRM process.

Have you spent even a fraction of that on understanding exit paths? If you’d rather not live the situation described above, read along.

The E-word: A Strange Taboo

Investors live by exits, but many founders keep dreaming of unicornization and avoid the “E-word” until it’s too late. Yet, in 2016, 97% of exits were M&As. And most happened before series B.

Exits matter because that’s when you, your team and your investors get paid. Oddly enough, and to use a chess metaphor, we hear a lot about the “opening game” (lean startup), the “mid-game” (growth) but very little about this “end game”.

As a result, founders miss opportunities or leave money on the table. This is a shame. Our fund, SOSV, has over 700 companies in portfolio. We want the best possible exit for each of them. And fortune favors the prepared! Now, how to get 700 exits (and counting)?

To explore the topic, organized a series of Masterclasses tapping corporate buyers, bankers, investors, lawyers, and startup CEOs with M&A or IPO experience in San Francisco. It was a group that included the founders of Guitar Hero — bought by Activision; JUMP Bikes — a SOSV portfolio company bought by Uber, Ubiquisys  — bought by Cisco, and Withings — bought by Nokia. Each one for hundreds of millions).

Their observations can be summarized below.

Maximize Optionality

“Founders must be aware of what contributes to an exit. This means understanding partnerships and how they are formed in the business space the entrepreneur is working in,” said one MasterClass participant.  

As founders, you build your product, your company and… optionality. You need to understand the options open to your company, and take steps to enable them.

The most likely one is an acquisition but there are others like IPO (including small cap), RTO, SBO, LBO, Equity Crowdfunding and even ICO.

“Exit is not a goal ​per se, but as a CEO it is something you should think about as early in your cycle as possible, while being business-focused,” said the London-based investor Frederic Rombaut, of Seraphim Capital.

Indeed, most participants said that exits should always be on the chief executive’s agenda, no matter how early in the process. “Exits should be on the CEO agenda. Not front and center, but on the agenda. M&A is a by-product of a great business and targeted BD. IPOs are always an option once you’ve built significant cashflow forecasting.”

It’s important to ask questions like: How many “strategic engagements” with potential buyers have you had this month? Is your message and value clear in their eyes? Have you considered an acquisition track in parallel to a fundraise?

It doesn’t stop there:

  • Equity crowdfunding might help close some gaps at seed stage.
  • Early IPOs on smaller exchanges can be an option to raise over $10M — the robotics startup Balyo went public and raised 40MEUR on Euronext to get rid of a critical ‘right of first refusal’ option held by one of its corporate investors.
  • Reverse mergers can work too: the medical exoskeleton company EKSO Bionics went public this way.

One thing is sure: the time to exit is not when you’re running out of money.

Companies are bought, not sold

Unicorn or not, the most likely exit is an acquisition.

As George Patterson, Managing Director at HSBC in New York said, “Good tech companies are bought, not sold. The question is thus: how to get bought?”

Patterson says it’s important to understand how mergers and acquisitions actually work; how to prepare a startup for an exit; and how to develop a “feel” for the market you’re exiting through and into. ;

How M&A works

Hearing from corp dev veterans from Cisco, Logitech, Dassault and IBM, a few key ideas emerged:

  • Motivations vary

It could be (from least to most expensive, or as a mix), as listed by Mark Suster, Managing Partner at Upfront Ventures:

  1. Talent hire ($1M/dev as a rule of thumb — location matters)
  2. Product gap
  3. Revenue driver
  4. Strategic threat (avoid or delay disruption)
  5. Defensive move (can’t afford a competitor to own it)
  • How corporates find you

Corporates find deals via the development of partnerships, investment (CVC), their business units, corp dev research, media, and investor connections.

Asked about the best approach, Todd Neville, Manager of Corporate Business Development and Strategy at IBM (who gave the most detailed description of the corp dev process), said, “Do something cool to one of the IBM customers. If they rave about even a POC, we’re interested.”

In other words, business development is corporate development. 

Get the house in order

Buyers typically want to know three things:

  1. Is your IP really yours?
  2. Is your team capable?
  3. Will your customers stick around?

For IP, they will check your contracts (staff and contractors), run some automated code analysis for proprietary code and open source use. They will evaluate potential IP infringement. No point buying you if you end up costing more in lawsuits!

For your team skills: sitting down with your engineers will tell them plenty enough without understanding the details of this or that algorithm. Be sure the last thing a corporate wants is to be accused of stealing!

Lawyers engaged early can help. The later the clean-up, the more costly and painful.

Develop a feel for your “market”

Develop relationships and create champions within corporates. It will help promote your deal when the time comes, and will let you keep your finger on the pulse of corporate strategy to time your moves.

Do you read the earning calls of Cisco or IBM (or others relevant to you)? This is where strategies are presented. Are your keywords coming up there or in their press releases?

Chris Gilbert, former CEO of Ubiquisys (sold to Cisco for over $300M) was very deliberate in planning his exit.

Selling start on day one and is a leadership-only function — work out who will be your buyer. Only the CEO can do this. Constantly articulate why a company should buy you,” Gilbert said. Bring clear messages into the acquiring company so it can be presented upwards: give them the presentation you would like them to show their boss! When the time is right, force decisions through competition. If you know they have to buy you, your starting position is strong.”

The Dark Art of Price Discovery

There are dozens of formulas (from DCF to comparables) to evaluate a deal — which also means none is ‘correct’. What matters is: how much would you sell for, and how much is the buyer ready to pay?

Gilbert, at Ubiquisys, described how close interactions with his banker helped drive the price up among the bidders assembled.

Just like buyers, we meet bankers and lawyers too rarely at startup events, but there is much to learn with them. They make deals happen, avoid value erosion and optimize price. They often also make introductions before you engage them, to build goodwill and earn your business.

And if you worry about fees, the right banker handsomely pays for itself by finding more bidders, and playing “bad cop” for you, avoiding direct confrontation with your future employer. Do you want a slice of the watermelon or the whole grape?

Final Twist: Exits Are Not Exits

When asked about what happens after an M&A or IPO, buyers said that they generally hoped the founders would stay with them for many years. Often using re-vesting, earn-outs or shares of the acquiring company to incentivize them. Neville, from IBM, mentioned a security company they acquired whose founder is now the head of one of the largest IBM divisions.

In the case of IPOs, supposedly the ultimate “exit”, any block of shares sold by founders would face extreme scrutiny and might cause a price drop.

So who’s exiting during those deals? Investors (and not always).

Eventually, if the average age of a startup at exit is 8–10 years, the active duty period of founders (if not replaced in the meantime) extends even more. Better love the problem you’re solving, and your customers!

Thanks to speakers, participants and supporters of this Masterclass series:

London: Frederic Rombaut (Seraphim Capital), Joe Tabberer (FirstBank), Chris Gilbert (Ubiquisys), Jonathan Keeling (Crowdcube), Fred Destin, Tony Fish (AMF Ventures, James Clark (London Stock Exchange), Denise Law (SGCIB).

Paris: Frederic Rombaut (Seraphim Capital), Manuel Gruson (Dassault Systemes), Pierre-Henri Chappaz (Rothschild Global Advisory), Christine Lambert-Goue (All Invest), Olivier Younes (EXPEN), Eric Carreel (Withings), Fabien Bardinet (Balyo), Xavier Lazarus (Elaia Partners), Pierre-Eric Leibovici(Daphni). Jean de La Rochebrochard (Kima Ventures), Jeremy Sartre (SmartAngels), Gwen Regina Tan (Entrepreneur First).

San Francisco: Natasha Ligai (Logitech), Matt Cutler (Cisco),Will Hawthorne, (CODE Advisors), Ryan Rzepecki (JUMP Bikes), Charles Huang (Guitar Hero), Jeff Thomas (Nasdaq), Shahin Farshchi (Lux Capital), Ammar Hanafi (Moment Ventures), Adam J. Epstein (Third Creek Advisors), Nathan Harding (EKSO Bionics), Kate Whitcomb, Anthony Marino and Ethan Haigh (SOSV).

New York: Todd Neville (IBM), George Patterson (HSBC), Ryan Rzepecki (JUMP Bikes), Aaron Kellner (SeedInvest), Jeremy Levine (Bessemer Venture Partners), Taylor Greene (Collaborative Fund), Adam Rothenberg (BoxGroup), Eli Curi(Fenwick & West), Ian Engstrand and Salil Gandhi (Goodwin), Warren Spar(Sparring Partners Capital), Duncan Turner, Vivian Law and Sheng Ge (SOSV).