Creating the Silicon Valley of Natural Food: Q&A With Entrepreneur Steve Hughes

In 1997, Steve Hughes was named CEO of Boulder, Colo.-based Celestial Seasonings tea company. Although he came from a conventional food background, Hughes quickly saw the potential of the natural foods movement—and he realized that Boulder was one of its epicenters. Along with local first-generation natural products company founders like Steve Demos and Mark Retzloff, Hughes was instrumental in turning Boulder into what he calls “the Silicon Valley of natural and organic food.” 

For more than 25 years, Hughes has helped build some of the natural products industry’s iconic brands. After leaving Celestial Seasonings, Hughes moved on to serve as CEO of Frontier Natural Products. He then built Boulder Brands, which launched EVOL Foods, Udi’s, Smart Balance, Earth Balance and other brands. Seven years ago, Hughes founded Sunrise Strategic Partners, which is now one of the leading investment firms in the natural channel. 

Steve Hughes, CEO & co-founder of Sunrise Strategic Partners. 

At Sunrise, Hughes identifies and invests in brands in trending categories that are transforming the healthy, active and sustainable-living space. Sunrise recently merged two companies in its portfolio—Teton Waters Ranch and Sun Fed Ranch—to create the industry’s leading grass-fed/finished-beef platform dedicated to regenerative agriculture. Other Sunrise investments include Maple Hill Creamery, which produces 100% grass-fed, organic dairy products, and Kodiak Cakes, which produces whole-grain, high-protein pancake and waffle mixes. 

Hughes recently reminisced about his experience in the natural products industry and shared his predictions about the future on the podcast Compass Coffee Talk, co-hosted by industry veterans Bill Capsalis and Steven Hoffman and sponsored by PRESENCE Marketing, Naturally Boulder, Naturally San Diego and Naturally New York.

Read on to learn more about Hughes’ perspectives on brand building, hot investments in the natural products space, regenerative agriculture, the top components of a good business model and more. 

Q: Over the years, you’ve really kept your eye on how to build brands, how to consolidate and scale, and how investments and economics affect the natural products marketplace. How is all of that going so far in 2023?
For 25 years, there was nothing but capital, increasing almost every year. If you had a good idea, you could probably get some funding to get started. But what happened last spring was that the pendulum kind of swung back the other way. People were less prepared to invest in companies that maybe had a great idea but not a great business model. 

There are a couple of reasons why this happened. First of all, the Fed started making money more expensive. And then there was a lineup of natural brands that went public, like Beyond Meat, Oatly, Tattooed Chef. They came out of the box trading well above their IPO price, but they were businesses that had great top lines without very good business models. They were losing money, and they’re now trading 95%, 90% below their IPO price. That has really cooled off investors looking to take the big swing at high-growth, not-great-business-model kind of companies. 

Before, this capital was pretty patient. They’d invest in a company, and if that company was losing money but the business was growing, they’d keep funding the business. But that changed pretty dramatically pretty quickly. I think there’s a little bit of retrenchment now, and I think it’s going to be with us for a while because interest rates are not going down anytime soon. They’re probably going up. 

Q: What does that mean for natural products companies looking for investors currently or in the near future?
I think when you look at the lineup of companies that went public in 2020 and 2021 and how they’ve performed in the public space, it’s given investors a real pause about, OK, what are the rules? What has to happen for a company to be successful today? I think the answer is a bit different than it was a year or two or three years ago.

If you’re a company that’s got some scale and making money, I would just be really prudent now and be patient and grow and protect your bottom line. But if you’re a smaller company that isn’t cash-flow positive, you’ve got to get cash-flow positive. You’re not going to get funded, or if you do get funded, you’re not going to like the terms of that funding. 

I think what we did with Teton and SunFed Ranch is a good example. These are two pretty good-sized companies, at about $60 million each. They had just turned profitable, but we figured if we put the two of them together and created Grass Fed Foods, we’d end up with a $120 million business growing 30% plus, making good money. 

That’s one model. The other model I call “safety in numbers.” If you're a smaller company that’s underfunded, is losing money and can’t get funding, think about other brands in your category that are complementary and are facing the exact same issue. Could they or should they be trying to merge? I think that’s going to be the theme over the next 18 months—call it the mini-merger, where you get two or three small companies in the same category that together are profitable.

Q: Grass Fed Foods just recently launched. Can you tell us more about how it came about?
We invested in Teton Waters Ranch, which was grass-fed hot dogs and dinner sausages, six years ago. They were sourcing most of their raw material out of Tasmania, which is the ideal place in the world to get grass-fed meat. We built that business, got it to $60 million. But there was nobody to scale in the grass-fed space. 

One of the challenges for regenerative agriculture companies like Teton is for the company to get the scale, so the retailers and food-service operators can really have confidence they can lean into it and get the product supplied properly and professionally. My partner, Vince, kept knocking on doors, saying, “If we could get two of these companies together, we could clear the field and be the largest.” 

Then, I met Chris and Matt from SunFed five years ago at Expo. They’re sixth-generation ranchers in Northern California that do fresh grass-fed meat—what goes in the butcher case, what goes on the table at the restaurant. They had gotten SunFed to $60, $70 million at that time.

So, we had these two beautifully complementary companies—one doing prepared meat with an international source, one doing fresh meat with a domestic source. The big challenge was this was going to require somebody who really knew what they were doing to put these two together. We brought in Jeff Tripician, who had spent 15 years in premium protein with Niman Ranch and Coleman Natural Foods and had successful exits on both. So now we’ve got a scaled business with a guy who’s been there, done that—a guy with a playbook. 

We invested in Teton when it was a $3 million business and today, it’s part of a $120 million platform. This is the largest grass-fed beef platform in the space, and I think it’s going to ramp and grow very quickly. This is really going to be a rocket ship. This could be the biggest outcome in Sunrise history. 

Q: Can you talk a little bit more about the regenerative agriculture you’re promoting with Grass Fed Foods and other companies? 
At Sunrise, we really felt six years ago that regen agriculture is going to be perhaps the biggest fundamental mega trend of the next 20 years—because, basically, it’s back to the future. It’s how we did it 100 years ago before we industrialized our meat supply and dairy industry. It’s better for the earth. So, we’ve put about probably 40% of our capital into this space. 

One of the companies we invested in is Maple Hill Creamery, which is America’s first and only 100% grass-fed organic dairy milkshed, with over 150 farms. There are so many great positives to their regen agriculture business model. 

First of all, they rotate the cows around the milkshed every three days. This makes the grass look like you haven’t cut it in three years—like how it used to be on dairy farms. The cows are also productive until they’re 14 years old, whereas an organic cow might be productive only until age 4. 

A calf never gets an ounce of the mother’s milk on an organic farm. They get their own formula. But we incentivize Maple Hill farmers to wean, to have the calves on the mom for eight months. That makes the chemistry of the milk different, and better for the consumer. Cows are naturally wired to eat grass—they have four stomachs for that reason—and their grass-fed milk is a different chemistry than the milk from cows fed grain. 

We launched Maple Hill Milk into Whole Foods. Our best item at Boulder Brands, Earth Balance margarine, sold $85 a week per store at Whole Foods. But after just 90 days, half gallons of whole milk from Maple Hill were going $600 a week per store. So, the consumer gets it. A challenge for us is to get the products there in an economical way that they can afford.

We were smaller, later-term investors in Vital Farms, which produces eggs, butter and ghee in the regen agriculture space, and it’s really exciting to see what’s happened with that business. It’s one of those that came out in the class of 2020 IPOs that traded way up, but is now normalized back to a pretty good place. It’s $15-a-share stock, and I think they've got nothing but white space in front of them.

Q: Speaking about brand development, we have a question from a listener: “What are the basic three to five general components of a great business model?” 
Well, the first ideal is a highly differentiated, meaningful point of difference, ideally attaching an untapped consumer need. You’re looking for something the consumer’s ready for but isn’t on the market yet, like Maple Hill milk. 

The second thing is margin. If you're a 50% gross-margin business, your ability to get the cash flow to break even quickly is there. But if you’re a 20% gross-margin business, you’ve got a long road to go and a lot of wood to chop. 

The third is talent. To get to a business of $10, $15 million, you’ve got to almost be manic, right? You’re spending your own money. You’re spending nickels like manhole covers. You make every decision, because you’re on the line. But when your business starts to scale, you need to have the ability to bring in the “been-there, done-that” talent and be able to manage that talent. And that’s a challenge, because people that have been successful, that have been with bigger businesses and then come to smaller businesses, have a different business-management model. 

Once we get the right CEO in place, the folks across our businesses see that, really, almost overnight, they start making the kind of progress and traction they need to get to scale the business.

Q: Can you give us an example, like how that applies to Kodiak Cakes? We know this is a story you’re really proud of personally, and there’s even a “How I Built This” podcast on NPR about Kodiak. 
Kodiak is probably my favorite business experience. I got a call from my partner Jamie Manges at Trilantic Capital Partners, and he said he knew somebody who knew Kodiak co-founder Joel Clark, and Joel was getting ready to take in capital. So, I went on the internet, and they had the hokiest video of a trailer, which is their office, and a bear breaking into it, right? I thought, “This is something. OK, I’m just doing Jamie a favor. OK, I'm that kind of guy.” 

Kodiak’s point of difference was a whole-wheat, high-protein alternative to white refined flour, which meant it could play in any category white refined flour is in. When Joel came to see me, Kodiak was at $15 million. It was at Costco and Target. 

Joel showed me his deck, and when I got to the second page, I went, “Holy smokes, Joel, this is a billion-dollar brand.” He went, “What are you talking about?” I said, “Joel, you have got a 20 share of pancake-mix business at Target, and the category's up 20%. The category nationally is up 2%. You’re bringing millennial moms with money to Target to buy pancake mixes.”

So, we partnered up with Joel, and it was fascinating. It was just a great collaboration. Joel has got such great business and brand instincts. His business IQ is off the charts. 

We came up with what we call the Kodiak Cabin. The foundation of the cabin is pancake mixes in 25,000 doors. The first floor is baking mixes in 25,000 doors. The second floor is all of that in a cup you can microwave in a minute. Then, the third floor is frozen waffles. 

Kodiak went from $20 million to $200 million when we sold the majority of the control to Catterton 18 months ago. When I spoke to Joel recently, he was at $350 million.

Two years before he met us, Joel and Cam, his partner, were on “Shark Tank.” They were told all the reasons they weren’t going to be successful. I think they offered Joel $500,000 for half of the company. And, he said no, wisely.

I’m kind of a brand junkie and a trend junkie. I’ve been on some of the great rides in this industry. But working with Joel on this one was so special because it was so personal. All of his family had equity in the business, and he got to an extraordinary outcome. To have a small part in helping him do that is so great. 

Q: Finally, what’s on the horizon for you personally? What kind of work is exciting for you right now?
I love looking for the next new thing. As I said earlier, I think products that revert us back to the basics are an untapped consumer need, whether it’s grass-fed meat and dairy or heirloom grains.

I’ve been talking with one company that’s doing stone-ground milling the old way. This company has just gotten started. They’re in the Northeast in Whole Foods, and they’re outselling Dave’s Killer Bagels by 50%, 75%. So, the consumer gets it, right? But one of the big challenges companies like this have is capital. 

I also like resolving the disconnect between what a company founder says their unique point of difference is and what their product package says. One of the things we learned at Sunrise over the years is that you have your story, your concept statement. You want that to be 40%, 50% top-box resonating with your target consumer. But you want to make sure your package reflects that concept too. Because the reality is that for these small, emerging companies, 99.9% of their marketing budgets are package.

This industry is so dynamic, and while it’s going to go through different peaks and cycles, I think it’s just fascinating to see how many brilliant and caring people are in this industry. I think a young founder can reach out to anybody in this town and get a cup of coffee. I think that’s something we need to continue to nurture and build on, because there are tougher days ahead.

I've gotten a lot of great things out of this industry, a lot of great friends, a lot of great experiences. I’ve done well. It’s been great for my family, and I want to give back a little bit, and not necessarily with a price tag to it—just to help out where I can. 

Zevia Latest in Hot Season of Industry IPOs

This article originally appeared in Presence Marketing’s August 2021 Industry Newsletter

By Steven Hoffman

Zevia the Latest in a Hot Season of Industry IPOs, Private Equity Investment
For decades, the natural products industry has repeated the gospel of the relationship between diet and health.

This year, the Covid-19 pandemic drove that simple truth home, to consumers seeking to boost immunity and health, to businesses seeing opportunity in selling better-for-you products, and to investors, as sales of natural foods and supplements surged in both brick-and-mortar locations and via e-commerce, as shoppers became much more comfortable shopping for groceries from their computers or smartphones at home during lockdown.

Now, as the U.S. healthy food industry emerges from one of the most challenging times in its history, investment in the natural and specialty foods channel is surging, including private equity and public offerings.

This year alone, to date in 2021, more than $10 billion in venture-backed capital has been invested in grocery startups, “vaulting past the $7 billion raised in the sector last year,” reported The Spoon on July 2. According to an April 2021 report by Finistere Ventures and Pitchbook Data, a total of $22.3 billion in private equity was invested in agrifood tech companies, including novel ingredients and alternative proteins, meal kits and food delivery, e-commerce, consumer facing tech, and supply chain, reported Food Dive. 

In the public markets, a number of healthy products companies have completed, announced, or are considering IPOs, as the stock market continues to show signs of strength.

Here are highlights of IPO activity announced over the past few months:

Zevia Rides No Added Sugar Trend to IPO
Zero-calorie beverage maker Zevia began trading on July 22 on the NYSE under the ticker symbol ZVIA, pricing shares of its initial public offering at $14 per share. Net sales of Zevia products increased 29% year over year to $110 million, while increasing gross margins from 43% to 45%, reported Food Navigator-USA. Zevia credited its 2020 growth to a combination of velocity gains, growth in e-commerce (now accounting for 13% of sales), and increased distribution, with product available on Amazon, Zevia.com and more than 25,000 retail locations in the U.S. and Canada.

Specialty Grocer The Fresh Market Files for IPO
Specialty grocer The Fresh Market, based in Greensboro, NC, filed for an IPO on July 16. The specialty grocer operates 159 stores in 22 states. In the filing, the company reported comparable store sales growth of 22.3% in FY2020, up from -1.8% the previous year. The company intends to list on the Nasdaq exchange under the symbol TFM. CEO Jason Potter, in a letter to prospective shareholders, said the company made a number of changes after being acquired in 2016 by a private firm, including remerchandising the stores to focus on premium fresh food and offering competitive pricing on staple items, reported Grocery Dive.

Newly Combined Dole plc Announces IPO, Will Trade on NYSE
A newly created company formed from the combination of Total Produce plc and Dole Food Company Inc. announced on July 19 that it is planning an IPO of 26 million shares, priced between $20 and $23 per share. The new Dole plc says it will list shares on the NYSE under the ticker symbol DOLE. The combined businesses each have more than 150 years of history in the fresh produce industry, says the company, which claims it is one of the world’s largest producers of fresh bananas and pineapples, and one of the leaders in value-added salads and fresh-packed vegetables. The company also says it will have a growing presence in categories including berries, avocados and organic produce.

Healthy Snack Company Stryve Foods Begins Public Trading after SPAC Merger
Confident the company can disrupt the meat snack category, Plano, TX-based Stryve Foods, maker of meat snacks, on July 19 announced a merger with Andina Acquisition Corp. III under a shareholder-approved deal. Andina, a specialty purpose acquisition corporation (SPAC), changed its name to Stryve Foods, and began trading on the Nasdaq exchange under the symbol SNAX in late July. Stryve Foods is led by co-founder and co-CEO Joe Oblas, and co-CEO and chief marketing director Jaxie Alt, a veteran of the Dr. Pepper Snapple Group, reported Food Dive. Valued at $170 million, Stryve began by selling air-dried cured meats known as biltong, a tradition originating in South Africa that uses less sugar and additives than traditional meat jerky. Stryve reported sales of $14 million in 2019 and nearly $20 million in 2020, reported the Dallas News.

Instacart IPO Could Be One of the Biggest IPOs of 2021
After a round of fundraising this past spring that valued the company at $39 billion, rumors have abounded about a potential public offering from home delivery service Instacart. That said, Forbes reported in June that if it does go public, Instacart could potentially be one of the biggest IPOs of the year, though it was reported the company could opt for a Direct Listing, an alternative to a public offering in which no new shares are created and only existing, outstanding shares are sold. Currently, there is no information related to an Instacart IPO release date. However, MarketWatch reported that the company replaced its founder Apoorva Mehta as CEO with Facebook veteran Fidji Simo, who will take over leadership of the company in August ahead of an anticipated IPO possibly later this year.

Thrive Market Is Considering $2 Billion IPO Amid Surging eGrocery Sales
Online grocery sales nearly tripled in 2020, according to a July 2021 report by Packaged Facts. Based on this explosive trend, Bloomberg reported on July 8 that online membership-based natural products grocer Thrive Market, headquartered in Los Angeles, is considering an initial public offering at a valuation of more than $2 billion. According to Bloomberg, the company is working with investment bank Goldman Sachs Group. The company was founded by natural products and tech entrepreneurs Nick Green, Gunnar Lovelace, Kate Mulling and Sasha Siddhartha. By 2016, the company raised $141 million across three rounds of funding following its launch in 2014. According to Thrive Market, for every paid membership, Thrive Market donates a free membership to a family in need. 

Chobani Files Confidentially for IPO; Company Valuation May Exceed $10 Billion
Chobani, the company that put Greek yogurt on the map, could potentially be valued at more than $10 billion in an IPO, a source told Reuters on July 7. The company on July 6 filed a confidential draft registration statement with the Securities and Exchange Commission (SEC) for a proposed underwritten public offering of common stock, with the number of shared and price range yet to be determined. Chobani, which means shepherd in Turkish, was founded in in 2005 by Turkish immigrant Hamdi Ulukaya, who, with a small business loan, bought a yogurt plant in South Edmeston, NY, that was being closed by Kraft Foods. Chobani, which produces yogurt, oat milk, dairy and plant-based creamers and other products, also is renowned in the natural products industry for its business accelerator program for mission-based food startups, the Chobani Incubator.

Eat Just Is Targeting a $3 Billion Valuation in Considering IPO in Q4 2021
California-based Eat Just, cofounded in 2011 by Josh Balk and CEO Josh Tetrick, has raised a total of $440 million to date, including a recent $200 million placement led by the Qatar Investment Authority, Forbes reported on June 25. According to Forbes, Eat Just’s cultured meat division, GOOD Meat, also secured $170 million in financing in May 2021 as it builds out a large-scale manufacturing facility for cultured meat in Singapore. Eat Just seeks to be one of the first companies to sell meat made from animal cells instead of slaughtered livestock, and according to Forbes. Tetrick feels the positive feedback on cultured meat the company has received in Singapore serves as validation for expansion of cultured meat products in the U.S. in the future. Tetrick confirmed to Forbes that a public offering is “definitely getting closer.”

Naomi Osaka-backed Salad Chain Sweetgreen Confidentially Files for IPO
Fast casual restaurant chain Sweetgreen, specializing in salads and plant-based foods, on June 21 announced it had confidentially filed for an initial public offering, with Reuters reporting that the restaurant chain, which includes tennis star Naomi Osaka as an investor, is hoping for strong investor interest “as demand for plant-based food products surges globally.” The healthy food chain was founded in 2007 with one location in Washington, D.C., by three college roommates at Georgetown University’s business school. Currently, the company operates 122 locations in 12 states across the U.S. To date, the company has raised a total of $478.6 million in funding over 13 rounds, according to Crunchbase. Sweetgreen was named one of Fast Company’s Most Innovative Companies in 2019 and 2020. 

Vita Coco, Runa Parent Company Files for IPO with Company Valued at $2 Billion
All Market Inc., parent company of Vita Coco, Runa energy drinks and the water brand Ever & Ever, may be planning an initial public offering as soon as Q3 2021, according to a June 18 report by The Business Times. According to unidentified sources, All Market could be valued at more than $2 billion. Vita Coco, founded in 2004, produces a variety of coconut-based beverages. According to Statista, sales of Vita Coco products totaled approximately $160 million in 2020. All Market Inc. in 2018 acquired Runa, a popular energy drink made from guayusa, found in the Amazon rainforest. The company’s Ever & Ever brand markets pH balanced water in recyclable aluminum bottles.  

Oatly Raises $1.4 Billion in May 2021 IPO; Shares Rise 18% on First Day of Trading
Swedish oat milk maker Oatly, which reportedly counts such famous investors as Oprah Winfrey, Natalie Portman, Jay-Z and former Starbucks CEO Howard Schultz, raised $1.4 billion in an initial public offering on May 20. Shares were priced at $17, valuing the company at nearly $10 billion, according to CNBC. The company now trades on the Nasdaq exchange under the ticker symbol OTLY. In 2020, the company reported its revenue more than doubled over the previous year to $421.4 million, with food service accounting for 25% of sales and retail accounting for 75% of sales. Oatly reported a net loss of $60.36 million in 2020 as it invested in expanding into new markets, raising brand awareness and manufacturing, CNBC reported. Oatly CEO Toni Petersson in May told Food Navigator-USA “This is about conversion, it’s about converting people who used to drink cow’s milk into Oatly. And the addressable market is just massive … so it’s growth over profit.” Oatly products are currently sold in 60,000 retail locations and more than 30,000 coffee shops, reported VegNews.

Jessica Alba’s Honest Co. May 2021 IPO Raised $412.8 Million
Honest Co., the cruelty free personal care, household products and baby products brand co-founded by actor Jessica Alba, raised $412.8 million in an initial public offering held on May 4, CNBC reported. Trading under the ticker symbol HNST on the Nasdaq exchange, the company sold 25.8 million shares at $16 per share in its first day of trading, valuing it at $1.44 billion. The Honest Co. had revenue of $250 million in 2016, but has yet to turn a profit, reported LiveKindly. Alba, who started the company in 2011 three years after having her first child, said she founded the brand because she noticed a lack of natural baby products made without harsh chemicals in the marketplace. “When you look at this business, it feels like this is the direction in which the world wants to head,” said Motley Fool analyst Jason Moser on June 28. “A company that's very focused on ESG and sustainability. I think a big question for a business like this, it really boils down to pricing oftentimes. It's a little bit more expensive to make this stuff right now in the near term… As time goes on, those costs will come down, and I think a company like the Honest Co. has some brand equity that could play out in its favor.”

Impossible Foods In Talks to Go Public with a $10 Billion Valuation
Based on an April 8 report in MarketWatch, plant-based foods maker Impossible Foods is preparing for an initial public offering that could value the company at about $10 billion. Founded in 2011 and based in Redwood City, CA, Impossible Foods was recently valued at $4 billion in a private funding round in 2020, MarketWatch reported. The company’s signature product, the Impossible Burger, debuted in 2016. Sources told Reuters in April that Impossible Foods is exploring an IPO within the next year or a merger with a special purpose acquisition company (SPAC). Merging with a SPAC – a shell company that raises funds in an IPO with the goal of acquiring a private company – is becoming a popular alternative for companies seeking to go public “with less regulatory scrutiny and more certainty over the valuation that will be attained and funds that will be raised,” Reuters reported. Reuters also disclosed that Impossible Foods has raised $1.5 billion in the private investments, to date, with backers including Khosla Ventures, Horizons Ventures, and celebrities including tennis star Serena Williams and rapper and music entrepreneur Jay-Z. According to Food Dive, rumors of an IPO for Impossible Foods have circulated since competitor Beyond Meat went public in 2019.