June 7, 2020

Real estate investing to consumer tech investing and the differences between 2008 crisis and 2020 - by Polina Chebotareva and Filipp Chebotarev.

Real estate investing to consumer tech investing and the differences between 2008 crisis and 2020 - by Polina Chebotareva and Filipp Chebotarev.

In this episode of Fundraising Radio we had two guest speakers - Filipp Chebotarev and Polina Chebotareva telling about the differences between the current crisis and the crisis of 2008 and how investing during these times works. We've touched onto multiple subjects, including - how to evaluate your startup, pitching to investors and much more.

In this episode of Fundraising Radio we had two guest speakers - Filipp Chebotarev and Polina Chebotareva telling about the differences between the current crisis and the crisis of 2008 and how investing during these times works. We've touched onto multiple subjects, including - how to evaluate your startup, pitching to investors and much more.

Polina Chebotareva: https://www.linkedin.com/in/polina-chebotareva-aa44966b/

Filipp Chebotarev: https://www.linkedin.com/in/filipp-chebotarev-385a472a/

Cambridge SPG: http://www.cambridgespg.com/


Transcript

This is Fundraising Radio and today as guest speakers we have Phillip Chebotarev - chief operating officer at Cambridge SPG and Polina Chebotareva - managing partner of Cambridge SPG.

this episode we'll touch on two real estate investing.

we'll move on to general VC funding, how to get this funding, how to switch from real estate to VC it.

Cetera.

let's start with Felipe, take it off from giving us some of your background and some background on CHAM bridge SPG.

Yes absolutely.

it seems like only yesterday, but it was 2010,

when Paulina and I both quit our jobs and started Cambridge SPG.

at the time were in our Belina would you say were in our early or mid twenties or late?

I'd say, well, I'm older than you.

I was definitely in my mid twenties, late twenties, 36 personal information.

We were in our twenties and we, so, and we started Cambridge at BG to, invest in and acquire distressed real estate.

prior to that, we both had corporate jobs. we were both, had.

Amazing jobs and had great time, but, when the real estate market, really crashed and, in two thousand eight thousand nine, by 2010, things were still really bad.

the people, right, half of, the investors were trying to buy as much real estate as possible.

the other half thought that it was going to be worth even less in 2011 and 12.

we obviously believed that it would increase.

we started raising capital, in, late 2010 and over a five and a half year period, we ended up raising 350 million of equity.

we acquired 44 large distressed real estate assets on the West coast, mostly in California and Nevada. since then have divested out of 42 of the 44 and we have one in escrow right now.
that was a great experience of really understanding how to raise capital.
I would say, because real estate itself is very quantitative.

It's very easy to understand, right? You have the location, you can see what, are in the area and you can pretty accurately project what rental rates you will get for your property.

and determine the cap.
Rate, which is the multiple of which the property sells that right.

Multiple on the net operating income.

the, we really learn how to raise capital during that time, from both high net worth individuals, family offices, and some corporate investors as well.

before we move on to actually discussing what, Cambridge SPG invests in and how you raise capital for that, funds, I was wondering, what did you invest in right now? So pulling up actually, nevermind.

I missed a question.

first of all, I wanted to talk about the difference between the current crisis of 2020 because of the pandemic and the crisis of 2008.

that's the question for Polina, because as she said, she was older back in a day, so I assume she knows more. Well I'm older and wiser.
Well I mean, there's no doubt that there is a crisis going on now, but, it was very different.
I mean the crisis caused in 2007, eight, nine was, started in real estate.

the opportunities that were in effect afterwards were in real estate.

we were picking up properties for 10, 15 cents on the dollar, very different from today's world.

There's nothing to really know what real estate might take, an impact because of this.

obviously the crisis started with this COVID-19, followed by political, things going on to say that the financial crisis of 2020 is officially on pause since today, big factory is up 20%.

they say 10 to 12 year cycles.

So we're due for something.

I like your joke, Phil, but seriously,

I genuinely enjoyed that one.

I'm just going to remove my second screen tracking.

All those .

Turn on the screen.

You should turn on your screen and Phil will send you the picture of the girl that represents this.

Let's, let's move on back to our topic, which is fundraising.

one of the questions that I get pretty frequently is from early stage founders who have a cofounder or a partner in it, or venture of being their relative.

a lot of concerns are raised from an investor perspective.
sometimes investors feel uncomfortable investing in companies that have two relatives working as a core team. Do you feel the same apply to you when you were raising your money?

White DOP is that I, I feel like , what about you Phil? I mean, I think that we have such a good perspective and the dynamic, like, especially on the consumer side, what we're currently focusing on now we have this female and male perspective also we've been working together for so long.

They're kind of bouncing the same ideas off of one another, but then bring different perspectives through it as well.

I've never, ever felt any type of, disadvantage of, being partners with Philip or feelings that any of our investors feel that was an advantage.

I don't know that I, I completely a plus for us. Yeah.
I think if anything, right.
It's either been neutral or a positive.

Um. Got it.

basically your recommendation to the thundered asking the question is, go for it, go ahead with your relative and do the company right.

Well, I would say so there's actually quite a few examples, of actual family businesses that have become very successful businesses.

One of them, so we are an investor in a company called toasty, super bites, and it was founded by a mother and daughter team.

they started it literally in their garage, until their neighbors got sick and tired of the ups truck coming up to pick up hundreds of boxes and they moved into an office, and have since grown into one of the fastest growing snack companies in the country.

and they're still right.

It's still a mother daughter founded team.

then, another one that comes to mind is a company also in California called perfect bar.

that company recently sold Towanda Lee's, but it's like eight siblings start little company.

There's like eight of them.

they raised, you know, they're very successful.

They raised a very successful round, from BMG, which is one of, the top tier firms and consumer, and then, had an exit with Montelli.

I would say, right it's less about trying to see, what the perception would be or right.
If something works right, and you have this aligned mission, just go for it.
I think that's why Paulina and I have been able to work together is because we both see eye to eye. We do have a different perspective, but we have the same goal.

so it's been very positive working together. Yeah.
That's another advantage.
Got it, got it.

here, I want to ask you a question, how do you decide? So eventually, essentially you were, the real estate investors and then he switched investing in stirrups.

I'm wondering, how did this happen? So personally, a big fan of, alternative sources of capital.

I think that some VCs get way too much attention and that's, ping some people who might have my in, who might be interested investing in stirrups is a great idea.

how do these happen to you? How do you decide like, all right now is the time for us to write the first check to start?

it was, I would say it was a year and a half long, process and what was happening. in 2015 and 16, were very busy divesting, right.

Selling the real estate that were able to acquire, 2010 through 14, but, so Paulina and I had a little startup called Slims organics where were trying to make a hundred calorie, egg white based like pop snack.

it was like a weekend, on the side project, were working with a food scientist and, so we're always passionate about food and health and wellness.

as I remember, as were closing one of our last real estate deals, we got a call, from a guy named Jeremy. he would pitch us deals all the time.
he pitched us like five deals and there were kind of special situations.
Like one was, a distressed company that took on like $9 million of debt that they shouldn't have.

they needed, a white Knight investor to come in the next 30 days and bail them out.

We were like, that's not us.

he goes through these scenarios and nothing sounds interesting.

he brings up a company called foodstamps and, food stirs at that time was very small business, less than a million, in Santa Monica.

they were making organic, non GMO bake mix and baked goods and selling it online only online. Y up.

were interested in food, and we always just kind of knew like qualitatively that you can make money in consumer products.

went to UCI where the UCI has the Palmer, our school of business and Paul Mirage, sold hot pockets to Nestle for two point $6 billion.

we knew that, you can have a big exit in this sector.

he mentioned that Sarah Michelle Gellar Buffy the vampire Slayer was one of the cofounders. we said, look, we're going to do the deal.
as long as we can get a picture with Buffy.
he invited, so he invited us to meet the team in Santa Monica.

I mean, honestly it was because Sarah, Michelle Gellar was a founder. We were said, okay, let's go to Santa Monica.

we'll listen to the deal if, whether it's a good deal or not, we'll learn and we'll meet Buffy the vampire Slayer and maybe get a cool picture for social media.

and so went and were blown away.

I mean, gleitz as the founder and Greg, who's now the CEO of the company, Greg Fleishman and Sarah, they just, we're very confident that they will take over this very stagnant, category, which at the time was dominated by, Dunkin, Hines, Pillsbury, and Betty Crocker, these brands that haven't seen any innovation, for five decades.

you really had a unique offering that was clean label, organic, had very unique offerings. we ended up leading, their series a and what happened was Pauline.
I were just going to invest, ourselves.
So were going to invest, right.

our investors, our real estate investors, constantly check in and say, what's the next deal what's going on? What are you seeing? And so we'd say, well, we're not seeing any real estate deals, but we are investing in this company and it will tell me about those companies.

we would tell them why we're investing in this company. they say, well, Peter, we also invest.

we realized that it's the same business, right? Like the money that we're raising for real estate, we would put together an LLC raise, however, my legit say $5 million to buy $5 million asset.

Now, instead of right, we still feel formed an LLC raised a few million dollars. instead of buying a real estate asset by equity in a company, so that's how it all started.

our second deal of course, was once upon a farm, which was a tiny company in a garage in San Diego doing $400,000 of annual revenue, had a very high burden rate.

they had the best product in the industry.
They're making cold pressed, fresh baby food.
using high pressure pasteurization to get fresh baby food, 120 day shelf, life refrigerated.
it really was a unique product, very big need in the marketplace for it.
Ari Roz and Cassandra Curtis were the original founders and they just did an incredible job with the brand, the

positioning, the skews, but it was very difficult for them to get it off the ground because retailers didn't know where to put the product it's baby food that didn't go in the baby food aisle.

you're dealing with a refrigerated supply chain.

there was just a lot of, because it was a new category, it was very difficult to navigate for all of us.

so, but we ended up leading their series a round, as our second deal.

over the next seven months, were able to help bring in Jennifer Garner as a major investor and cofounder into the business.

through that process, John Foraker, became the CEO and John's background is he built a company called Annie's organics.

it's one of the biggest and first natural organic brands in the country.

He had a big exit to general mills, sold it for 820 million and then resigned to games you have once upon a farm.

since then the company has had over 25 X revenue growth in 24 months.

one of the fastest growing companies in the whole industry, and so that was our second deal.

since then, we've invested in over two dozen, fast growing CPG brands in food beverage, personal care and beauty.

Got it.

before we go too deep in your interior deal flow, I was actually going to ask you a question that he bugging me the whole time you were talking to, Jeremy, who is that guy who gave you that first deal? Who was that.

Broker he's a business broker.

similar to any agent that sells you real estate, there's also business brokers that deal with, representing business owners or, people that raise capital for like a seed stage or series.

So.
All right.

Can we go in depth into business broker who the hell is business broker? Because I'm personally not even sure if I know that the answer for that question to you, Lynn, us, that business brokers and we're specifically.

Yes.

So, so for example, when companies go out to raise capital, or they go to sell, or they're looking for a strategic, deal, right? So whether they're looking for money, right, an investment, or they're looking to partner, let's say, a beverage company, wants to improve their margins, right.

They're really good at sales and marketing, getting new distribution, but they're not very good at manufacturing supply chain production.

they may look for a strategic partner to partner up with who has a really strong manufacturing, right. And can improve their margins.

they can just focus on sales and marketing, or they're looking to sell their business to either a private equity firm or to a manufacturer, to a larger company.

they'll, they'll tend to utilize, either business brokers or, finders and this, these, sometimes individuals, sometimes it's, a, from, like an investment banking firm, that goes out and solicited.

It's very similar to an agent that you hire to buy or sell a home.

Alright.

And I just realized.

That a focus in their network is in this realm versus in real estate, for example, like this one was more focused on consumer and specifically in food and beverage.

Got it.

I just realized that I actually did interview a business broker.

I did not know that the official title is business broker.

I just called them brokers.

that's a pretty interesting topic and we'll not go into that topic because I was wondering how do you source those deals? So first deal was sourced through that business Bureau curve, and then it moved on.

how are you doing this right now? How do you find those a deal? So I know fully, definitely likes, garish based third, cause I've heard Gary twice or odd tests, but other than finding those entrepreneurs in urges, how do you find them?

Well, we're very deeply network in, everywhere from word of mouth, from our other friends in the VC community.

We're in several deals together alongside of other VCs.
we're constantly, just discussing deal flow what we're currently working on.
Well as we go to a lot of philosophy events, project nosh, founder made, all of the expos.

there's also business brokers that we utilize, but I would say that it's a combination of all of them, when you're networked in, you kind of follow some deals maybe sometimes for two years, and then they're right for you, but maybe not in the first time you've met the company or the founders at a tree, let's just say,

How long? So one of the questions that I get pretty frequently is how long should you work with an investor to get this something that you can call an established relationship? My personal recommendation is like a year or so of somewhat constant concept, but what's your advice for them? So when do you feel like, yeah, I know this guy for awhile,

That's so deal specific because we've seen deals that were just too good to pass up and they would have to jump on it.

from God, we did like purvey revolt, which we invested within like three weeks.
We closed that round and thank God we did because within a year and a half, we already had an exit with it. Nice very successful one.
if we didn't jump on it right away, and dilly dallied, maybe we would have passed that up.
there's other ones that we really nourish that relationship for a good year and a half sometimes just to really see,

if they're following the trajectory, if they're building the team, if the revenues are up, if they're improving their margin profile and just all other, parameters that we've kind of look at.

Got it.
So we're talking about.
The deal flow.
I was actually going to ask you a question about cold emails or somewhat cold emails.

How do you react to those introductions? So if someone who does not know you personally, and he or she cannot get an introduction to you through another founder or through another investor, and they just send you an email saying like, Hey, I, I saw your website.

It looks pretty interesting.

Can you take a look at my presentation? So you respond to those or spam them,

Phil, you want me to get this one? Are you because we do get this all the time.

Our mailbox is bombarded.

I could, I could answer it or you can doesn't matter.

I mean,

we do get deals, cold calls all the time, which I think it's nice, somebody that really is looking to raise funds and they're passionate about their company.

They should source and try to find any which way to get to a VC.

that's actually what separates the winners from losers, right? Some people go, well, I don't know anybody.

that's the first roadblock that they put in front of themselves.

I think that's nice that they are courageous and that they're going out and trying to find Philip, or I, let's just say on LinkedIn or some other form where they can just contact us.

Okay.

they do, I do have to say that if it's a warm introduction, at least find like some type of, a way to get to us where it's through someone that definitely sets you apart from the thousands of cold calls that we get.

again, it all has to do with the deal.

I, we have seen, people contact us where we don't know them, but something is compelling about what they're trying to pitch and fill up.

I get on the phone and we go through their deal.
we spend some time doing research, doing diligence.
if the deal is compelling and it came just like from a cold call, then, so be it.
it does have to kind of deal with the deal itself, the product, the team, all the numbers. let's see, am I leaving anything else out though?

No, I would say is in any investment.

that goes for anybody reaching out to us.

Four.

When we work with our limited partners and any time.

I was pulling us at any time that the introduction can come from a trusted source or a personal relationship.

that deal is just going to get a lot more attention.

It doesn't mean the deal still has to be good, right? The deal still has ready everything about it, but it's better.

Right.

And think, right.

Think about this right.

Constantine.

Let's say, you get a random one day.

it's describing an investment and someone says, look, there's 250,000 left in this deal.

And this is all in an email.

You've never, you don't know the, you don't really understand the sector and they're just pitching this email.

You probably not gonna respond to it.

You're probably just going to delete it right now.

Let's say, a close friend of yours or somebody that you've done multiple deals with, right.

calls you and says, Hey, let me tell you, I just invested in this company.

Here's what they're doing, blah, blah.

You should jump in on it.

Right.

You're going to take a look, right? Cause it's your close friend or somebody that you respect professionally is telling you about this deal.

You're going to pay a lot more attention to it than just a random email. So with that in mind, right.
People right.
We're all people and we all have the same kind of biases.

when the introduction or the referral is coming from a trusted source and a close source, it's just gonna be prioritized in our minds.

Absolutely.

I wanted to move on to, it was, we're reaching our 30 minutes a timeline.

I want to ask you, what's going on with you and investing right now during the pandemic.

are you following your strategy from 2008 where you're just buying a distressed real estate or are you waiting for the dust to settle down and then you will start investing back in startups?

we're not waiting for the dust to settle.
over the last 45 days, we've invested over 10 million in four financing rounds. one new deal, three follow-ons.
we've been very active and we saw it.

the way that we saw the pandemic from an economic standpoint, as a black Swan event, versus a fundamental shift in, the economic conditions, and also the industry where we're investing in is consumer products, right? And food beverage, personal care products that are sold in grocery stores and online, and those products will fail.

That's just surged.

on the one hand, it's actually been a better business environment for the consumer products industry, not fully, but to, to many degrees.

as far as distressed real estate.

naturally we looked, we, we wanted to see what's going on in the market and there's no distress real estate out there.

We looked that doesn't exist and it's stagnant because sellers, the buyers don't want to pay the same price they did before the pandemic started.

They want, 15, 20% discount and sellers aren't willing to sell at a discount.

the transactions are just like, the volume of transaction is decreased, but the fundamentals are still there.

as I said earlier, cheesecake, factory's up 20%.

I think we can go well on its way.

Gotcha.

I will also add to this topic by just saying, some of the companies that were on our radar in diligence, where we wanted to see what will happen to them really proved themselves out during this time.

I think that this was a very crucial moment where it was the survival of the fittest.

we really saw like who folded the cards and who just took advantage and improved every which way from the budget spent to improving their margins, to increasing sales, to just really like coming out of this in the most positive way, and then re attracting us back to the opportunity of possibly investing in those brands, in our next few months.

Got it, got it.

That's a really interesting approach.
we, I mean, I have a last question for two of you and this, in this case, it's going to be two call to actions. So be ready to listen to those.
So call to action to our listeners.

What's your recommendation? What do you think is the one thing that you want the listener to do as soon as this episode is over, that should bring them closer to success and whatever way you find success, preferably receiving a check from an investor.

What's that one thing that we want them to do,
I think, know your numbers and know your listeners.

if you're coming to pitch to a VC versus, a friend's round, clearly you have to have a lot more organized approach to doing so know, what the VCs are looking for and checking off their boxes before you come and ask them as if they are friends and family.

there's obviously a lot more that goes into the diligence from a VC standpoint than a mom and pop or a friend round where it's more emotionally driven, right.

It's more qualitative versus quantitative.

So that would be my advice.

Yeah.

I would, I would say, and this is, I've used this example before, but I say you have to have your dots in place, so, right.

Well so whoever is looking at the dots can very easily connect them and put them together. Right.
it kind of goes to luck favors those who are prepared.
if you go into a meeting with an investor I'm not prepared, right.

Just kind of hoping that your story will get them to write a big check. Chances are that, they're not gonna revisit your deal over and over again.

I'm asking Alina said, be prepared, make sure, your business inside and out know every single KPI, every single number, your customer acquisition costs, your margins, your contribution margin per channel, just right.

No all those numbers, like they are, second nature because that's really going to demonstrate, yeah,
That you're very competent and right.
You your strategy, it ties in the entire strategy.

when what's going on with every aspect of your business and then of course set a reasonable valuation, make sure that your evaluation is in line with,

Mmm.

What's market, don't go too low because going too low, would raise some eyebrows.

Like why are you valuing it's a low, but also don't raise it.

don't set a valuation that's too high, which makes you look right unrealistic.

Well, it might also disrupt your business in the future because obviously you might have to raise higher and higher.

if the revenues don't project the valuation in the future, you might have to have a down round, which would tremendously hurt you in the future.

you really have to be careful with valuation.

I definitely agree with Phil that's definitely something to be weary of.

So well break my own rules.

We'll extend our episode further from 30 minutes to probably 35.

I will ask you that question.

You both mentioned belly Asians, and I think that's super important part.

What's your advice on valuation? Is there like a book, is there a strategy for people to follow because often evaluating your company is extremely hard, especially you have a product, but you don't have sales yet.

Well, so for consumer products, right? So, not commenting on tech or, life sciences or biotech or, but in CPG, pre-revenue company.

Um.

very early stage where maybe it's to develop the product.

oftentimes we've seen, evaluation between half a million and a million that's, very early stage market.

I think once you have your product developed and maybe you have some sales, right, it can raise to 2 million and 3 million.

Now that doesn't mean that your company is actually worth 1 million or 2 million, 3 million, because if you go to sell the company, right, it's liquidation value is probably zero, right.

the way that the valuation works is right, it's giving credit for the work that has been put in and the business plan that has been established and executed on, but also, right, it's assuming you're paying as an investor, of a premium for the growth that the capital that you invest is going to create, right?

for example, let's say your a hundred thousand dollar revenue business, but if we invest 1 million, that 1 million will create 5 million in revenue.

So right.

The valuation it's very much, more of an art form than a science, but it has to make sense, right? Because at the end of the day, be investor, it needs to make money.

If it's a fund like ours, our limited partners need to make money and we need to make money.

we, so we in most funds make 20% of the profit that we're able to generate for our investors.

1 million and it doubles, right? We'll create 1 million of profit.

Our investors make 800,000 and we make 200,000 right now, let's say we invest 1 million and it does 10 X.

? Right Then that number could be a 2 million.

Or if we invest 10 million in a two X's, then we would get 20% of the 10 and the investors would get eight.

the deal has to be extended, right? Because there's all these waterfalls that need to be considered.

Right.

on a personal note, I wanted to mention that after a couple of pitches to investors, if your affiliation is off, they will tell you, trust me, they will tell you.

So no worries.
Right Phillip and pulling a agree with me on this positive note.
We'll wrap it up.
Thanks a lot, Phillip and Paulina for coming up and for sharing your experience. I think that was a really fun journey of yours.
So thanks for sharing it.
Thank you for having me.
Thank you so much for having it.