There’s nothing more American than a comeback story. Rocky. Rudy. The Karate Kid.
The business landscape is filled with successful comeback journeys. Walt Disney failed several times — and even went bankrupt once — before building the Disney empire.
When Steve Jobs and Steve Wozniak founded Apple in 1976, it struggled. For 22 years, the company rarely found sustained success. Apple actually fired Jobs in 1985. Jobs returned to Apple as a “consultant” in February 1997 when Apple bought a startup he had launched (that company was struggling too). In July 1997, Jobs convinced Apple’s board to fire CEO Gil Amelio and make him interim CEO. In 1998, Jobs launched the iMac. In 2001, Jobs launched the iPod. And Apple finally became Apple.
Even Bill Gates wasn’t a runaway success in his first startup. Gates’ first startup, Traf-O-Data (it read and compiled traffic data) only lasted a few years. Yet he came roaring back a few years later with Microsoft.
Sugarfina, the investment opportunity I’m presenting to you today, plans on joining this tradition of great American comebacks. And I believe it stands a pretty good chance of doing so.
A Sweet Deal
Sugarfina is a high-end candy company. It likes to describe itself as the Tiffany of candy. That’s a lofty comparison. But it’s targeting exactly the right market. The gross margins on the high end of the candy market can be significant — approaching 70%.
Sugarfina started off as a high-flying venture-backed startup in 2012. In 2017, it raised $35 million in venture funding from Great Hill Partners.
And it was really good at making candy. It generated $25 million in revenue in 2016. In 2018, it did about $47 million in sales. And all of its candy was Instagram-worthy.
Unfortunately for Sugarfina, its original founders were much better at making candy than running a business. By September of 2019, Sugarfina‘s debt had caught up to it. It owed more than $26 million to creditors. And it filed for bankruptcy.
Sugarfina didn’t lack suitors in bankruptcy court. That’s where Diana Derycz-Kessler, Paul Kessler and Scott LaPorta come in. They saw Sugarfina‘s potential. It was an established luxury candy brand. The product was terrific. Customers already loved it. It just needed to be run well. And this trio knows how to run companies.
The Kesslers and LaPorta are established turnaround artists and executives. They know operations and selling. And they also know a good investment when they see one. They managed to pick up Sugarfina for around $15 million.
Paul is the co-founder of StartEngine, one of the world’s top startup investing platforms. Many of you have invested in deals on its platform. He’s also been involved in more than 700 investment transactions, whether as lead, co-lead or syndicate investor. Diana (Paul’s wife) is a lawyer by training (Harvard Law). And she has extensive investing and business experience.
But for me, the biggest reason to be excited about this team is Scott LaPorta. He’s a seasoned executive who has held top level positions at Levis, Caesars and Bolthouse Farms. And he understands how to build and scale operations.
And when he took over as Sugarfina‘s CEO, he changed three things instantly. First, he realized that Sugarfina was carrying too much inventory. So he took inventory levels from $15 million to $5 million.
Then he recognized that having operations in three disparate facilities was killing Sugarfina’s ability to meet demand and scale. So he took the savings from reducing inventory and built out a consolidated Las Vegas operation center.
And with a retail apocalypse looming (which the pandemic accelerated), he had to reduce Sugarfina‘s reliance on brick-and-mortar sales. So he launched sales on Amazon (in the U.S.) and Rakuten (in Japan) and improved Sugarfina‘s own e-commerce site.
Once he fixed the operations, he could start working on the fun stuff — making great candy and expanding distribution.
Here are just a few of the new products Sugarfina has launched:
- A European-inspired gelato collection with fun packaging
- An expanded line of cookies, including dark chocolate cookie dough
- A tea-inspired collection of gummy bears
- A tropical collection of vegan gummy bears
- Hard seltzer-infused candy (in collaboration with Truly)
- A Simpsons-branded line of candy.
These new products have caught the eye of consumers, and the results are starting to show. Scott says he expects Sugarfina to be profitable on an EBITDA (earnings before interest, taxes, depreciation and amortization) basis in 2021. He said Sugarfina is showing growth rates in the high teens when compared to non-pandemic years. And he’s expecting a monster fourth quarter this year.
Combine that with the fact that Sugarfina generated about $25 million in revenue last year — despite being in a pandemic AND in turnaround mode — and you get a company poised to take off.
Did I mention the fact that the company also has a store in the newest Las Vegas casino, Resorts World?
There’s definitely a lot to like about this company.
Now, some investors might be worried about the debt Sugarfina is carrying or its $125 million valuation. I’m not.
The Kesslers and LaPorta own most of the debt. And much of the debt will be collected by “in-kind payments” and not cash. So the Kesslers and LaPorta need to make Sugarfina a successful company. Shareholder and investor interest are in perfect alignment on this front.
The $125 million valuation is pretty good for a startup that’s staring hockey stick growth in the face. It’s a five times multiple on revenue — and that’s pretty fair.
The big question for any company valued at $125 million is: what kind of exit can investors expect? I had a long conversation with LaPorta about potential exits. He’s open to going public via either an IPO (initial public offering) or SPAC (special purpose acquisition company). It’s just a matter of what’s going to generate the highest return. And he’s hopeful he can do that in less than five years.
As a result, Sugarfina is a very unique investment opportunity. It’s a startup with proven product-market fit that’s poised for hockey stick growth. It’s one of the rare startup investments that could go public (relatively) quickly. And even more rare, it’s helmed by an executive who knows how to lead public companies. So share value could increase beyond the IPO.
That combination is hard to find.
Security type: Crowd SPA (Stock Purchase Agreement)
Price per security: $10
Valuation: $125 million
Minimum investment: $500
Where to invest: Republic
Deadline: May 1, 2022
How to Invest
Sugarfina is raising up to $5 million on Republic. If you don’t already have a Republic account, you’ll need to sign up for one. Once you verify your account and are logged in to Republic, visit the Sugarfina deal page. Then click the button to invest. Enter the amount you want to invest, starting as low as $500, and proceed through the required steps. Be sure your investment is confirmed, and then you’re good to go.
This opportunity, like all early-stage investments, is risky. Early-stage investments often fail. The investment you’re making is NOT liquid. Expect to hold your position for five to 10 years. An earlier exit is always possible but should not be expected.
All that said, I believe Sugarfina offers an attractive risk-reward ratio.