In the wake of a well received Health & Wellness Investor Forum (a new, value-added event held prior to NCN IX), educational sessions are likely to become a permanent fixture at NCN meetings. Co-sponsored by NCN and Partnership Capital Growth Advisors, our Investment Banking Partner, the meeting presented an industry overview, in addition to transaction and financing trends.

NCN Principals Tom Aarts and Grant Ferrier presented an overview of the market segments that comprise the nutrition industry, highlighting size, growth and recent trends. This was followed by a candid and passionate discussion about how to bridge the financing "gap" between the founder, friends and family, on one hand, and professional financial sponsors (VCs, PEs) on the other. Early-stage nutrition companies in that gap have a hard time attracting their next round of investors, who prefer to write larger checks for slightly bigger businesses. Yet, they need additional capital to get to a point where they are attractive.

Investment Alternatives Under Discussion:

1. Crowd financing structure, where many investors contribute or pledge a small amount of capital. Challenges include a) who would do due diligence, b) how information would be provided to investors in a timely manner, and c) how this arrangement would be set up legally.
2. Create model for or partner with different types of angel investor networks, like Golden Seeds or the Pasadena Angels
3. Venture fund specializing in funding small companies. Such a fund could possibly be initiated or managed by Nutrition Capital Network.

PCGA Presents Transaction and Financing Trends

In the second half of the forum, David Thibodeau and Janica Lane of Partnership Capital Growth Advisors (PCGA), co-sponsor of the forum and an NCN investment banking partner, presented an insightful overview of transaction and financing trends in health-related markets. Points of note:
1. Overall, IPO transactions are down sharply from their high in 2007, as are PE investments, although these recovered somewhat in 2010 and may continue to recover in 2011.
2. M&A transactions from $10M-$500M also took a dip after 2007, although these have since recovered or even strengthened. Larger transactions of $501M+, however, saw a bigger drop-off after 2007 and have yet to recover.
3. Several sources indicate that there is substantial liquidity in the market, seeking worthwhile investments.
4. During 2009-11, M&A EBIDTA multiples have increased; with 11.2x as the average YTD.

PCGA concluded that capital is available to health and wellness companies with strong fundamentals.

Healthy Living Industry Ahead of U.S. Economy

Overall, the healthy living industry (10-year CAGR of 7%) has seen annual growth rates that have been double those of the U.S. economy over the last decade. PCGA has developed a Healthy Living Index comprised of company stocks from relevant subsectors, including Healthy Food & Beverage, Personal Care, VMS (including ingredients), Weight Loss and MLM based companies. It has consistently outperformed the S&P index, both in terms of share price development and multiples that are "2 turns" better than those of the average S&P stock (10.8x vs. 9x). This is driven in particular by healthy foods and better-for-you personal care. Two subsegments that have fielded lower investor interest are: MLM-based stocks and weight management stocks.

PCGA reviewed recent corporate investments within its healthy living subsegments, highlighting notable success stories (Kashi, VitaminWater, Stonyfield), along with examples of some less successful acquisitions.

Key Success Factors
Participants and presenters agreed that one important key success factor (KSF) was to understand and retain an acquired brand's core consumer, in addition to “the soul” of the brand. Another KSF appeared to be to keep a prominent founder in place. Other success factors, according to a PCGA survey, included: cultural integration, "best people," focus on integration, and merger value. Factors for failure cited in the PCGA survey included: ignoring the integration challenge, overestimating synergies, problems with management integration, and critical issues discovered after the deal was closed.

PCGA identified two sectors in the healthy living space to watch going forward: Wellness / IT monitoring (e.g., Fitbit, Bodybugg) and new "super" markets in retail (e.g., Sunflower, EarthFare).