I saw a business almost go under because the owners were too worried about stuff that didn’t matter. Lots of busy work and shiny new distractions, not a lot of production.

There are so many shiny things to distract management teams from actually moving the needle in a company. You probably know what I’m talking about — that new business line that sounds exciting but will cost a lot of money and time. All the while, this particular management team hasn’t fully optimized their existing business.

In another post, I talked a little bit about the CEO transition zone — where founders either rise to the occasion and transform into a seasoned operator or fizzle and get replaced by one. A common trait of CEOs that don’t make it through the transition zone might be called the “shiny penny syndrome.” They consistently get pulled in new directions without ever focusing on their primary one. While the try-many-things strategy might have contributed to early traction and success, this is usually an ineffective way to build a focused, sustainable business over the long term.

If you’re a fund, it’s important to recognize this trend. If your portco management team is always pitching new investments or expansions in board meetings, it might be beneficial to mandate that a formal analysis accompany these new investments. No strategic analysis? No discussion. Plus, I’m not talking about little things like crafting a new contract for a potential enterprise customer or expanding flavors of an existing granola bar line. I’m talking about the companies that sell dietary supplements but now want to sell mac and cheese.

The Mac and Cheese Experiment

A few years ago, a company in my network that specialized in supplements decided to branch out into snack foods. This alone wasn’t a bad idea. All of their products supported the same diet. So fundamentally, going for more share of the customer wallet wasn’t outside the realm of possibility.

The issue was choice of snack food — mac and cheese. Obviously, many things were missed before launching. Let’s talk about three of them:

1. Customer behavior analysis

Would customers that bought protein powder and related capsules (the same customers who were focused on limiting food intake and cutting calories) receive a hefty mac and cheese product with open arms?

Short answer: no.

Customers came to this brand for supplements, not grocery items. The management team was largely blind to this fact and thought that anything they launched, as long as the ingredient list was aligned with the diet they historically targeted, would be a hit.

Generally speaking, in the consumer/food and beverage/supplement spaces, if you want to exit a company, you really need to showcase a retail or grocery store footprint. Companies that sell items online do not fetch the same valuations as brands that have a heavy brick-and-mortar retail presence across the country. Remember, the majority of consumer grocery purchases occur in-store, so it makes sense to capitalize on categories that work on the shelf.

Unfortunately, this brand had no substantial presence on any grocery shelves. So this was largely a “build it and they will come” blind bet. They entered a crowded category in a space they had no experience with, trying to change existing customer buying behaviors.

2. Supply chain and production efficiency

Was the company’s production team prepared to fold this product into existing processes? Or would this mac and cheese product require an entirely brand-new supply chain?

It’s one thing to launch a new product that can be produced within existing supply chains. It’s another thing to launch a brand-new, unique product that requires a different manufacturer, different production lines, and new ingredient supply chains from different geographies.

Basically, there were hardly any economies of scale efficiencies in this new product. The brand spent many months tracking down a copacker that could produce a specific type of noodle that met dietary requirements. They had to experiment with new ingredients — many of which didn’t hold up or have a long shelf life. They spent a lot of money on food scientists to figure out what might work.

Remember, their existing supply chain was focused on supplements: powders in plastic tubs, capsules in sachets. Boxed mac and cheese was way out of left field.

3. Financial capabilities

Was this new product going to require new or an outsized portion of existing capital to launch? Would the company be able to absorb the failure if the product didn’t work?

Sometimes big bets can pay off. If the company has ample cash and profitability to absorb a failure, it might make sense to take outsized risks for outsized returns. However, if the brand hasn’t quite optimized its existing business, or it’s smaller and doesn’t have the liquidity to absorb the failure if the big bet doesn’t work out, it’s probably not a great idea to bet the farm.

This particular company invested a substantially large sum of money and energy into this product. They had to set up new supply chains, hired retail salespeople, established new manufacturer relationships, underwent extensive testing and customer focus groups, and more. All of this, for an up-and-coming consumer brand that historically focused on low-cost supplements, was a big bet.

This particular bet ended up costing them millions of dollars over just a few years. They made little to no headway getting these products into grocery stores. The products that did make it through the gauntlet of distributor presentations didn’t turn on the shelf like they needed them to.

Customers accustomed to buying protein powder online to be delivered to their door were not changing their behaviors to buy mac and cheese in a store. This mac and cheese bet also started pulling down existing supplement revenues.

The company had to make procurement decisions to place purchase orders for mac and cheese instead of supplements. Since the food didn’t pan out, they missed out on those sales as well as the supplement sales. It very much almost took them down. This was a big driver of them essentially having to fire-sale the company to a new owner a year or two later.

Keep the main thing the main thing

You might have heard this phrase as well. But I think it applies beautifully to portfolio companies.

Is a new idea your portco management team pitches really a distraction… or is it complementary, additive, or enhancing to existing business? Is this new idea part of the business’s “main thing?” Or is it a “side project?”

Growth capital injected into any business is meant to double down on what it does well. It might be meant to enhance the team or even improve ingredient quality or manufacturing processes. The capital might be meant to achieve better economies of scale for existing product lines.

Be very careful when portco management teams start pitching “mac and cheese ideas” that require a substantial investment. Sure, maybe some of them work out. But if your existing team isn’t keeping the main thing the main thing, they could be headed for disaster.