Investing memo: MUD\WTR: $X0M on $X00M (pass).

This is not a formal memo, but a fluffy one meant for a blog nobody reads. Obfuscating numbers for privacy.

I’m a zombie without caffeine. Today, I had 4 espressos, considered my life choice and then had another one. The option to invest into a coffee alternative company may be a sign from above.

First, I invest in SaaS startups, so CPG is very much outside of my wheelhouse. The curiosity here is around a macro trend and its second order effects (like does one need different vertical software to support a healthy cpg?). Second, and this is probably the Russian in me, but healthy choices are generally the minority in human nature and are more likely when life is good (you are rich and Maslow’s hierarchy is covered). So there is a TAM to consider In fact I’m more bullish on vice driven startups, from social media to video games. It pays to monetize dopamine loops.

As their pitch goes, Americans are overstimulated, over caffeinated and under-slept. We stay up all night building our dreams, stress out over investor meetings and optimize every second of our calendar. Something has got to give. Google trends shows a rise of interest in non-alcoholic beer, impossible burgers and now caffeine alternatives.

There is something to be said about us culturally. Many take pride in their sheer hustle, lack of sleep and get shit done lifestyle. My friend at McKinsey (Partner) sleeps four hours on a good night. My old boss, backed by Mark Cuban, goes through diet cokes like skittles. An old co-founder is a self described (he is a doctor) manic depressive, without the depressive side. I’m lucky to have insanely successful friends, but sometimes I worry about them.

On the flip side, Lux’s Josh Wolfe mentions that chips on shoulders put chips in pockets. A zen lifestyle may be good for a person, but a society thrives on the shoulders of people who have something to prove. May be this is the elusive chance to have your cake and eat it too.

People will pay to feed the beast while being healthier. The key, as with impossible burgers, is that the substitute has to taste as good as the real thing and be cheap. Now we are not serving fake coffee here, but the mushroom based cocktail from MUD/WTR has to provide a similar buzz and a pick up in motivation.

And it the payoff seems to be there with the company now at $70M ARR with 58% gross margins (double that of Starbucks). More impressively, starting in 2018, the CAGR is at an astonishing 200%. The team has been incredibly capital efficient with a total life time raise of $15M. They are selling 5% of the company at a $200M pre and a conservative 3x ARR multiple (is that conservative for CPG?), given the current macro. Given MUD’s current market penetration rate of only 0.1% in the US and Starbuck’s $80B market cap, this one has legs to grow.

I don’t doubt that more people will seek healthier way to get their kick, but as they do, competition will follow. There are already a dozen different non alcoholic beers on the market (I like Athletic), so this has the potential to go like Casper.