Creating the Silicon Valley of Natural Food: Q&A With Entrepreneur Steve Hughes

In 1997, Steve Hughes was named CEO of Boulder, Colo.-based Celestial Seasonings tea company. Although he came from a conventional food background, Hughes quickly saw the potential of the natural foods movement—and he realized that Boulder was one of its epicenters. Along with local first-generation natural products company founders like Steve Demos and Mark Retzloff, Hughes was instrumental in turning Boulder into what he calls “the Silicon Valley of natural and organic food.” 

For more than 25 years, Hughes has helped build some of the natural products industry’s iconic brands. After leaving Celestial Seasonings, Hughes moved on to serve as CEO of Frontier Natural Products. He then built Boulder Brands, which launched EVOL Foods, Udi’s, Smart Balance, Earth Balance and other brands. Seven years ago, Hughes founded Sunrise Strategic Partners, which is now one of the leading investment firms in the natural channel. 

Steve Hughes, CEO & co-founder of Sunrise Strategic Partners. 

At Sunrise, Hughes identifies and invests in brands in trending categories that are transforming the healthy, active and sustainable-living space. Sunrise recently merged two companies in its portfolio—Teton Waters Ranch and Sun Fed Ranch—to create the industry’s leading grass-fed/finished-beef platform dedicated to regenerative agriculture. Other Sunrise investments include Maple Hill Creamery, which produces 100% grass-fed, organic dairy products, and Kodiak Cakes, which produces whole-grain, high-protein pancake and waffle mixes. 

Hughes recently reminisced about his experience in the natural products industry and shared his predictions about the future on the podcast Compass Coffee Talk, co-hosted by industry veterans Bill Capsalis and Steven Hoffman and sponsored by PRESENCE Marketing, Naturally Boulder, Naturally San Diego and Naturally New York.

Read on to learn more about Hughes’ perspectives on brand building, hot investments in the natural products space, regenerative agriculture, the top components of a good business model and more. 

Q: Over the years, you’ve really kept your eye on how to build brands, how to consolidate and scale, and how investments and economics affect the natural products marketplace. How is all of that going so far in 2023?
For 25 years, there was nothing but capital, increasing almost every year. If you had a good idea, you could probably get some funding to get started. But what happened last spring was that the pendulum kind of swung back the other way. People were less prepared to invest in companies that maybe had a great idea but not a great business model. 

There are a couple of reasons why this happened. First of all, the Fed started making money more expensive. And then there was a lineup of natural brands that went public, like Beyond Meat, Oatly, Tattooed Chef. They came out of the box trading well above their IPO price, but they were businesses that had great top lines without very good business models. They were losing money, and they’re now trading 95%, 90% below their IPO price. That has really cooled off investors looking to take the big swing at high-growth, not-great-business-model kind of companies. 

Before, this capital was pretty patient. They’d invest in a company, and if that company was losing money but the business was growing, they’d keep funding the business. But that changed pretty dramatically pretty quickly. I think there’s a little bit of retrenchment now, and I think it’s going to be with us for a while because interest rates are not going down anytime soon. They’re probably going up. 

Q: What does that mean for natural products companies looking for investors currently or in the near future?
I think when you look at the lineup of companies that went public in 2020 and 2021 and how they’ve performed in the public space, it’s given investors a real pause about, OK, what are the rules? What has to happen for a company to be successful today? I think the answer is a bit different than it was a year or two or three years ago.

If you’re a company that’s got some scale and making money, I would just be really prudent now and be patient and grow and protect your bottom line. But if you’re a smaller company that isn’t cash-flow positive, you’ve got to get cash-flow positive. You’re not going to get funded, or if you do get funded, you’re not going to like the terms of that funding. 

I think what we did with Teton and SunFed Ranch is a good example. These are two pretty good-sized companies, at about $60 million each. They had just turned profitable, but we figured if we put the two of them together and created Grass Fed Foods, we’d end up with a $120 million business growing 30% plus, making good money. 

That’s one model. The other model I call “safety in numbers.” If you're a smaller company that’s underfunded, is losing money and can’t get funding, think about other brands in your category that are complementary and are facing the exact same issue. Could they or should they be trying to merge? I think that’s going to be the theme over the next 18 months—call it the mini-merger, where you get two or three small companies in the same category that together are profitable.

Q: Grass Fed Foods just recently launched. Can you tell us more about how it came about?
We invested in Teton Waters Ranch, which was grass-fed hot dogs and dinner sausages, six years ago. They were sourcing most of their raw material out of Tasmania, which is the ideal place in the world to get grass-fed meat. We built that business, got it to $60 million. But there was nobody to scale in the grass-fed space. 

One of the challenges for regenerative agriculture companies like Teton is for the company to get the scale, so the retailers and food-service operators can really have confidence they can lean into it and get the product supplied properly and professionally. My partner, Vince, kept knocking on doors, saying, “If we could get two of these companies together, we could clear the field and be the largest.” 

Then, I met Chris and Matt from SunFed five years ago at Expo. They’re sixth-generation ranchers in Northern California that do fresh grass-fed meat—what goes in the butcher case, what goes on the table at the restaurant. They had gotten SunFed to $60, $70 million at that time.

So, we had these two beautifully complementary companies—one doing prepared meat with an international source, one doing fresh meat with a domestic source. The big challenge was this was going to require somebody who really knew what they were doing to put these two together. We brought in Jeff Tripician, who had spent 15 years in premium protein with Niman Ranch and Coleman Natural Foods and had successful exits on both. So now we’ve got a scaled business with a guy who’s been there, done that—a guy with a playbook. 

We invested in Teton when it was a $3 million business and today, it’s part of a $120 million platform. This is the largest grass-fed beef platform in the space, and I think it’s going to ramp and grow very quickly. This is really going to be a rocket ship. This could be the biggest outcome in Sunrise history. 

Q: Can you talk a little bit more about the regenerative agriculture you’re promoting with Grass Fed Foods and other companies? 
At Sunrise, we really felt six years ago that regen agriculture is going to be perhaps the biggest fundamental mega trend of the next 20 years—because, basically, it’s back to the future. It’s how we did it 100 years ago before we industrialized our meat supply and dairy industry. It’s better for the earth. So, we’ve put about probably 40% of our capital into this space. 

One of the companies we invested in is Maple Hill Creamery, which is America’s first and only 100% grass-fed organic dairy milkshed, with over 150 farms. There are so many great positives to their regen agriculture business model. 

First of all, they rotate the cows around the milkshed every three days. This makes the grass look like you haven’t cut it in three years—like how it used to be on dairy farms. The cows are also productive until they’re 14 years old, whereas an organic cow might be productive only until age 4. 

A calf never gets an ounce of the mother’s milk on an organic farm. They get their own formula. But we incentivize Maple Hill farmers to wean, to have the calves on the mom for eight months. That makes the chemistry of the milk different, and better for the consumer. Cows are naturally wired to eat grass—they have four stomachs for that reason—and their grass-fed milk is a different chemistry than the milk from cows fed grain. 

We launched Maple Hill Milk into Whole Foods. Our best item at Boulder Brands, Earth Balance margarine, sold $85 a week per store at Whole Foods. But after just 90 days, half gallons of whole milk from Maple Hill were going $600 a week per store. So, the consumer gets it. A challenge for us is to get the products there in an economical way that they can afford.

We were smaller, later-term investors in Vital Farms, which produces eggs, butter and ghee in the regen agriculture space, and it’s really exciting to see what’s happened with that business. It’s one of those that came out in the class of 2020 IPOs that traded way up, but is now normalized back to a pretty good place. It’s $15-a-share stock, and I think they've got nothing but white space in front of them.

Q: Speaking about brand development, we have a question from a listener: “What are the basic three to five general components of a great business model?” 
Well, the first ideal is a highly differentiated, meaningful point of difference, ideally attaching an untapped consumer need. You’re looking for something the consumer’s ready for but isn’t on the market yet, like Maple Hill milk. 

The second thing is margin. If you're a 50% gross-margin business, your ability to get the cash flow to break even quickly is there. But if you’re a 20% gross-margin business, you’ve got a long road to go and a lot of wood to chop. 

The third is talent. To get to a business of $10, $15 million, you’ve got to almost be manic, right? You’re spending your own money. You’re spending nickels like manhole covers. You make every decision, because you’re on the line. But when your business starts to scale, you need to have the ability to bring in the “been-there, done-that” talent and be able to manage that talent. And that’s a challenge, because people that have been successful, that have been with bigger businesses and then come to smaller businesses, have a different business-management model. 

Once we get the right CEO in place, the folks across our businesses see that, really, almost overnight, they start making the kind of progress and traction they need to get to scale the business.

Q: Can you give us an example, like how that applies to Kodiak Cakes? We know this is a story you’re really proud of personally, and there’s even a “How I Built This” podcast on NPR about Kodiak. 
Kodiak is probably my favorite business experience. I got a call from my partner Jamie Manges at Trilantic Capital Partners, and he said he knew somebody who knew Kodiak co-founder Joel Clark, and Joel was getting ready to take in capital. So, I went on the internet, and they had the hokiest video of a trailer, which is their office, and a bear breaking into it, right? I thought, “This is something. OK, I’m just doing Jamie a favor. OK, I'm that kind of guy.” 

Kodiak’s point of difference was a whole-wheat, high-protein alternative to white refined flour, which meant it could play in any category white refined flour is in. When Joel came to see me, Kodiak was at $15 million. It was at Costco and Target. 

Joel showed me his deck, and when I got to the second page, I went, “Holy smokes, Joel, this is a billion-dollar brand.” He went, “What are you talking about?” I said, “Joel, you have got a 20 share of pancake-mix business at Target, and the category's up 20%. The category nationally is up 2%. You’re bringing millennial moms with money to Target to buy pancake mixes.”

So, we partnered up with Joel, and it was fascinating. It was just a great collaboration. Joel has got such great business and brand instincts. His business IQ is off the charts. 

We came up with what we call the Kodiak Cabin. The foundation of the cabin is pancake mixes in 25,000 doors. The first floor is baking mixes in 25,000 doors. The second floor is all of that in a cup you can microwave in a minute. Then, the third floor is frozen waffles. 

Kodiak went from $20 million to $200 million when we sold the majority of the control to Catterton 18 months ago. When I spoke to Joel recently, he was at $350 million.

Two years before he met us, Joel and Cam, his partner, were on “Shark Tank.” They were told all the reasons they weren’t going to be successful. I think they offered Joel $500,000 for half of the company. And, he said no, wisely.

I’m kind of a brand junkie and a trend junkie. I’ve been on some of the great rides in this industry. But working with Joel on this one was so special because it was so personal. All of his family had equity in the business, and he got to an extraordinary outcome. To have a small part in helping him do that is so great. 

Q: Finally, what’s on the horizon for you personally? What kind of work is exciting for you right now?
I love looking for the next new thing. As I said earlier, I think products that revert us back to the basics are an untapped consumer need, whether it’s grass-fed meat and dairy or heirloom grains.

I’ve been talking with one company that’s doing stone-ground milling the old way. This company has just gotten started. They’re in the Northeast in Whole Foods, and they’re outselling Dave’s Killer Bagels by 50%, 75%. So, the consumer gets it, right? But one of the big challenges companies like this have is capital. 

I also like resolving the disconnect between what a company founder says their unique point of difference is and what their product package says. One of the things we learned at Sunrise over the years is that you have your story, your concept statement. You want that to be 40%, 50% top-box resonating with your target consumer. But you want to make sure your package reflects that concept too. Because the reality is that for these small, emerging companies, 99.9% of their marketing budgets are package.

This industry is so dynamic, and while it’s going to go through different peaks and cycles, I think it’s just fascinating to see how many brilliant and caring people are in this industry. I think a young founder can reach out to anybody in this town and get a cup of coffee. I think that’s something we need to continue to nurture and build on, because there are tougher days ahead.

I've gotten a lot of great things out of this industry, a lot of great friends, a lot of great experiences. I’ve done well. It’s been great for my family, and I want to give back a little bit, and not necessarily with a price tag to it—just to help out where I can.