What’s the next food trend poised to sweep the nation? A recent conference showcasing roughly 60 recipients of Whole Foods local producer loans revealed some candidates: Maybe a half-fruit, half-vegetable roll-up that tastes like pure fruit (as a parent, I have to say, that’s genius)? Maybe goji raw biscotti? Definitely something with minimal but high-quality ingredients or exotic origins (from an American perspective).
There are plenty of contenders, if you judge by who’s getting funded. I was struck by the fact that even food companies with minimal revenues are attracting investors. That’s partly because food is a hot investment category; the breakout successes are going to be the companies that not only provide great products but also make good financing choices as they grow.
How to do that was the topic of the financing session at which I spoke — and I suspect the concerns that attendees raised are on the minds of many other growth businesses. So here’s a selection of the top questions, with brief answers from our panel.
How do you find people who want to invest?
Ben Lee, director of business development at CircleUp, a crowdfunding platform that connects accredited investors with innovative consumer and retail companies, suggested calling the CEOs of businesses you respect and asking them three questions: Where did you get money? Does that seem like a good fit for my business? Can you introduce me? Pat Finn of Finn Capital Partners said introductions like these produce most of his deals.
Equity investors generally are looking for a strong brand, great taste, good potential margins and a defensible product (a big brand can’t just copy it).
If a social and environmental mission is core to your business, look for investors that share your commitment. Kate Danaher of RSF Social Finance noted that mission is crucial for her organization — they want to see businesses that are pursuing real change, and for those that fit the profile, RSF may be able to provide debt financing a bit earlier than a bank.
How do I decide between debt and equity?
A lot of businesses think they need to bring in equity investors as soon as possible. Every business is different, but I recommend bootstrapping the business for as long as you can. Building your customer base and revenue stream is going to help you get a better equity deal. Also, if you are going to raise equity, it’s a good idea to talk to a bank first because often you can leverage that investment. For example, rather than raising $500,000, you may be able to arrange a $250,000 line of credit from a bank that is contingent on raising $250,000 in equity (I worked with a client who did just that.). This helps reduce the amount of equity you give up, strengthens your banking relationship and ultimately reduces cash-flow challenges.
It’s also important to know what your needs are and be honest about what you want to do with the company — what does the investors’ exit looks like? It’s key that owners and investors are on the same page before a transaction takes place. And panelists agreed that you should be getting more than money; you should be getting access to a network of advisors who have had success in a similar space.
Debt financing gets you working capital without giving away ownership in your company, but you’ll need positive EBITA (earnings before interest, taxes and amortization). If you’re pre-revenue or don’t have positive cash flow, it’s going to be hard to bring on debt because you can’t show that you can service it.
Whichever route you take, if you don’t have financing experience, it’s a good idea to find an advisor who can sit on your side of the table in negotiations to ensure that you’re fairly represented.
How do I value my company?
The short answer is, that’s really hard. There are some tools that can help you figure it out (CircleUp has a basic valuator), but it’s often worth investing in outside counsel to get a realistic view. Valuations are tricky and you don’t want to over- or undervalue your business.
Again, the most important piece of advice is, if you can build the business to a healthy state without equity investors, you’ll get a much better valuation without having to give as much away.