How to Get Investor Funding for a New Food Venture
When starting a food brand, the list of initial expenses can seem to be never-ending. Finding and renting a building, developing an innovative line of products, purchasing equipment, and supplies, hiring employees, finding a manufacturer…the costs can quickly go far beyond the meager savings that many expectant entrepreneurs hoped would get their business idea off the ground. Unfortunately, many of the traditional lines of financing are often not very friendly towards small business startups. According to one recent study, over eight out of every ten small businesses applying for loans from banks and other traditional lenders were denied funding.
While selling direct-to-consumer, or via online e-commerce platforms such as Amazon certainly allows food startups to gain a foothold into the market, growing a brand, increasing production and distribution, and actually making a decent living from your entrepreneurial dream almost always takes a solid investment of cash upfront.
For many small business owners and future entrepreneurs, searching for investor dollars is often seen as the only way to get your business idea off the ground. In this short article, we take a real look at the numbers to see how many businesses actually rely on investor funding during the onset of operations. We then consider some pros and cons associated with accepting investor funding. Finally, we offer a few tips and suggestions on how small businesses can successfully attract investors to put money into their business on favorable terms.
Some Statistics on How Startups are Funded
Popular reality TV shows like Shark Tank might give the wrong idea that most small business ideas can only grow and spread their wings when they are lucky enough to get an influx of outside investor funds. However, according to this infographic published by Entreprenur.com (with data provided by Fundable), less than one percent of startups are funded by angel investors who are high net worth individuals who offer initial financial backing in entrepreneurial ideas, typically in exchange for ownership equity in the company.
If that seems like a small amount, consider that only 0.05 percent of startups are able to secure funding and investment from venture capitalists who typically look for business ideas that they feel represent high-growth opportunities. Of the estimated 565,000 startup companies that are launched every month in the United States alone, well over half of those companies are funded by personal savings and credit. Almost 40 percent of these business ventures also get substantial funding from family and friends. It is also worth mentioning that crowdfunding, while still a relatively rare source of financing for startups, was identified by the data as the fastest growing funding source for startup businesses.
In the specific case of food brands, a 2018 U.S. Food & Beverage Startup Investment Report published by Food Tech Connect found that “with acquisitions on the rise and more capital flowing into the industry, 2018 was another great year for U.S. based food and beverage startups. The year saw $1.45 billion invested across 200 disclosed deals, according to our research. In total, there were 247 reported financings in 2018.” Further research finds that venture capitalists are quickly jumping on board to capture some of the huge opportunities in the growing food business. Pitchbook states that venture funding for U.S.-based food tech companies has grown from about $60 million in 2008 to over $1 billion in 2015.
Why the growing interest from investors in the food market? For starters, the United States Department of Agriculture states that U.S. consumers, businesses, and the government spent over $1.62 trillion on food and beverages in stores and on away-from-home items in 2017. Simply put, people from all walks of life need to spend money to eat. As interest in healthy, organic, and nutritious diets continues to grow, investors are certainly paying attention. In the specific case of the Keto Diet and other low carb diets, an expected compound annual growth rate of 5.3 percent should be seen over the coming four years.
Pros and Cons of Investor Funding
The statistics outlined above should indicate that funding procured from angel investors and venture capitalists will most likely continue to grow for startup food brands in the health and wellness sector of the food industry. But just because the money is there, should entrepreneurs and startups automatically accept the money from people wanting to buy a stake in your business?
Pros of Investor Funding
On the plus side, angel investors might be able to offer more than simply a needed injection of capital during a strategic moment during your business launch. Though not every angel investor will want to be intimately involved in the daily grind of launching a new business venture, some will willingly offer insight and wisdom from years of experience in funding other entrepreneurial ventures. In the best of cases, some investors might be able to offer useful contacts to help you find manufacturers or to set up a meeting with a potential retailer or distributor.
Furthermore, accepting investor funding can also typically help small food brands get their product to market more quickly. Having sufficient funds and resources to pour into market research, beta-testing, development, and marketing, product development, etc. can make a major difference in getting your product onto the shelves and in front of potential customers in a timelier manner. If your product launch is on a tight time schedule, finding the right investor can be fundamental in meeting deadlines and beating your competitor to market.
Other potential benefits associated with finding angel investors or venture capitalists include:
• Personal network contacts
• Less bureaucracy in the process of financing
• No increasing debts and interest rates as with traditional small business loans through banks
Cons of Investor Funding
The most obvious drawback that comes with accepting an investor is that you lose complete control of your business. Many investors will tend to avoid the “hands-off” approach, and instead want to be involved in some of the major decisions affecting the direction of the company. In the worst of cases, business owners might be forced to change or alter some of their values that were an original part of the inspiration for starting the business. For example, an angel investor that has put in a substantial amount of money might encourage (or demand) that you cut corners on sourcing ingredients in order to save on production costs so that profits start rolling in more quickly. If part of your original impetus for creating a business was to create fair and ethical supply lines, this could obviously present a problem.
Another drawback of accepting investor money is that the investor may require a certain percentage of ownership in your business. While any investor is obviously taking some sort of risk by investing in a startup, it can be frustrating to have to cede 30 percent (or more) of your profit once the business starts to take off due to your hard work.
Lastly, some investors (and in particular venture capitalists) might set unreasonably high standards or expectations in terms of return on investment. This pressure can yet another level of stress to entrepreneurs who almost always have an endless list of things to keep them busy.
When choosing the best investor for your startup, it might be helpful to consider investors who:
• Have proven experience within your specific industry,
• Share some of those visions, goals, or values that were a founding element of the business idea,
• Is willing to reciprocally negotiate terms including percent of ownership, expected return on investment, etc.,
• Is willing to offer more than just money (i.e. contacts, tips, network connections, etc.)
Strategies for Successful Investor Funding
If, after analyzing the pros and cons of accepting outside money, you believe that investor funds are the best way to start or grow your food brand, there are a few strategies that can help you find and contact the best investors for a mutually beneficial partnership.
Get Known in the Industry
There’s not a high likelihood of you accidentally bumping into an investor just seething to invest $100,000 in a previously unheard of Keto snack. Finding and meeting the right people requires you to invest time and resources in putting your brand and your product in front of the right people. Participate in a tradeshow within the health and wellness sector, and have information (and samples) ready to give out to the right people.
Use Social Media
Yes, wealthy investors probably have a Facebook account as well. Whether to use organic content, paid-for advertisements, or expensive influencer marketing, social media can not only help you gain clients but also attract the attention of potential investors.
Try Crowdfunding
While raising money for your business idea through donations is often a bit of a long shot, there are a number of or equity crowdfunding platforms where strategic investors might hang out and periodically take a look at potentially profitable business ideas for their money. Some of the best equity-specific crowdfunding programs include
• AngelList
• Seedinvest
• StartEngine
• CircleUp
• Wefunder
Get Your Products Out There
Lastly, the best way to attract investors if having them experience and try your product. Give out samples, don’t be afraid to knock on doors, send emails, or make a phone call. Let people know that your brand exists and that you have a product that is unlike anything else out there. The more exposure your brand has, the better the chance that an investor will come across it and have his or her interest sparked.
