One of the most common questions we get from food and beverage entrepreneurs is about finding investors and raising capital.
“So I really want to start a food business, but is it necessary to raise outside capital? Where do I even start? When is the right time to start talking to investors?”
Unfortunately, CPG businesses are typically very capital intensive. Especially if you are experiencing strong growth! Even if you are cutting costs by outsourcing different parts of the business, such as working with a co-packer for production. You can still only grow as fast as you can make your product. And producing your product costs money.
So while the answer to the question is no, it’s notabsolutely necessary to take on investors to be successful, it is going to make things a lot easier to have the necessary cash needed to fuel the strong growth you’re going to hopefully achieve.
Now, does that mean you are ready to go talk to the big VC’s in the CPG space? Probably not just yet. Unlike the tech world where you can pitch investors on simply an idea, many of the venture capitalists in CPG want you to have a product in the market with some proof of sales and happy customers before they even entertain the idea of an investment.
So now we are faced with the chicken and the egg problem. You need investors to build your business, but you can’t get investors without sales. So how do you get those initial dollars to produce your product so you can start selling and get customer feedback. This is where the real hustle comes in!
Here are a few good ways to find initial funding to get started with your business:
- Savings: Well it is your passion right? What are savings for 🙂
- Food Incubators and Accelerator Programs: There are a lot of great incubators and accelerator programs popping up around the country that can offer everything from commercial kitchen space, mentorship and even investment to help you get started. Some include: Union Kitchen DC, Food-X, Chobani Incubator, SKU, Land O’Lakes Dairy Accelerator
- Borrowing money: bank loans, credit cards or an SBA loan – This can be a good way to get cash quick without giving up equity. However, bank loans can be tough to get approved, as food startups are apparently pretty risky (who thought?) SBA Loans can be a great option. You can also use credit cards for those initial expenses to get your business going.
- Crowdfunding: Many entrepreneurs have turned to crowdfunding to raise investment for their startups. And some awesome companies got their start this way. There are different types of crowdfunding, everything from offering equity in your company to simply offering gifts in exchange for small contributions. PieShell is great crowdfunding site focusing on the F&B industry. Not only does crowdfunding help you raise funds, but it also can be a good way to get thousands of brand ambassadors that now know about your brand and are excited for your product to hit the market. Other crowdfunding sites include CircleUp which also focuses on CPG, kickstarter and Indigogo.
Okay, now that you have money to spend, it’s GO TIME! Find a manufacturing partner or commercial kitchen to get your product made and get out to get those initial sales and customer feedback, so when it’s time to push it to the next level, you have the right story to tell investors.
When talking to investors it’s super important that you know everything there is to know about your business. That includes the ins and outs of your product, the market landscape and competition, your target market, and most importantly the numbers! Be sure that you have well thought out forecasts and can explain every last number. Maybe your margins aren’t great to start, but make sure you have a plan in place to improve them with future growth. If you aren’t a numbers person (which many of us aren’t!) get someone that can help. It’s worth it!
Steven Vigilante from CircleUp shared some insights on the Food Startups Podcast about raising investor money:
- Work with your finance team to determine how much you actually need. It’s not always the best idea to take as much money as possible. You give away a lot of equity in these early rounds and so be mindful of raising only as much as you need.
- Raise before you think you need to. Don’t let yourself get in a hard spot with limited runway. Investors will smell blood in the water! You have the most control over your investment round when you have the option to walk away.
- Be prepared to find the best partner for your business. That might be an investor that hands over cash and then leaves you alone to run your business. But more often, its a strategic partner that is much more than just an investor. Having a strategic investor onboard can really help you with important industry introductions, future fundraising and they can act as an experienced advisor that is there to help you make your business a success.
Also, it is important to remember that at the end of the day, above product, market opportunity, sales numbers and everything else, what these investors are most interested in, is YOU – the founder. They are investing in your passion, resilience, resourcefulness and determination to make your dream a reality. So keep that in mind when pitching investors. Passion is contagious!