In your recent FoodTech Fireside podcast with Michael Wolf of The Spoon, you mentioned that startups might rely on different types of funding: venture capital, angel investments, family offices or bank financing. How can the startups identify the most appropriate funding type?
I think it is difficult for founders to think about it from the investor’s perspective. Venture capital, for instance, is a very specific model and investors have a very specific outcome they are thinking about.
Founders and entrepreneurs in the food space need to recognize that food is a different category than traditional technology or healthcare. It doesn’t necessarily scale as quickly so it doesn’t make sense to compare food business with tech companies raising large investment rounds.
Evaluating their type of company and understanding their market size can help the startup identify the type of investor that is going to be most appropriate for them.
Most companies start with friends and family money or angel money. Early-stage startup founders often raise capital from people that know them personally and believe in them. These investors know what their investees have done in the past and feel that they can trust them with their money.
Without personal guarantees and track records, getting a traditional bank funding is going to be much harder. That is why money from family and friends as well as angel investments from local angels that are geographically located where the company is are typically the best places to start.
If a startup is getting from half a million dollars to four to five million dollars in sales in a 24-month or 36-month period, that is when institutional capital, venture capital, family office money or in some cases private equity becomes more appropriate.
It also makes sense when the opportunity itself is going to be large enough. By large enough I mean seeing a path to get to 50-100 million dollars in revenue or much greater than that.
I’ve mentioned family offices because I believe that food is a different kind of space. People in food are interested in changing the system, making the world a healthier place. They are often doing it for reasons beyond just the capital return.
Family offices have a different time horizon: they don’t need to be concerned about the startup growing to 15 million in sales in five years. Instead, they can take a 20-25-year timeline and say: I believe in what this company is doing, I can see how we can get behind them and provide resources for them to scale.
What is the best way for food startups to convince an investor? How should startups present themselves to investors to secure funding?
Especially in food, people are great at talking about their product and why they decided to create something. But they are not always great in talking about the business fundamentals as well as the big vision for the company. There is a fine line of definition between talking about the product and talking about the business.
And often we see founders talking entirely about their product and how great their product is, which may be the case, but from an investor’s standpoint, there has to be a sustainable business there as well.
Depending on the type of investor, it may have to be a high-growth business versus a more traditional business.