Want to know the secret to acquiring funding to grow a food-based business?
September 30, 2016
Investors to Triangle Food Makers: Don’t Take Our Money (If You Don’t Have To)
Four investors and bankers talk capital formation for food entrepreneurs at Triangle Food Makers in Durham.
As a partner in a local food-based business, I sure do. That’s why I joined more than 60 other folks at last night’s Triangle Food Makers event at the American Underground @Main Street. This is the fourth such event led by the Triangle Food Makers Meetup, organized by entrepreneur Jill Willett, and this one focused on just that question: how can food entrepreneurs attract and secure growth capital in order to build their food-based businesses?
The best advice from all four investors at the event: don’t.
“First of all, if possible, never borrow money, if you can help it,” said Carol Peppe Hewitt of Slow Money NC, “and if you must, borrow as little as possible.”
Panelists Scott Wolfson from the Carolina Small Business Development Fund (formerly The Support Center), Jennifer Sherwin from Self Help Credit Union, and Stephanie Nieman from SJF Ventures all agreed with this advice, each sharing about their organizations and how they think through investment.
Another discussion point on which the panelists agreed: equity investment doesn’t make sense for everyone.
In fact, said Nieman, equity is not right for most entrepreneurs. Before taking any investment, cautioned Nieman, it’s important to determine what your future plans for the business are going to be. In the food industry, it’s far more rare to need a significant investment in order to scale, and so debt-based financing options are often a better fit.
Hewitt backed up this claim with stories of successful investments made through slow money, which is traditionally lower-dollar, lower-interest rates. Food-based companies, said Hewitt, are not technology companies that need to invest heavily in coding, product design, sales and marketing teams, and infrastructure.
Typically, to grow a food-based business, you either increase demand (sales and marketing), or you increase or maximize production (with better equipment, hiring production and operations staff, increasing efficiency and yield). Food-based businesses can also fuel growth and add profits when they can bulk order supplies and cement their supply chains to acquire ingredients at the most competitive prices. It doesn’t take millions of dollars to do this, agreed Hewitt and Nieman, which could give food-based entrepreneurs an advantage if they do eventually require funding.
There are times when a larger investment does make sense, said Nieman. If you are operating a company that has great market penetration and a strong customer base in one region, and you’re looking to bring the company to scale in two or more additional regions, a larger investment could be necessary. It’s only at this point when a institutional capital investor like SJF Ventures is interested in food-based businesses.
For any food-based business that does take on investment, even if it is from a family member, it is imperative that startups, their founders and those family investors have clear and written documentation. If the documentation is equity-based, it benefits all parties to have it reviewed by a lawyer.
For debt-based agreements, it may be enough to have a simple promissory note with an attached amortization schedule for the repayment of the loan. This is important, said Wolfson, because if you do find yourself in need of future debt investment, from a bank or from a community development financial institution (CDFI) like Self Help or the Carolina Small Business Development Fund, the loan officers are going to require that documentation.
Lenders will also look at your family financial situation prior to making a loan, said Sherwin, regardless of how well the business is doing.
“If you haven’t demonstrated that your business can pay you enough to meet your personal financial needs, we are going to require a co-signer on the loan,” said Sherwin. This is not meant to be restrictive, said Sherwin, it is meant to help protect the debt investment and also the entrepreneur.
Investors look for different rates of return. For an organization like Slow Money NC, which pairs businesses with investors that are interested in supporting local businesses and farmers, interest rates on loans are typically between 3 and 4 percent, though some loans have been as low as 0 percent and some as high as 8 percent, said Hewitt.
For CDFIs, rates on loans depend in part on the loan amount and the length of the loan. For Self Help, rates range between 2 percent and 15 percent, said Sherwin, depending on circumstance. At the Carolina Small Business Development Fund, most loans are between 8 percent and 10 percent, said Wolfson. Traditional bank rates could fall anywhere between 6 percent and 15 percent.
The bottom line: if you’re a food-based entrepreneur, you have a variety of options to help grow your business. Taking on an equity investor isn’t always the best option, as there may be other ways to help your business get the cash infusion it needs to grow. Whenever you seek investment, said Wolfson, it’s critical to have a business plan to demonstrate that you understand not just your business but also your competitor’s businesses, and to know your numbers.
After sharing this advice with the crowd, investors heard from four local companies as they conducted practice pitch sessions to showcase their food-based businesses in front of investors and the audience. Read about the four companies that pitched here.