Funding a specialty food business continues to be a challenge in this economic environment. During an education session, taking place at the Summer Fancy Food Show on Tuesday, June 27 at 9 a.m. on the Javits Center’s Main Stage, a panel of experts will give insights into maximizing funding.
Moderated by Jack Acree, EVP at Saffron Road Foods, the “Funding Your Future” session will cover funding options at each stage of a business, timelines, how to tell a brand story to investors and banks, and different ways to think about valuation and deal structures. Acree will be joined by Lauren Abda, founder and CEO of Branchfood, a food innovation and entrepreneurship hub, Hallie Bonnar of New Fare Partners, an investment fund, and Nick McCoy of Whipstitch Capital, an independent investment bank.
Specialty Food Association thanks Zipline Logistics, which will sponsor the session. Zipline Logistics is an award-winning North American 3PL that specializes exclusively in the transportation of retail consumer goods.
SFA News Daily spoke with McCoy about the topic.
What advice do you have for early-stage makers working to finance their business?
The first thing is to understand clearly how the company will provide an economic return to investors. For early-stage brands this is understanding the headroom of the brand clearly and how that will translate into a value at exit. Headroom is the practical size that a brand can be considering the channel success, velocities, average SKUs, and all commodity volume or ACV percentage (the volume-weighted penetration of a brand in a channel) of analog brands as validators. They should also have a plan to get to profitability at exit and ideally have an earnings before interest, taxes, depreciation, and amortization (also known as EBITDA) margin of 15 percent or higher so that investors can underwrite their investment based on a profit-based multiple as well as potentially a revenue based one. Profitability also opens many more potential acquirers at exit, increasing the likelihood of a successful exit for the investor.
What mistakes do specialty food companies often make when working to fund their business?
Here are a few:
• Building a business model that does not reach profitability early enough.
• Not bringing in a broad enough team (including board members, advisors, outsourced providers of CFO, marketing, sales, etc. services, diversity inside an existing team, etc.) that can help them expand their investor network, give them additional credibility with investors, and execute much more capital efficiently by making fewer mistakes.
• Focusing too much on valuation and too little on the quality of partners and shared vision with their investors. Once an investor is on board you cannot get rid of them, so the partnership needs to be prioritized more than valuation.
I also see a lot of opportunities to preserve more founder equity at final exit by optimizing the structure in fundraising. Some companies will raise multiple notes to avoid pricing a round and ultimately raise at a lower-than-expected level and wipe out much larger amounts of equity than ever expected. The same can happen with using participating preferred or other guaranteed return structures to get a higher valuation in fundraising. If things do not go as planned the penalties are severe.
What would you like attendees to get out of the session?
Ideally to have more knowledge and be empowered to raise capital more effectively. I want the capital cycle of this industry to accelerate so that brands have more access to capital, operate more capital efficiently and investors get returns faster to recycle those larger fund amounts into innovation.
When seeking funding from investors or banks, what should a company be prepared to share?
Pretty much everything is potentially required. For founders/CEOs that can also be personal, i.e., background checks. I think it is important to maintain organized financials and documents on the business so that when the request list comes in it is easy to respond to.
How do funding strategies change as a business grows?
Early-stage businesses raise seed money from the founder’s extended network. The founder is most important now. The structure is nearly always common equity or a convertible note.
Checks of $3 - $10 million: when companies can raise amounts in this range, they move away from individuals investing in the founder through their network to smaller institutions strategic investors, or family offices who will do much more due diligence on the business opportunity and traction so far. Structure is more often preferred equity although there are some convertible notes too.
Checks of more than $10 million: at this point, the pool of investors is all larger family offices, institutions, and strategic investors. These investors spend the most time in due diligence of the projected final exit valuation of the company and will value their investment today by dividing that number frequently by 3 or 4. Brand headroom is very important here as is the potential for a profitability-based exit. The structure is always preferred if the ownership is under 50 percent.
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