Financing Your Venture

This is not legal advice

So you have a great packaged food business idea, but you’re not sure how to pay for everything to take it from concept to reality. Depending on how you proceed, it could cost you anywhere from $5,000 to over $50,000 before you even get your first sale, and that assumes little to no new food technology.* So, how do you fund your new venture? Below are several of the most common ways packaged food entrepreneurs do it. Since financing a business is such a huge topic, we recommend consulting additional resources and books, especially if you plan to seek capital from grantmaking organizations, angel investors, and venture capitalists.

Your Own Money

The less-exciting version of OPM (Other People’s Money) is, inevitably, your own money. The reality is that most packaged food companies will receive capital from their founders’ pockets - or their spouses’. How much you contribute depends on how much of the legwork you plan to do yourself; having a food lab develop your product from scratch costs significantly more than having a food scientist tweak a recipe. It also depends on how professionalized you want to look on day 1. Some startup companies will affix sticker labels to their products initially for $500, while others will pay $30,000 for a design firm to create product packaging and buy wrapping so that their products stand out on the shelf.

Credit Cards

Many founders have taken out credit cards with 0% financing for 12 months to front startup costs leading up to production and initial market entry. While these cards carry high interest rates if they are not paid off, they present an accessible and inexpensive form of bridge financing when used appropriately.

Grants, Prizes, and Accelerators

Several food business accelerators exist in major cities, often targeting either food tech or mission-driven companies. There are also pitch competitions across the country (and online), which offer cash prizes for good business ideas regardless of industry. Some state governments also have grantmaking and investing arms that offer funding to startups who do business in their state. There are often even more options if you identify as an under-represented individual or operate in an underserved community.

If you are affiliated with a university, you may have access to additional funding opportunities through Centers for Entrepreneurship and innovation programs on campus.

Angel Investors

Angel investors can be anyone† who is interested in investing their own money in high potential businesses. Because this is such a broad statement, there are angel investors for all shades of entrepreneurship. Some angel investors band together to make it easier to attract startups and coordinate investment opportunities. Others operate on their own. Angel investors, because they are using their own money, do not necessarily face specific time constraints on their investment. They may be willing to work with you on a long-term growth strategy. Finding the right angel investors, whose values and goals align with your company, can be tricky, but it’s critical to find a good fit beyond your capital requirements.

Friends and Family

You can also raise money from your existing network of friends and family. Typically this is the first fundraising round of outside capital that companies pursue, but of course that depends on whether your friends and family have the cash and risk tolerance to invest in your startup. Under SEC rule 506, up to 35 non-accredited investors can be included in your investment round, so long as they have financial knowledge (or advisors) and already know you. This allows your brother Thomas and aunt Karen to invest, even if they aren’t millionaires. However, you will still need to provide investor materials and should consult with a lawyer as you complete this process.

Venture Capital

Venture capital firms raise money to create funds for investment in high potential startups. These funds typically last 10 years, after which the VC has an obligation to return the invested capital to its owners. Because of this time constraint, VCs are usually looking to invest, grow, and exit (sell your company) within a 5-7 year period. They’re looking for fast growth and high returns (think 20x). They can often provide connections and resources to help you accelerate your growth phase. If you accept VC capital, you are on their timeline. While details involving venture capital are far too complex to get into here (check out the book Venture Deals), we wanted to call out the potential for VC investment as another way to fuel growth. Finding the right VC, much like finding the right angel investors, is about having a shared vision and mutually benefitting from the arrangement.

Several VCs invest in food tech; fewer invest in packaged food products that lack a patentable or proprietary process. There are still plenty out there - you just have to find them! CPG specific VCs also exist, although they usually like to see traction through sales (you don’t need to be profitable - yet). If you find a VC whose investment thesis aligns with your product, you should seek out a warm introduction (have a mutual friend connect you). Most VCs simply receive too many emails to spend much time reading through unsolicited proposals.

Lines of Credit

Once you have ongoing business, you can finance your company through lines of credit. You can receive cash for your outstanding accounts receivable and inventory, and you can work with banks to establish a credit facility. These can be useful options as you look to scale but won’t help much in pre-launch financing.

Crowdfunding

These services are just as much of a marketing campaign as a way to raise capital. In order to succeed, you should have a marketing and PR plan that communicates your value proposition to potential backers/investors. Each of these services is different; some only give you money if you raise your target amount, while others will fund you even if you don’t meet your goal. You also have to choose between a backer campaign and an investor campaign. Backers typically receive product in exchange for pre-payments, while investors will receive an ownership interest in your company through a SAFE (Simple Agreement for Future Equity). Your investors will remain your champions, because your success is their success, but investor campaigns attract additional scrutiny from the SEC.

Working Capital

Once you’re operational, your challenge, in addition to everything else, is to manage your working capital. It’s challenging because you spend money producing your product, but often won’t see cash from sales for several months. Even as you finish one production run for your product, you’re already planning your next even though you haven’t sold the inventory you currently hold. How do you handle this? There are several options. Here are a few of the most common:

Request better payment terms from suppliers. When you work with co-packers, ingredient suppliers, food labs, and others, they’ll typically invoice you and request payment. If you can get a 30 day payment period, instead of having to pay immediately, you’ve just created some wiggle room; such an agreement is called Net 30 payment terms (there are also Net 60 and Net 90, although less common).
Reduce the pay cycle with customers. Instead of a 30 day pay cycle from customers, establish a Net 15 or Net 0 cycle, which gets cash back to you faster.
Work with financing companies. Various companies will finance your inventory and receivables to get you cash now in exchange for a small percentage off the top. Of course, this is another cost to you, so you should weigh it against the benefits to determine whether it is the right approach.

Footnotes

*If you have a patentable food tech product, like cultured meat, your experience will be more aligned to the tech VC space

†Government regulations typically require these individuals be “accredited,” which means that they must earn $200,000 per year or have $1M in assets