A few weeks ago, I shared a post I had written about options for financing your food business. Today's article is about how to find and assess these options.
A quick reminder on the options — Traditional options to fund a young food or agriculture business usually include debt, investment or philanthropy. On the debt side, you can self-fund through credit cards or borrowing from your savings. You can ask friends and family to loan you money or you can take out a small business bank loan with your property as collateral. On the investment side, you can raise money through providing ownership (equity) in your company. Equity investment for startups is most often done by asking for seed funding from angel investors. If your business is a little more mature and has the business markers (sales, user numbers, market niche, etc.) that attract capital, you can raise larger amounts of money through venture capital. Alternatively, if you are a nonprofit enterprise (501c3), or a social impact for profit business with access to a fiscal sponsor, you can also apply for philanthropic grants and donations to support your mission-driven work. There are also philanthropic investment vehicles, like Program-Related Investment (PRI) or Slow Money, as well as community-based fundraising vehicles, like crowdfunding, that create new opportunities for entrepreneurs.
In order to choose the best option, you must look at your business structure, your capital requirements, the cost of capital and your fit with the investor's intentions.
Questions to ask:
1. Is my enterprise providing a broad charitable benefit? Regardless of whether you are an official 501c3 or not, you can sometimes gain access to charitably-minded funds if what you want to do can be considered "social impact". If so, you may be able to access a low interest loan, crowdfunding, or a grant through a fiscal sponsor.
2. What are your capital requirements? How much do you really need? Have you valued your company properly? Are your financials clean and ready for review? What about your sales markers? Do you have a path to profitability? And then, what is your exit strategy or plan to pay back your investors? What is your funding horizon? Answers to all of these questions are critical to optimizing your likelihood of fundraising success. Be clear with yourself before you go into the process. If you need money fast, working with a foundation is rarely the way to go. An individual might invest more quickly, but may require different payback terms.
3. What kinds of investments has your prospect already made? Can they afford to invest in your company? What is your investor's typical time horizon and level of engagement? It is also critically important to research under what securities rules you are soliciting investment and make sure you are staying inside SEC regulations. Finally, are you really looking for money, or are you hoping for something more from your investor, like distribution relationships or business advice?
Finding investors is rarely as hard as it might seem. Start with like-minded enterprises and see who funded them. Some of the most overlooked investment sources are individuals or foundations based in your own community. Talk to your network. Research online. Figure out who the local foundations are. Word of mouth is one of your strongest tools - and a great way to start building buzz for your investment opportunity. While doing this prospect research, be sure to communicate your business successes on social media and through other channels. Remember that every conversation links to every other conversation. Network through your local chamber of commerce or funder alliance, and research online. Many communities have a local chapter of the Sustainable Agriculture Food Systems Funders or a venture capital network. RSF Social Finance is a pioneering social impact investment firm that holds regular webinars. Financing is rarely hard to find, although it takes hard work to secure it.
Some entrepreneurs assert that it is best to never take outside investment, including loans, preferring instead to grow organically through traditional means such as sales revenue, so they can keep full ownership of their business. Other businesses require large amounts of capital up front, like agriculture, value-added products, technology or infrastructure, and usually have to take on some kind of front end investment. The interplay between investors and entrepreneurs is delicate. Both sides want to see success, but sometimes their interests are at odds. The more you can do up front to make sure that terms, and expectations are aligned, the better.
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