This content first appeared on Locavesting.com
Raising capital is difficult for any startup or small business. But it’s especially challenging for entrepreneurs in food or agriculture. Margins are often low, especially in the beginning. There’s also enormous risk due to factors outside of an entrepreneur’s control, like unexpected weather impact on crops. Providing collateral that lenders will accept can be difficult for a young food or agriculture business.
On top of that, food entrepreneurs and farmers often stumble into business, inheriting the family farm or following a passion for cheese making until one day the passion has grown into a business and it’s time for expansion. These accidental entrepreneurs may lack the business savvy required to attract investors, such as a preparing a solid business plan and establishing sound accounting.
On the other side of the equation, investors may be unfamiliar with farm and food business growth stages and try to apply financial models from other industries.
It’s no wonder the gap between investor and entrepreneur is sometimes hard to bridge! The good news is that there are more options than ever for food-based businesses.
SHOPPING FOR CAPITAL
Traditional options to fund a young food or agriculture business usually include debt or equity. Revenue sharing—where the business pays investors back by sharing a set percent of revenue or profit each month—is also increasingly used.
Many businesses start off by self-funding through credit cards or borrowing from their 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. There are also online lenders who don’t require collateral, but they often charge very steep interest rates for the favor.
On the equity side, you can raise money by selling an equity (ownership) stake in your company — if you have an idea that is attractive enough for this kind of investor. Angel investors (wealthy people who like to use their money and knowledge to help early stage startups) typically want an equity stake.
If your business is a little more mature and has the business markers (sales, customers, growth, a large market opportunity, etc.) that show high growth potential, you can seek larger amounts of money through venture capital.
Equity has its benefits. But investors typically assume that they’ll make a big return on their investment through a sale or acquisition of your company. Before you enter in to an agreement with an equity investor, be certain you fully understand the terms and how these angel or venture agreements will strengthen or weaken your ownership control of the company and your ability to seek further funding.
If you are a nonprofit enterprise (501c3), you can apply for grants from foundations or tax-deductible donations from individuals to support your mission-driven work.
While all of these traditional routes can be useful, there have been some recent innovations in the financing space that create new opportunities for early stage entrepreneurs.
Newer forms of capital for food and agriculture startups or business expansion involve hybrid models, like Program Related Investment, Slow Money, crowdfunding or combining traditional and non-traditional methods into one funding package that allows different forms of capital to spread risk.
For nonprofits that have earned income streams (i.e. where the nonprofit generates income from sales or offers something investable, like real estate), Program Related Investment (PRI) can be a good opportunity. PRI typically take the form of a low- or no-interest loan, guarantee, or linked deposit, and even occasionally, an equity investment in your nonprofit.
Foundations like this form of giving because it better leverages their donation and also provides incentives for the nonprofit to become financially self-supporting through its commercial activities for charitable purposes. Nonprofits with charitably-oriented commercial enterprises prefer PRI because it often allows for a larger investment than a typical grant. When done well, PRI loans and equity investment create deeper mutual long-term commitment to success between both donor and “grantee” than traditional donation-based investment.
You may have heard about Slow Money. A nonprofit organization founded in the midst od the financial crisis, it has spawned a network of investors across the country and the world that want to support local, sustainable food and agriculture. Slow Money-inspired groups now operate in dozens of regions. Their models may differ, but most make low-interest loans and, to a lesser extent, equity investments. But they all aim to create a direct relationship between an investor and a food business, and on terms that are mutually agreeable and beneficial. For example, a loan to a farmer might carry a very low interest rate supplemented by a weekly delivery of fresh eggs or produce.
This is a different model from a traditional bank loan where interest rates are set by factors far removed from the community and entrepreneur. Many times, these loans are simply sealed by a promissory note and a handshake to indicate it is a loan between friends.
Slow Money also helped to create Local Farms Fund, an innovative program for beginning farmers to help them buy land in New York.
Money, of course, is just part of the equation. In recent years, incubator and accelerators have cropped up to help turbo charge the growth of young companies through a mix of training, mentoring and capital. Commonplace in the tech world, there are now a growing number of incubators and accelerators focused on food ventures. Some are even backed by established food companies. New York-based AccelFoods runs an accelerator for ambitious food companies looking to break into the mainstream, while Chobani and Sam Adams offer programs for young food and beverage producers. There are even incubators and boot camps for beginning farmers! But be warned: they typically involve a fee and a hefty time commitment on the part of the entrepreneur.
Tap the Crowd
Crowdfunding has become a popular option for cash infusions. Businesses tend to use donation or rewards-based crowdfunding sites like Kickstarter, Crowdrise, Indiegogo or Barnraiser to market their idea to friends and their networks. Crowdfunding is very similar to a fundraising campaign on public television or radio, where the business solicits “donations” in return for a token gift recognizing the donation. If you want to use crowdfunding, be sure you actually have a “crowd” as most of the money you raise will come from your own network.
You can also crowdfund a loan through Kiva Zip. In the case of loan-based crowdfunding, contributors make small micro-loans to an entrepreneur and the entrepreneur pays off the loan in a mutually agreeable time. Farm and food businesses have become one of Kiva Zip’s fastest growing loan segments, says Kiva’s Katherine Lynch.
The newest form of crowdfunding involves investments. Food companies that have demonstrated traction and growth can try investment crowdfunding sites, such as AngelList or SeedInvest, that connect companies with wealthy investors. CircleUp, another site, specializes in fast growing food companies and other consumer goods.
Starting May 16, when Title III of the JOBS Act goes into effect, this sort of investment crowdfunding will be extended to the general public for the first time, rather than just wealthy investors, providing yet another option for food ventures.
For more on these and other options, see our Raising Capital guide.
Seeking capital can be one of the most exciting parts of growing your business. With a little preparation and luck, you’ll not only secure the capital you need to grow your enterprise, you’ll gain a new set of stakeholders and allies who can help you succeed.
Stay tuned for Part Two of Shopping for Capital: Preparing for your Capital Raise.
Margaret Gifford is the founder of Watervine Impact in New York. Watervine helps food, health and agriculture enterprises enter new markets, gain customers and access funds for growth. Margaret’s mission is to bring together business and impact capital to grow healthy and sustainable communities.