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.
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. To learn more about these and other options, as well as what you need to do to prepare for a capital raise, join me at Food + Enterprise on April 8th and 9th. The event includes my panel discussion “FOR LOVE AND MONEY: WHAT MOTIVATES FOOD SYSTEM INVESTORS” April 8th at 10am, and other related topics “SHOPPING FOR CAPITAL: MATCHING FUNDING SOURCES AND COMPANIES” and “CROWDFUNDING 2.0: OVERVIEW OF AN EVOLVING SECTOR”
For more information read the full article on www.locavesting.com.