In our monthly “SKU View” series, Food Entrepreneur is tapping the expertise of mentors at SKU, a consumer products accelerator based in Austin, Texas, to deliver timely insights on issues that affect early-stage food and beverage brands.
AUSTIN, TEXAS — Raising capital is considered a grueling task, made more difficult amid economic volatility. Startup founders seeking to bolster a business in the near term should understand and prepare for the challenges ahead.
“Compared to six months ago, today’s investment climate is a time of uncertainty,” said Matthew Mitchell, an adviser, investor and educator to food and beverage startups, venture capital firms and university students. “It’s not that investors are negative. It’s just that they don’t know yet what Q3 and Q4 consumer sentiment will look like. While there is certainly still lots of available cash out there, investors will likely wait to see how things play out for the next couple of months until they take on new deals. It’s unfortunately a wait-and-see game.”
He described the dynamics of the Great Recession, when “strategics protected cash for emergencies and private investors reserved cash for their core portfolio companies.”
“New money still was invested in strong companies but at slightly lower valuations and with terms that favored investors,” he added.
Mr. Mitchell teaches entrepreneurship at Loyola Marymount University and Georgia Institute of Technology. He was a founding team member of the Coca-Cola Venturing and Emerging Brands organization, which was developed to invest in and acquire startup beverage companies.
He shared insights and advice for startup founders navigating a stressful fundraising environment.
Food Entrepreneur: Given the current market, what steps should founders take knowing that it may be more difficult to raise money?
Matthew Mitchell: Being old enough to remember the CPG startup world in 2008… First, good brands will usually weather storms. There are a group of brands that came out of the last recession stronger and better poised for success because they focused their work and capital on the must-win areas.
In most cases, these brands went deep rather than wide. They focused on their key markets, consumers and retailers. They invested their capital in areas where they had a greater probability of growth. They avoided chasing new territories, they avoided large amounts of innovation, they avoided splashy marketing programs, and stuck to the basic day-in and day-out execution. Most importantly they learned and made improvements to the business.
And thus, when the tight capital markets relaxed, these brands were well positioned to start to grow further. They had created loyalty with their ecosystem and could now start to expand faster because they knew what worked and didn’t with core consumers.
For those founders who are raising money, can you talk about the process?
Mr. Mitchell: Raising capital is a separate job in itself. I am always pleasantly surprised that there are some entrepreneurs that have truly mastered the art of both running the day to day of a business and effectively raising money for the future of the company.
But it is not for everyone. The first thing someone must do is to gauge what money is needed for what growth both now and potentially in the future. Dilution is very real in raising money. It works if the overall value of the business gets bigger, but if the business isn’t expected to get to large scale, it may have a more negative impact than positive. Manage your cap table.
Once you decide that you do indeed need to raise money, leverage your network as much as possible. Tell them your story focusing on the opportunity, the facts and the hypothesis. And then keep telling the story as you learn more each day. Remember, it takes time to get someone to write a check, so start early and be patient.
What are the key qualities investors look for in entrepreneurs, and what are the dealbreakers?
Mr. Mitchell: First and foremost, investors are looking at signs of high potential of success. So, entrepreneurs that can articulate a vision and a narrative of how to get to this definition of success will always rise to the top. I am looking for passionate storytellers that get me excited about joining them on their brand’s journey.
But the caveat to storytellers is the negative creep of dreamers and con-artists. “Alternative facts” or “I’ve got the next $1 billion brand” sends out big warning signs to me. There has to be authenticity and trust with investors. This is a tough business with challenging success probability percentages, and being aware and honest prepares you with your investor allies. A healthy dose of optimism balanced with high knowledge of your business are qualities that get any investor’s attention.
One attribute that does stay the same no matter the path is desirability — does it fill a consumer need? Every entrepreneur needs to be able to articulate why their brand or product fills a gap that doesn’t exist in the market today. And it has to be about the consumer’s need, not the competitive market, not the retailer, and not the distributor. The competition, retailer and distributor help you find success and a point of difference, but ultimately the consumer dictates.
What should early-stage entrepreneurs know about vetting and partnering with the right investor?
Mr. Mitchell: I refer intentionally to investors as “allies.” They may not always be your friends, but with skin in the game, they should always want to be your biggest fan. (Well, maybe other than your mom.)
With this in mind, entrepreneurs should ideally be interviewing investors as much as they are being interviewed. Usually the investor asks most of the questions, but I think the entrepreneur should be asking questions to determine “fit.” Does this investor appreciate the business idea? Is this an investor that will challenge but also support me? Will the investor stick around during challenging times?
Of course, this is the ideal, and not everyone has that luxury to find the perfect fit. There are sacrifices sometimes that need to be made. So, if it’s not the perfect marriage, then at least there should be some trust. Allies at their core need to be able to know that there is truth, if not always alignment, between the parties to be effective.
Do you have any final recommendations for founders given the current environment?
Mr. Mitchell: Speak to your existing investors. See what their position is on further investment and at what levels.
Build out some “what if” scenarios and know the metrics that cause you to adjust your current business plan.
Assess the situation with your broader ecosystem. Speak to various groups to plant seeds if indeed something is needed to manage through a challenging environment. Specifically, determine new investor interest level, inquire on suppliers’ credit terms, and evaluate key employees’ potential concerns.And, finally, don’t give up hope. I have seen many companies weather storms when they are prepared. Flexibility and fortitude are at the heart of many strong entrepreneurs. Hopefully most of the entrepreneurs reading this will also work though this period and emerge stronger.