“If I may, how much money are we talking about?”
Six years into entrepreneurship, running both a nonprofit and a for-profit, and I still find myself asking the same question to other founders in conversations about how to take a food business to the next level. But my tone has changed—from sheepish, almost guilty, to comfortable, conversational.
When I first left my Master’s business school program to “find myself” in the food world, I did everything I could to avoid discussing anything related to money. I was happy to talk in abstract terms about the intangible value of running a mission-driven business, but the minute true dollar amounts entered the conversation, I scampered away. Partially, it was because I didn’t want to admit that I wasn’t making any money; as my former classmates raked in six or seven figures in banking and consulting jobs, I was burning through my savings and piling up credit card debt trying to chase a dream I hadn’t even settled on.
Sitting in the audience at food conferences, listening to founders talk about their paths from start to sustainability, I hoped to hear my story echoed in one of theirs. So often, their successes sounded like press releases, a combination of “market fit” and sheer luck that felt hopelessly unattainable. As I took the first steps to starting my own two businesses, a nonprofit production studio and a culinary consulting business, I became acutely aware that I had no solid benchmarks for anything: what to charge, what margins to aim for, what revenue targets to goal-set against. Investment criteria and the realities of startup funding were “inside knowledge” I could not find—not even with my degree in finance.
Let’s face it: Food entrepreneurship is not accessible to all. Money is inherently tied to privilege, where social connections (from an elite school, for example) and generational wealth (from one’s family and friends network) provide a gateway to potential investors and donors. Even with the right introductions, race, gender, and age can be factors in who is able to call those same investors and donors to action. TechCrunch reported in 2016 that women made up only 7 percent of VC partners, and over 85 percent of venture-backed investments in 2017 went to all male teams (or male individuals). Meanwhile, less than 1 percent of venture-backed businesses are Latinx or Black-owned.
What did I need to know as a young woman of color who wanted to be my own boss? In order to find out what was happening behind the curtains, I had to ask directly. That’s why I interviewed 10 other founders—people behind food companies both new and established, local and nationwide, thriving and now-shuttered—about their experiences navigating the ins and outs of financing a business. Take this as a field guide for aspiring food entrepreneurs, from rustling together start-up funding to navigating the sometimes inscrutable worlds of crowdfunding, small business loans, accelerators, and venture capital.
Be prepared to risk it all
The greatest irony of entrepreneurship is that it is expensive. Before the very first blip of revenue ever hit my bank account, I had spent that amount five times over, months before. I withdrew my paltry 401(k) from two years in management consulting and ate the fees to be able to pay one more month of rent on my apartment—and that didn’t even include other living expenses.
“From the onset of the business, there are ‘on’ costs,” explains Scott Norton, co-founder and CEO of Sir Kensington’s, an upscale condiments brand he started in college with classmate Mark Ramadan. The two began with ketchup tastings in their dorm room and quickly realized they needed to raise money. “We didn’t have any money to invest as students, but we needed money to pay for working capital, basic overhead, logistics, warehousing, wages—[things] you would not be able to get credit or a traditional loan for.”
This need for funding is not lost on lenders, but according to Pooja Bavishi, founder and CEO of Malai Ice Cream, raising money can be difficult for a food start-up. “The food industry is seen as such a high-risk industry in the eyes of traditional financing options. They aren’t going to take a chance on you the way they may for tech.”
That means that the money usually has to come from the founders themselves. Alice Cheng, CEO of hospitality jobs and networking platform Culinary Agents, tells me she cashed out the entirety of her 401(k) from a 13-year career at IBM to start her business in 2012. “This is when you ask yourself, are you all in?” she says. “How much are you willing to personally sacrifice?” Morgan Johnson, President of Ample Hills Ice Cream, an artisanal ice cream shop started by husband-and-wife team Brian and Jackie Cuscuna in 2011, echoes the same sentiment: “Brian and Jackie put in $225K of life savings to open up [Ample Hills] after Brian’s 40th birthday as a catalyst to seek a different career.”
Some founders without cash turn to credit. Brian Bordainick, former CEO of Dinner Lab, a now-closed membership-based dinner club, says he and his co-founders pooled $30K to $50K on their credit cards to build the initial business infrastructure. “We just bought the equipment, and were making it work cooking out of an apartment,” Bordainick says. “We were all moonlighting and just wanted the opportunity to pursue [this idea] full time [...] because we felt there was something there.”
Expect to hit up friends and family first
Tens of thousands of dollars may seem like a lot of money, but for a new business, that is just barely enough to get started. Most founders I spoke to said they began looking for external funding within the first two years. This is colloquially called a “friends and family” (F&F) round, although it typically also includes investors like angels, or high net-worth individuals who invest in businesses.
For many young business owners, this stage entails a somewhat uncomfortable shift from believing in yourself to asking others to believe in you too. “These people are investing in you,” explains Andrew Jacobi, founder & CEO of the now-shuttered Untamed Sandwiches. As a first-time restaurateur, he didn’t have the metrics or history to pitch the usual circuit of restaurant investors, but after months of cold emailing, meeting up with former colleagues over coffee, and conducting mini-tastings for interested parties, he finally strummed up enough support for a $500K round. “I talked to 300, 400 people,” he recalls. “Only 12 said yes.”
We have all heard the stories of founders from wealthy, well-connected families who seem to breeze through fundraising. As Quartz reported back in 2015, “the most common shared trait among [successful] entrepreneurs is access to [capital] and connections that allow for access to financial stability.” This monetary cushion can also afford founders higher risk tolerance, a mental trait that’s often associated with successful entrepreneurs. But for those of us who weren’t born into that world, grit and perseverance are everything—and researchers have found that being an entrepreneur can actually increase your risk tolerance over time.
Cheng, the Culinary Agents CEO, encourages new founders to go out and tell everyone and anyone about your idea, because “You never know who you’ll talk to.” She met the investor who would eventually lead her round (or put in the most money) at a networking event; despite Culinary Agents being outside his general portfolio of investments, he signed on board after she followed up with monthly progress reports.
Figure out the kind of funding that makes the most sense for your business
“What is the business I want to build?” For me, it came down to social impact and a mission beyond money; I took a hard look at the profit/loss statements of my events and saw that if I wanted to turn it into a scalable, high-ROI (return on investment) business, I would have to sacrifice much of why I started the business in the first place, and decided to pursue a nonprofit path.
For Ori Zohar, co-founder of mission-oriented single-origin spice company Burlap & Barrel, growing slowly and steadily as a for-profit through a mix of reinvesting in the business using its own earned revenues and Kiva, a loan platform aimed towards low-income entrepreneurs, made the most sense. A second time founder, Zohar had learned the hard way after accepting venture dollars for his first start-up and taking “on an unhealthy level of expenses to subsidize aggressive growth at a short term loss.” Eventually, the company collapsed.
With Burlap & Barrel, he decided to change his approach. “We are a Public Benefit Corporation, which means we’ve decided to build a business where supporting our partner farmers is tied into our success,” he says. “Bootstrapping our business has come with certain trade-offs—paying ourselves just enough to get by, for example—but it's worth it for the control that it gives us over the company's strategic growth.”
Mackenzie Barth and her co-founder Sarah Adler, both recent undergraduates-turned-entrepreneurs, faced a similar crossroads as Spoon University saw its initial burst of success: “We had to decide: Do we want to try and grow fast, raise fast, build something really big?” They ended up deciding to apply for TechStars NY, a startup accelerator program that bridges the gap between startups and the world of venture capital. “We had heard multiple nos from VCs at that point,” Barth recalls. “We needed the guidance, focus, and tools to get to that next step.”
For Spoon University, the results of TechStars spoke for themselves: “It was rapid experimentation [during the 12-week program], constantly testing, killing things to see what worked,” Barth says. “We started with 200K unique visitors to the [Spoon University] site, and by the end, we were at 2 million.” This isn’t just for the founders’ benefit, as accelerators take an early monetary stake in the business as well: TechStars invests $120K in cash for 6 percent equity of the business; Y Combinator, another accelerator, invests $150K in cash for 7 percent, and the food-specific Food X offers $65K cash, along with a business development and mentorship program worth $50K, for 8 percent.
At these prices, each company’s overall valuation (or monetary worth) is calculated to be $2M or less, which can mean that some business owners are accepting less money for each percentage of ownership in their business than they might otherwise. “There is cheaper money out there, always, if that’s the only thing you’re looking for,” explains Peter Bodenheimer, Program Director of Food X. The bigger concern, he argues, should be program-business fit. “[A program like ours] is looking for a timeline that is accelerating with money and speed, leading to an exit [where founders reduce or remove their stake in the company by selling the business, merging with another, being acquired, or shutting down] or other liquidity event [in a few years’ time]. If that’s not [the founder’s] goal, then bringing VC in can lead to misalignment.”
Since I had a background in finance, the concept of using both equity and debt (in the form of loans) to fund a business was drilled into me early on. But the reality is that debt is often unavailable to founders in early stages, something Malai Ice Cream’s Bavishi describes as a “chicken and egg” problem. Banks use checklists to determine if a borrower is worth lending to, taking into account available funds, physical assets, or a strong business credit line—all things most first-time entrepreneurs without family wealth often lack.
Even Small Business Association loans, specifically created to help new entrepreneurs, can be difficult to obtain. “SBA loans are less expensive than a traditional bank loan, because SBA will guarantee a large part of the loan,” Jacobi explains. “But the SBA lenders still must put you through the same credit evaluation process.” Despite having four brick-and-mortars by the time his application for Untamed Sandwiches was reviewed, Jacobi says his loan was denied. “It was just a big waste of money and time,” he tells me.
When debt and Friends & Family aren’t an option, crowdfunding can fill the gap. “I was 22 when Nomiku started,” says Lisa Fetterman, co-founder and CEO of the sous vide appliance and meal-kit company. “All my friends and family were broke chefs or students.” After maxing out their credit card limits and unsuccessfully approaching over 80 venture capital investors for money, she and her co-founder husband turned to crowdfunding to build their first batch of machines. “We made $1.3M over two campaigns on Kickstarter, $600K in three days,” she says. “That traction put us over the edge [with investors].”
To date, Nomiku remains one of Kickstarter’s most successful food-based campaigns. While Kickstarter operates on an “all or nothing” model, where businesses that fail to reach their targets don’t receive any of the money raised, other crowdfunding platforms—including food-specific ones like PieShell—offer more flexible milestones. Rob Laing, founder and CEO of Farm.One, a specialty indoor vertical farm, raised just shy of $500K on equity-based crowdfunding platform StartEngine last year after putting $30K of his own money into the business and raising a Friends & Family round of $135K.
Recognize that the VC route isn’t for everybody
Even Barth, whose company VCs were responsive to early on, warns it is easy to “get caught up” in the process and pitch an unattainable vision of growth and scale just to appease investors. Zohar from Burlap & Barrel reminds me that in a world where tech-sized exits in the hundreds of millions or more are seen as the apex of success, food businesses often load up an “unhealthy level of expenses…spending more than they are making,” only to run out of money before hitting any major milestones.
Dinner Lab’s Bordainick knows this all too well: The company shuttered after raising $9.1M and launching in 30 cities in just over five years because the ideal exit—an acquisition by a larger company—wasn’t forthcoming. “We worked on the deal until the 11th hour, but we just needed more time,” he recalls. “I wish we had shored up cash reserves to [allow us to] keep moving forward.”
Joanne Wilson, angel investor and founder of Gotham Gal Ventures, says she’s happy to see more and more savvy entrepreneurs turning away from misguided investments and focusing on growth and profitability first. A business’s runway, or amount of time it can survive without additional funds, has a “certain cadence to it,” Wilson says. “The first and second investment, it’s 12-18 months. After that, you should be raising enough for 24-36 months. Have enough runway to focus on the business instead of always trying to raise more money.”
Johnson tells me that Ample Hills was making $3M in yearly revenue across three locations before even contemplating their Seed round in 2015. It was at this point that the owners needed more money to open a factory in Red Hook, and while it was feasible with the cash they had on hand, “They weren’t wealthy enough to think that if the money went to zero, ‘That’s okay.’” Over and over again, the founders I spoke to said they adhered to the same principle: Raise only enough money to achieve what isn’t possible with the money already available in the business, and know when to stop.
Choose your business partners wisely
Lastly, it’s important to remember that the fundraising choices you make can have a lasting impact on governance. Farm.One’s Laing, a second-time founder, reminds me that “Not that many investors have the skills or experience to add value besides money.” Moreover, they can force a founder’s hand towards actions he or she may not want to take, or remove a founder from power altogether.
Adding new layers to a business is not necessarily a bad thing, but it requires careful consideration. “No entrepreneur wants to give up control of the company, but sometimes it’s a necessary step,” Johnson tells me about Ample Hills’ Series A, after which the original founders no longer owned the majority of the business. “Ultimately, Brian and Jackie wanted to make ice cream that could be enjoyed across the country.”
Just as Brian and Jackie accepted this new chapter in their business’ existence, so did Sir Kensington’s Norton and Spoon University’s Barth, whose companies were eventually acquired by Unilever and Scripps Network, respectively. Norton no longer owns any part of Sir Kensington’s, but he still works as the brand’s CMO, while Barth left Scripps at the end of 2018, after it was acquired by Discovery.
Listening to these stories, I’m reminded of the way entrepreneurship puts us in touch with many of life’s greatest challenges: our anxieties around money, our fear of failure, and our search for a vocation that’s worth putting blood, sweat, and tears behind. As our industry pushes toward a more equitable future, empowering a diverse generation of food entrepreneurs is undoubtedly the way forward—and that makes openness from seasoned founders critical for change, along with the understanding that there is no one-size-fits-all recipe for success. The fighting spirit of being an entrepreneur, at its core, is about believing in something through good times and bad—even when it means it’s time to change course. “Rethink how you are different,” advises Fetterman. “I had to innovate, and for that I’m grateful.”
This article originally appeared on VICE US.