I’ve raised money about 3 times so far (all in kind of different circumstances) and to be fair, it’s super hard. That’s why generally I partner with someone who likes to raise money. I’m the product guy, and I’d rather take my time creating the product and have someone who actually enjoys raising money, raise money. This also means I’m only giving you a bird’s eye view on funding. Even I don’t know the complexity of raising money that well. It’s an art in itself.
Generally, funding is needed to not only reduce the financial stress of creating a startup but also to accelerate a startup’s growth to the point where it will reach terminal velocity and make people millions. Overall, getting funded is an investment of high risk, and high reward.
Though there are many ways for a startup to acquire money, we’re going through the traditional method in which how most food tech companies gain access to millions of dollars, which follows the software silicon valley model. But because the model is kind of getting its shit kicked out of it, this might change.
In general, one to four founders (lots of debate on what makes a good team, how many people and a lot of nuances in terms of skill, connections, whatever) develop an idea that seems feasible. I’d say that perhaps a Minimal Viable Product is good at this stage but in general, food tech requires a bit more of technical feasibility and confidence because of the upfront cost.
At this stage, individual people or angel investors will give money. People say there’s a rational reason why people are funded at the angel stage but in general, not a big correlation. Overall, investment is a risk mitigation exercise and each stage from angel to exit, has stages of risk mitigation that strengthen over time. Angels generally rely honestly on team comp, market size, if the solution actually makes sense, and as the Jewish say, chutzpah. I’ll say this for sure: serial entrepreneurs have a much easier time raising money. Even if you fail, you have a much easier time raising money than someone fresh.
How Much Can You Get?
I wish I could give you an average round size but after working at Motif Foodworks, I have no idea but in general, a round size gets absurdly bigger and bigger as you go step by step from Series A to Z.
For some examples, Liquid Death started with a seed of $2.6 million and now is in it’s series C or D (depending on who you ask) with their latest round raking in $75million. Impossible Foods, still private, has gone from a Series A of $6.25 to a huge Series H round of acquiring $500 million. I don’t want to get into valuations because eh, I dunno, I’m not a fan of talking in terms of valuations.
But these are insane raises valuations compared to your average food company. In general, average food companies that have less of a tech edge are generally bootstrapped and then raise maybe half a million to a million to get the gears going. In any case, money does the same purpose: speed up tech and scale up. Rocket fuel is dumped onto a kindling fire to ignite enough energy to fly you to the moon.
Round amounts vary but the common thread in funding is to get to the next round, you have to have a convincing story that your product is growing and every steps gets more scrutinous and harder. If your startup doesn’t grow and you’re struggling for cash, you can go into say, a debt round but investors have a lot more leverage when it comes to share.
So as you probably know, funding has a huge correlation to market performance, and its much easier to raise money when the market is going well versus when the market is sinking which we are seeing signs of now. Or not? I’m not sure. Every day tells me something different.
However, it’s not impossible to raise money. A common adage is that when you see people zig, you zag, Warren Buffet famously says. Be fearful when others are greedy. Be greedy when others are fearful.” And guess what? A huge chunk of the population takes this advice.
HonMun is and has been an LP, or Limited Partner who gives money to Venture Capital firms. VC firms then have an obligation to vet startups and fund the startups money In general, the VCs get a lot of the news, such as Andresen Horowitz, or Blackrock, but it’s the LPs that fund them and they are the stakeholders in the funding landscape. Sources of money come from everyone and all have their nuances. Consider royal families like Saudi princes, Teacher’s pensions, and activist funds. There’s still a ton of money circulating around the world.
As we go through My Food Job Rocks interviews, you may hear the word VC and LP a lot so the context helps.
So what changes when we talk about sustainability? A mix of things. As of now, sustainability is a buzzword many investors don’t understand this affects the whole chain of money. The big one? Most think short-term when the point of sustainability is a long-term play.
I believe there was a point before the slowdown where VCs were hunting for sustainability companies because it sounded good rather than it actually being viable and impactful to the world. There are also many ways for people with a lot of money can essentially pump and dump a company. Again, super complicated but the current system incentivizes short-term wins and covering up mistakes rather than the long-term play to improve the world.
Luckily, we are seeing a more thoughtful approach as the mania dies down. Unfortunately, it took billions in losses to see this happen.
Exiting a Company
Finally, exiting is the main goal for most investors. Investors, VCs, and even employees can only really cash out when a company is bought or acquired by another party or if it’s publicly sold such as on a stock market or something. There are so many ways to do this!
You might have heard of the word SPAC, or Special Purpose Acquisition Companies. These are essentially public companies with no product that acquire a company to put them in the stock market. Companies like Gingko Bioworks and WeWork are examples of huge companies that have SPAC’d. SPACing allows companies to skip the “paperwork” to properly exit and pay off investors. These became super popular during the pandemic.
Guess what? Most SPACs have not turned out well. A report shows that out of 199 companies that have SPAC’d, only 11% are currently above offer price. Most SPACs have tanked in the double digits with averages of around a 43% loss. I don’t know the details on how investors take money out of a SPAC, but I assume they are smart enough to, once their company SPACs, take their return on investment and run.
So what’s the point here?
Well, for one, funding a company is extremely difficult and is a whole class of expertise in itself. Even exiting has its challenges. Though funding has its problems, we wouldn’t have what we have today without it. If you’re planning to make a company and you need funding at some point in your company’s life cycle . Only advice? enjoy the journey, not the exit. Don’t go into a business to get rich, but to make an impact.
To summarize, raising money is a daunting task for any entrepreneur. In the beginning, people bet on people, but then they bet on product, and then they bet on scale and it’s ok to bootstrap all of these, but funding helps validate that you’re worth something and takes a lot of financial stress out of your life. But it’s a full time job. I highly recommend if you choose to start a business and you’re a technical person, convince someone to join you. If you can’t even convince one person to drop everything to join you, what makes you think you can convince the world that what you make is great?
Have any questions about funding? Message me at podcast@myfoodjobrocks.com