How Much Money Should You Really Raise?

Given the global pandemic, now might not seem like the best time to court investment. Well, it’s true the current economic climate isn’t ideal and “business as usual” has been thrown out the window. But for food companies that have a real shot at surviving the coronavirus crisis and the prolonged recession expected to follow, raising capital might be a smart strategy. In fact, it may the only way to keep the engine running.

This can apply to both businesses that are struggling a bit (but not on life support) and companies that are crushing it right now. Take, for example, a gourmet cheesemaker that sells mainly to local restaurants and specialty shops. Most of their accounts are closed for the time being, so cheese sales are suffering. However, if the cheesemaker saw a way to build more business by shifting strategies, a little extra cash could get them over the hump.

Or let’s say a small snack brand is experiencing the opposite impact of the coronavirus crisis: through-the-roof sales, especially via its ecommerce site. To ensure the company can keep up with the onslaught of online orders and maybe even take on a new retail account—and do everything in its power keep all those new customers post-pandemic—an influx of cash is probably necessary.

Acquiring additional capital might mean hitting up current investors, meeting (virtually) with potential new ones or pursuing any number of other avenues. Regardless, before an entrepreneur asks for funds—whether in this crazy coronavirus world or during more stable economic times—they should understand exactly how much money they need.

This might seem like something a business could ballpark. But as Tera’s most recent podcast guest explains, it should be a precise figure arrived at through an in-depth examination of a company’s current financial health, goals for growth and plan to achieve that growth. Heidi Huntington, vice president of finance at AVL Growth Partners, says that raising either too much or too little money can really hurt a rapidly scaling food business. When companies over-raise, they often give away more equity than is wise at their current stage. And when they under-raise, they are unable to execute their plans fully, forcing them to go right back out and lobby for more cash.

To figure out actual funding needs, entrepreneurs first must wrap their heads around cash flow. Start by doing a 13-week rolling cash flow forecast, then dig into when exactly money is moving in and out of the business. In the food industry, there are many delays in revenue actually converting to cash in the bank. Costs such as procuring ingredients, securing packaging, financing a big manufacturing run, distributor fees, trade spend—all of these require shelling out money long before that money is made back. Therefore, food entrepreneurs often need more funds upfront than they think they do initially.

Another reason it’s crucial for companies to know their ask inside and out is because they frequently must educate investors on how the whole food system works. Unless an investor is familiar with the nuances of this space and the many cash-conversion delays, they may not understand why an entrepreneur is asking for so much. But when a business owner goes into a meeting with confidence in their numbers and needs, they stand a much better chance of coming away with adequate capital.

Edible-Alpha® wants to help you grow your online sales, whether through your own direct-to-consumer site, Amazon or other e-commerce platforms. Our new FREE course helps food businesses develop an online strategy, considering logistics, operations, marketing, metrics and much more. This vital info can help companies thrive through the pandemic and beyond! View our course here.

And now, our roundup of the best food and beverage finance news, events and resources from around the web…

Consultant With TabletBusiness Model Insights

Raising CapitalRaising Capital

National Wholesale BrandsCPG/National Brands

Grocery Store Produce Section Market Trends Regenerative AgricultureFarming and AgTech

Mergers And AcquisitionsDeals/M&A

COVID-19-Related Resources for Food and Ag Businesses