102: Angels, Accelerators, Friends & Family

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Your business is based on something you believe about the world; you believe there is something missing in society, and you are working to fill that gap. That is both admirable and risky. Maybe you quit your job (or you are making tortillas in your kitchen at midnight), and you hope to raise capital so you can go full-time.

Unfortunately, institutional capital does not know you yet. Unless you have done this before, they are not going to back you until you have demonstrated that either (a) you are believable, (b) your business thesis is believable, or (c) in most cases, both.

Once your company gets to some semblance of scale, you have proven to an extent that your belief is credible. Until then, you need people to bet on you personally. Who will bet on you if the people closest to you won’t? What if you come from a background where plenty of people believe in you, but they have no money to back you?

Think harder than that. Think about your former colleagues, your bosses, people from high school, college. Still nobody? Nobody who knows anybody? Nobody who knows a banker who knows a successful founder in a similar space? Maybe you’re not cut out for this after all.

Except you are. Fundraising always takes longer than you think. Start reaching out to angels in your own network who are friendly. Apply their feedback as you expand into your broader network. You were bold enough to endure the vulnerability of putting your heart and soul into a product to see if people would like it. You need to get out there and be patient. Go to farmer’s markets, cold call investment bankers, and keep opening doors. Do everything you can to move your business an inch forward today. Keep going to trade shows and networking events on your dime. Eventually it will happen; just focus on controlling what you can and improve the business daily.

Accelerators

Another reason there are so few institutional funds investing in seed/angel stage concepts is that the check size is so small - it has to be; seldom does anyone invest $10 million into something with no proof of concept. In order to build a VC firm, investors have to raise a fund. The fees from the assets under management allow the VC to pay for people to look for deals, sit on boards, etc. The smaller the check size, the harder it is to raise a fund large enough to justify all the travel and meetings this requires. Accelerators provide some level of institutionalization because they aggregate brands. This makes them attractive ground for angel and seed fundraising.

The food industry boasts an incredible community of people looking to help small brands and technologies grow. Accelerators are formalized communities designed to facilitate the sharing of expertise from experienced executives, investors and consultants toward brands. Some accelerators provide capital, some even provide it “equity-free,” such as Chobani Incubator.

Structure

When you do find an angel investor, it is best not to establish a valuation right away. Instead, we suggest using either a “Convertible Note” or a SAFE. These options allow you to avoid having any implications on future rounds. You can hopefully stick with convertible notes of SAFEs until an institutional investor comes in later. 

Your guarantee to your investors is that the instrument in which they invested is accruing value, and they will receive benefit for investing now instead of waiting until an institutional investor validates you. Their investment will convert into the next round at the value of its principal plus accrued interest (in the case of a convertible note). It’s common to give them a discount of up to 20% on the next round as well to incentivize this participation. 

As for resources, get a good lawyer now. I recommend getting one as soon as you start a food business. There is a lot of nuance that you need to look out for. 

For food startups, I recommend working with Chuck Cotter, out of Boulder, CO or Gianuzzi Group in New York. Full disclosure, Chuck is a friend, but he spends 100% of his time on this stuff and has a great bedside manner. You can tell him I sent you.

Click here to read 103: Venture Capital & Growth Private Equity.

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