April 18, 2016

Raising Capital Without Selling Your Soul (PODCAST)

podcast food small businessMany of us start our small businesses with a broader mission or vision for what we’re hoping to achieve beyond just dollars and cents.    In today’s podcast, we talk with sustainable small business expert and author Elizabeth U about how mission driven businesses can raise the capital they need in an environment that seemingly values the bottom line above all else.


Jennifer: Today we’re talking to Elizabeth U the author of Raising Dough: The Complete Guide to Financing a Socially Responsible Food Business. She is an education specialist who happens to love hiking, surfing and practicing yoga. She is an education specialist for Xero, which is a cloud-based accounting software tool for small businesses. She is passionate and has extensive experience connecting entrepreneurs with the tools, resources and capital they need to launch and grow their businesses.


In fact, it was part of her expertise and background that lead her to realize and lead her to be frustrated a little bit honestly that there was no comprehensive resource out there for sustainable food entrepreneurs about how they raise money for their food ventures. Elizabeth wrote Raising Dough herself. The book can be found through independent booksellers, or by contacting the publisher Chelsea Green. We’ll have links to all of this on the website so that you can find the book for yourself.


She also co-hosts the Xero Gravity podcast for small businesses. Elizabeth, thank you so much for joining us today. I really appreciate you taking the time to answer some of our questions.


Elizabeth: Sure, I’m really happy to be here. Thanks for having me.


Jennifer: First and foremost, can you start by telling us what it actually means to be a socially responsible or sustainable food business?


Elizabeth: Well these are very wishy-washy terms and for me I think what’s important is to realize that many people are launching food businesses in large part to solve social or environmental problems. They may be really interested in filling a need in their community, or maybe they’re doing this because they want to offer a product that’s not available to people, whether it’s around dietary restrictions. There’s so many different reasons why people launch food businesses that really have a certain mission or values at their heart. To me, that’s what’s important; is how you define success and how you define what’s valuable to you. I don’t claim to have the definitive answer on what a socially responsible or sustainable food business actually is, I just want to make sure that everyone understands what’s important to them, so that they can then communicate those values whether it’s to their suppliers or their customers or of course as is most interesting to me, to their potential financial partners.


Jennifer: So speaking of which, when it comes to raising capital I mean this is an issue honestly that from a small business standpoint goes beyond just food, that we are focusing on food businesses here. Have you found that socially responsible food businesses run into issues that might differ from traditional small food businesses that may not be as mission-driven when it comes to raising capital?


Elizabeth: I think often the challenges that small businesses face in general are just like you were saying, far beyond just the food sector. They often run into similar problems. Particularly when it comes to small food businesses and entrepreneurs who have started these businesses out of some sense of a social mission or environmental mission, they have often a different definition of what it means to be successful that is often not the same definition that some of the more traditional sources of capital might have. For instance, traditional financing models generally want to find and reward businesses that are planning on growing as quickly as possible as big as they can possibly get, so that eventually they can either go public or sell to a larger company. That’s how these investors would make their money back. Especially if we’re talking about a small food business that comes into existence for the sole purpose of serving its community, that growth model just doesn’t make sense. So they’re going to need to look to other forms of raising capital beyond the traditional venture capital path.


Jennifer: Can you talk a little bit about what some of those resources for capital are that might be more geared towards the sustainable business model? Or at the very least a little more understanding the sustainable business model when it comes to food businesses?


Elizabeth: In addition to various sources of capital, there’s also different capital vehicles, so different capital tools. For one thing, you may have one investor, let’s say it’s your Aunt Sally. Sally’s got a lot of money and she so she might be one source of capital that can be understanding about your values, but even if you’ve got a sympathetic ear, you still need to come up with the particular capital tool. She might be interested in a friend and family loan for instance, or she might be interested in some sort of revenue sharing model.


There’s two answers to that question, one is who are we looking at to raise that capital from? And which types of investors might have the greatest chances of understanding your values and being able to align with those values along with the money that they invest in your business? The other thing that we really need to talk about is what are some of the different capital tools that might be better suited toward some of these more socially responsible business models? I mentioned friends and family, like your Aunt Sally, but also some of your most ardent customers, some of your most passionate customers might be prospective investors.


If you’re looking for a group of investors an organization that is really hosting the conversation around the country around what it might mean to support some of the most impact-oriented, some of the most values-based companies that are really addressing local food systems for instance or sustainable food systems, Slow Money should definitely be your first stop. Slow Money is a national organization that used to be part of Investor’s Circle, that’s the longest running national organization of angel investors that are looking to invest in companies that are solving social and environmental problems. Several years ago, the Slow Money group spun out of that and they’ve been hosting local workshops and events around the country, where people who are interested in investing in these types of food businesses that are really supporting building jobs in the community and building soil fertility as one of the impacts of the work of these small food businesses and farms, they’re connecting these investors with the businesses and the farms that are actually bringing about this positive change. So that is a really great place to start the conversation.


Jennifer: That’s a fantastic resource, thank you for sharing that, really appreciate that.


Jennifer: You were talking a minute ago about whether Slow Money being sort of one potential channel for folks to look into, they’ve got their Aunt Sally, can you talk to us a little bit about sort of these different buckets? Just so that anybody listening who may not have a financial background sort of understands a little bit of the difference between let’s say money that you’re receiving from your community, debt financing equity, what those phrases mean? Because I sometimes find that there’s a little bit of unknown-


Elizabeth: Yes.


Jennifer: As I talk to food entrepreneurs, and they’re also afraid to ask because they feel like they should know.


Elizabeth: Right, and actually think to me this is one of the reasons why I’m so passionate about this work, is that I really feel like there is a language barrier between the people that want to raise money and the people often who have it or have the power over how it is invested. All of these things can be described in simple language, and that was really one of the main goals for my writing this book is that I wanted people to really understand the terms that they were signing if they were entering into an agreement with the bank, and how you can learn to advocate for your own values in those negotiations. So thank you, for asking this question and thank you to all of you in the audience who are listening and trying to study up on some of these financial terms. The more you know, the better position you’ll be in in order to again advocate for your own values when it comes time to signing a term sheet.


If you really want to break it down, I think the two most common sources of financing are debt financing and equity financing. But there’s all sorts of other things that come into play. On the very face of it, debt financing means that somebody gives you money now and you will pay them back over time, usually with some sort of an interest rate. Whereas equity financing means you’re actually selling shares of your company to investors who give you a bunch of money up front, again in exchange for a share of the company, and often that comes with some strings attached beyond just that they would want to at some point later on down the road when your company has grown, get their money out in some way. In addition to actually owning that share of the company and wanting some liquidity, so that’s to get their money out at some point in the future, they may also want to have some say in how you manage that company. That’s equity financing in a nutshell.


Beyond that, there are also some times, in rare cases, sources of gift money that may be applicable in your case. Again friends and family, generous customers. In again very rare cases, if your company is very mission and value spaced, you may be eligible for grant money from certain organizations. I think that is a myth that that is available more frequently than it actually is. So gift money is something also to keep in mind. Then, especially when we’re talking about some of the crowd funding platforms, such as Kickstarter or Indiegogo, Barnraiser is one specifically for socially responsible food companies. People are often using these crowd funding platforms as a way to essentially run a sales promotion. That’s another thing to keep in mind is many of these community supported crowd funding methods are in fact essentially fancy sales promotions; you’re just using an online platform to collect the money from your customers and then you would essentially pay them back in the form of product over time.


That’s one other source of capital that can be very helpful. Even a non-technical version of community supported agriculture – people are also using pre-sales structures like community supported breweries or community supported bakeries or community supported coffee shops. You’re essentially selling a subscription to your prospective customers ahead of time as a way to finance purchasing a new piece of equipment for instance, or financing an expansion on your retail store. That’s another bucket as you described it, another financing tool that you might consider.


Then there are things that kind of fall in the gaps between these obvious buckets of pre-sales, debt financing, equity financing, or gift money. One falls in between debt financing and equity financing that I think is a particularly interesting tool for values based companies, is the concept of revenue sharing. It can behave more like debt or more like equity depending on how you set it up, but I won’t get too much into the detail. What it essentially means, is that you are paying your investors over time as a percentage of your whether it’s net revenue or gross revenue depending on how you’ve set it up. So especially for seasonal businesses that might be earning a whole lot more money during certain months of the year relative to other months of the year, it can be a great way to pay those investors back or pay whether it’s the debt investors or the equity investors back, in a manner that’s proportionate to the amount of money that you have on hand. So it can really help you with some cash flow concerns.


It’s often also used as an alternative to equity financing so that there’s no danger that you might at the end of the road find yourself in a position to be having to sell something or go public or sell to a larger company in order to give those investors their money back.


Those are just a few examples.


Jennifer: That’s really interesting, I hadn’t thought about the last one, the revenue sharing model. That’s a really interesting one to think of. I’m going to have to go back and do some more reading on that, so thank you for bringing that up.


Elizabeth: Sure.


Jennifer: Taking out the community-funded Kickstarter, Barnraiser type, if you’re looking for debt financing, if you’re looking for equity financing, or potentially some of these others that fall between the gaps, what sort of documents do these socially responsible entrepreneurs need to have in place before they actually start to go out and look for capital.


Elizabeth: In this case, chances are you’re going to need to fill out the same kind of paperwork as any other type of business; so if you’re looking at particularly traditional, what they call commercial loans – commercial loans is the kind of loan that you might get from a bank. First off I want to say that one of the most common misperceptions is that you start a new business, you need money, you go to a bank and get a loan. Unfortunately, that is not at all the experience that most entrepreneurs have, because banks are actually very conservative lenders and the main thing for them, they don’t care about your mission, they don’t care about how much you’re saving the world or think you might be, they just want to know that you’re going to be able to pay them back. For them, what this means is that want to see at least 3 years of revenue history before they’re even going to start a conversation with you.


When it comes to looking for debt financing, it’s actually far more appropriate for startup businesses to look at microfinance organizations and so by the US … I think this is the Small Business Association’s definition of small business is any business that has less than 5 employees. All startups fall into this category, and so a small loan … You might think that half a million dollars is not very small, but if you’re looking for any less than that chances are the big bank on the corner of your main street isn’t going to want to make a loan less than that. For them, it costs them just as much money to assess whether or not your loan is a good risk for them to take for a big company as it does for your small startup. Your small startup is so much riskier, they’re just not going to make the same money off of the interest on your tiny loan as they will off the large one. They’re not going to waste any time talking to you.


These microfinance organizations are far better geared toward making smaller loans more in the lines of $50,000 and less to startup businesses. In addition to the money itself, or in fact even before they would consider giving you those loans, they often provide a number of financial training courses to make sure that you are ready to appropriately use the capital that they are lending you. Also to make sure that your operations are set up, many of the are also associated with other business incubator type services, so that they can help you connect with different advisors that might be able to give you the advice that you need, help you work on your business plan, and even some of them are food oriented and might even be able to help you with assistance in, for instance, scaling your recipes to the point where you can do them in a larger scale once you graduate beyond your parent’s cook top or graduate out of your own kitchen, for that matter.


Jennifer: To finish off our discussion, and you’ve given us a lot to think about today which I really appreciate, based on your experiences and I know that you’ve obviously worked with companies of all types. Based on your experiences, is there anything that sets successful sustainable food businesses or essentially just sustainable businesses apart from those who set out to be sustainable food businesses but simply don’t either gain traction, don’t gain customer base? Are there any takeaways? So if there’s anybody listening right now who has either started or wants to start a food business that’s very mission-driven, are there any tips that you can give them on things they need to be thinking about in order to become as successful as they hope to be? However they define that word success?


Elizabeth: That is a great question, and I think to answer that I’m going to speak a little bit to my own professional arc.


For ten years I really spent a lot of time trying to help food entrepreneurs raise capital. At first I thought it was because people didn’t know how to invest in these small businesses and so I was working with organizations to help train foundations and lenders and investors and various funders how to support these investments into small sustainable food businesses. Then I thought, well no it’s actually because there aren’t enough of these loan funds or other investment tools to support the effort to invest in these small businesses. So I helped launch a loan fund that was geared particularly toward high-impact social food ventures.


Then I thought, no it’s actually because these small entrepreneurs or even growing entrepreneurs who have growing ventures don’t understand where to look for capital, or how to speak with the people that they find once they are looking to enter into some sort of negotiation with prospective investors. So I wrote my book as an attempt to map out all the different options and how you would determine whether or not any of them is a good fit. Then once you have determined which might be a good match for you, how you would go about accessing that capital.


Ultimately, what I discovered is that no amount of passion and no foolproof mission statement or vision is going to protect you from the fact of the matter that if you are starting a business, you need to have a clear sense of how the business is doing and a clear sense of which of your products have the best profit margin. Is this product actually making you money? Or is it costing you money? So time and time again I would see these entrepreneurs who were so passionate but really didn’t care enough about the numbers, and weren’t paying enough attention to the numbers. They didn’t understand their financials, they didn’t understand how to look at the reports that their accounting software was generating for them, or they weren’t using any kind of accounting or bookkeeping system at all.


That’s actually how I ended up working at Xero, because I realized that if we really want to help these sustainable food entrepreneurs at scale, and really grow to a point where they are making an impact not only in their own lives but in all of our lives and to the planet as a whole, they need to understand what’s actually going on in their businesses. I was so excited to find Xero and see how, forget about the brand name, any system, even if it’s a pen and paper in a ledger book or a spreadsheet, that is forcing you to have the discipline to understand where the money is going and where the money is coming from, and even give you visibility into who have sold something to? When is their invoice due? Are you actually calling them up to say, “Hey you owe me money, your invoice is overdue.” So many people loose money just because they aren’t keeping track of who owes them money and they aren’t making those collections phone calls, or they’re paying fees on bills or late fees on their credit card payments just because they’re not keeping track of their bills.


At this point I am convinced that the thing that really makes successful businesses stand apart is that in addition to having the passion and competence at whatever it is their business is doing, they also have the discipline to keep track of the books, make sure they’re reconciling their bank line items as they come in, and keeping track of all of the numbers behind the scenes in some sort of system.


Jennifer: I would say absolutely, I found in my experience in working with entrepreneurs that at its most basic, those numbers are the foundation of your business and whatever product you’re producing that’s all wonderful but if you can’t get that foundation stable, you simply don’t have a long-term business.


Really excited to have had the chance to talk to you today. Thank you so much, and again we will have a link to Elizabeth’s book, Raising Dough: The Complete Guide to Financing A Socially Responsible Food Business. We’ll also have a link to the Xero Gravity podcast that she co-hosts, and to Xero which as I mentioned is cloud-based accounting software for small businesses.


Thank you again, really appreciate your time and all your insight and expertise.


Elizabeth: Thanks so much for having me, it’s really been a pleasure to be here today.


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