April 4, 2019

Plotting A Map For Food Business Financing (PODCAST)

Today we are speaking of Tera Johnson, the founder and director for the Food Finance Institute. A serial entrepreneur herself, Tera’s mission is to create the next generation of environmentally and economically regenerative food and farming businesses. She founded teraswhey(r) and is the host of the Edible-Alpha podcast and, as you’ll hear, has first-hand experience in creating a successful investor-financed company. Tera is a frequent speaker, teacher, and financial consultant to sustainable food and farming businesses, social venture funds and investors.

Jennifer: Tera, thank you so much for joining us today.

Tera: Oh, thank you for having me.

Jennifer: I’d love to start this podcast by having you tell us about the Food Finance Institute and how the Food Finance Institute and you and your team are working to help food businesses.

Tera: Sure. I started the Food Finance Institute after I sold my own company, which is the national brand Tera’s Whey. If you go to a Whole Foods, or a … I call them the hippie co-ops, or yeah, or GNCs, anywhere in the country, you’ll see that brand these days.

Yeah. It’s now the number-one brand in the natural category, which is something I never … It was the big, hairy, audacious goal when I started, because there were over 200 brands.

Jennifer: Wow.
Tera: Yeah, isn’t that crazy? It’s crazy to me, and it’s number four of any brand of whey protein. Yeah. That’s any brand. Right? Yeah. But-

Jennifer: Ah, that’s amazing.

Tera: Yeah. Yeah. This is all relevant, because I had to raise $14 million to start Tera’s Whey, because I had to build a factory. There was no place to process organic whey at the time. That was the crux of the business model. There was no incremental way to start that business. I learned everything. I tell people I don’t even like money, and I had to learn so much of it to do that.

Yeah. Then, I had to raise more money in the pit of the great recession to support a national brand rollout, because we ended up doing that, ironically, much faster than we anticipated, because Whole Foods took us nationally right out of the gate, virtually nationally.

It takes a lot of money to support a rollout like that. I mean, people at the time … Now, this was 2019, people were telling me, “Well, you’re going to need about a million bucks to support it.” I was like, “Oh, no. Bailing wire and duct tape. I’m from the Midwest. We do everything on the cheap.” And it took a million bucks. Now, it’s more than that. I think it’s at least a million five.

Anyway, when we sold our company, I had investor money in. That’s the trajectory you’re on once you do that. When I sold my company, I was trying to figure out what I wanted to do next. I’m too young to retire. I really wanted to work with other entrepreneurs and help them on this money piece of the equation. Because of specific things with food businesses, you constantly need to bring money in from the outside to support their growth. It’s not like in software, where once you invest a bunch of money up front to develop the app or the software, and then your cost of goods is virtually zero, right? Every time you sell a license.

Food isn’t like that. We got to keep buying ingredients to make the food all along, and we have to make it, and there’s a whole bunch of issues with how equipment gets financed and that it’s not incremental. Right? It’s lumpy.

Jennifer: Mm-hmm (affirmative).

Tera: Because of all of that, financing food startups is really different, and the people who do a lot of mentoring and advising for entrepreneurs in tech really don’t understand food, and so that they are well-meaning and give a lot of advice that’s not particularly relevant to the food entrepreneur scene.

When we sold Tera’s Whey, I said, “You know, it is this money thing that I am probably the most uniquely situated to help people with.” I started the Food Finance Institute, and at the time, we were in the University of Wisconsin extension. Now, we’re just in the system, it’s called, which is the overarching entity for the university.
Tera: I mean, I could’ve done this on my own outside of a university setting, but I wanted this expertise to be accessible to people who couldn’t afford it in the private sector. The kind of work I do with clients, historically I’ve done with clients, anyway, has been the kind of work that investment banking people did. But it’s like investment banking light.

I mean, certainly not, we’re not investment bankers by any stretch of the imagination. But we understand the process, and we can help people get ready to raise money. That kind of expertise is hard to find, in particular for food.
Tera: When we started the Food Finance Institute, I was doing one-on-one consulting. What I was doing is working with food companies that needed to raise money to grow. My joke was that people would come to us after they’d lost money for three years and were tired of it.

It’s not unusual, right? That food startups lose money for a while, for a bunch of reasons. That scenario is not uncommon. I soon realized that there was way more work for some like this than I could do on my own. Then, the next question I asked myself was, “Okay. So, there’s more work. I could raise a bunch of money philanthropically and through grants and that kind of thing to support more people doing consulting, or I could try to build out a network of people around the country who could do this kind of work who were already consulting.”

We chose the latter approach, and I developed a consultant training that I do. I’ve bene training people around the country. Those people might be extension agents who are all over the country or small business development center business consultants or people who work for NGOs and non-profits. It’s a really wide range. And then some just really straight up, hardcore, private sector consultants participate, as well, which is … That diversity is incredible in the trainings that I do. What I’m working on with people is bringing them more knowledge about how you make money in food, and then how you package financial requests and how you get people ready to raise equity. There are three pieces to this.

A lot of the clients that people work with never go on to raise big equity. They want to do a smaller, local food company of some sort. But they’re probably going to need to raise debt. One of the things that I talk to people about is the fact that pretty much every food company needs to have some kind of working capital line of credit, or at least be working their way to that, because of the nature of food. We don’t actually eat the same amount of food all year round, so sales go up and down in a pretty predictable way.

Jennifer: They do.

Tera: For that reason alone, people need working capital access, and they need a banking relationship. There’s a lot of work for a small entrepreneurial company that goes into getting ready to do that.

Jennifer: As you said, there’s a lot of work, even if you’re not planning to necessarily raise $14 million, like you went out and did.

Tera: Yeah. I would not recommend to most people to even try to do that. It was an unusual situation, because I did that after having run a $50 million … We had 50 million in sales, that scale of a company, in the dairy industry, where we were processing whey for animal feed. I was really uniquely set up and qualified, and I had the right relationships. It’s unusual that people would invest in something without proof of concept the way they did with me.

But anyway, yes, what I did was really unusual, and most people will never do the big equity thing. But that doesn’t mean it’s not complicated. I tell people $150,000 shockingly doesn’t get you that far with a food startup. That’s already quite a bit of money, and will probably involve multiple sources of capital. People think, “Well, I’ll just go to a bank, or I’ll just do a Kickstarter campaign.” The truth is you got to do both of those things and probably some more things to get to 150. Most people do.

Jennifer: You’ve mentioned debts, you’ve mentioned equity financing. For folks who may not be aware, what is debt financing versus equity financing, and where does Kickstarter fall in all of this?

Tera: Yeah, that’s a great question. Yeah. Money isn’t money isn’t money. We think it’s all created equal, and it isn’t. The first big difference is debt versus equity. Debt is a contractual obligation that says, “I’m giving you this money, and you’re going to have to pay it back to me in some kind of term … it’s … and usually at some premium, which we call an interest rate.” Right?

That is a loan, is debt of all kinds of … There could be all kinds of variations of that. If you start your business, and your mom gives you some money, often I see those look like loans. They don’t just outright give people money. Maybe they don’t expect it to get paid off very quickly or at all, but it’s still a loan. That’s debt. All the way up to some kind of debt from some kind of community development financial institution, CDFI. They tend to be very active in … They’re called different things. They all have their own names, so you can’t really tell that they’re a CDFI. But they are going to be the most active lenders to really young startup companies. They tend to be very local, in local communities. An example here is WWBIC, Wisconsin Women’s Business Initiative Corp, who doesn’t just lend to women anymore. They have lots of training opportunities for entrepreneurs. Yeah. It’s the first stage of lending for people.

Then you grow out of that, and it’s looking at a relationship with a credit union or a bank. Probably not a big commercial bank at that scale, but a local bank. That’s all debt.

Equity is the other possible kind of money. Equity is typically an investment of some kind. At that point, you’re having a partner in your business, or somebody else who is going to own part of the business. From a financial point of view, though, bankers look at anything that comes in as cash as equity on the balance sheet. Because it will show up as short-term cash coming into the business. That’s where something like Kickstarter would come in. If you need to raise like $15,000 for your business, some kind of crowdfunding mechanism like Kickstarter is a way to do that. What’s interesting about that is you have to … To be legally compliant under the SEC requirements, you have to give something to somebody in return for it. It can’t just be an outright gift.

Jennifer: Oh.

Tera: That’s where you’re giving T-shirts and all that stuff.

Jennifer: Oh, okay.

Tera: Yeah. There’s actually a legal reason why they have to do that. Isn’t that interesting?

Jennifer: That is.

Tera: Yeah, yeah. Who knew? We thought it was just to get the T-shirt. Yeah. Or the mug or the sample product. Anyway, those are set up that way. What I like about Kickstarter is not as much that it’s a vehicle to raise a lot of money, but all of the work that the entrepreneur gets to do to be ready and successful at that, like having a marketing video, and having a good electronic database of people they know who they can do outbound promotions to, and having the infrastructure to do that, that lives on after the Kickstarter campaign. Right? They can use that in their marketing on an ongoing basis. I really like that about Kickstarter.

Anyway, that money, though, presuming you’re successful, then you get your 15,000, and that comes in into your business as cash. Yeah. There’s a whole continuum similar to having the continuum on the debt side. There’s a continuum of vehicles that are equity or equity like.

Jennifer: With all of these different vehicles, can you talk to the importance … if there’s somebody, let’s say, who’s listening just starting up or thinking about starting up, know that they might need financing down the road. Actually, I want to talk about that in a minute, too. But if you’re just starting up, does how an entrepreneur structure their business, whether their an LLC or a C corp or S corp, or sole proprietor, does that impact what financing options they have available to them?

Tera: Yeah. That’s a great question. I rarely have the opportunity to work with startups in FFI. We’re more typically dealing with people who aren’t raw startups. Right? But the idea, what I talk to people about is paths in food business. The typical scenario is people think, “Wow, I have this great recipe. I’m going to make this great thing.” Right? And say, I’m just going to use this simple example, like salsa. Right? I’m going to make this salsa, and I’m going to sell it in grocery stores. That seems to be the place people go. But that’s just one business model in food. Right? There’s lots of options with business models in food. What business model you are pursuing, that path, says a ton about the money you’re going to need, both how much and what kind of money.

These brands of a wholesale product like salsa, that growth path says that, like Tera’s Whey, if you really want to be this big, national brand, you’re going to have to raise $1.5 million. It tends to be for working capital. You know? That’s to handle your payments receivables, payables, inventory, that kind of stuff. Not a lot of collateral there. They have a harder time scaling with debt and need to use a lot of equity in that business. That choice about, the minute you choose that path, you’re choosing a certain path for the money, if that makes sense.

Now, if you are a small entrepreneur, who is like, “Okay. I’m in a smaller …” Madison has about 500,000 people, maybe a little bit more than that, our metro area does. What I find is that, for that size … and we are very foodie oriented here, local foodie … We’re really into it. Consumers embrace these brands, but it’s very difficult. We don’t have enough people here to sustain a wholesale brand in the city, for the most part. You have to grow beyond that, which people don’t tend to realize.

Anyway, but say I’m working with somebody, and they go, “No. I really want to be a local business. I don’t want to do that.” I’m like, “Well, you’re not going to probably have enough … There aren’t enough people here to get enough scale in your business here, so why don’t we think about something that is more vertically oriented, where you can sell direct to consumers, so you’re not selling at wholesale prices, you’re selling at retail prices.” And what would that business model look like?

That business model might be … It might be, I had a client who was making candy and toffee, and she decided she didn’t want to do the national thing, and so she opened up something here called Chocolaterian, which had a viewing kitchen. She was making her wholesale product, but people could look in and see it. Then, it was also a patisserie, which by the way, turned out to not be the European model of one of those where people go in the morning, have coffee and read the paper. It turned out in Madison people wanted to go and eat chocolate after dinner and drink red wine and listen to music.

Jennifer: Interesting.

Tera: Isn’t that interesting? Yeah. But that’s an example of somebody as an entrepreneur, who said, “Wow. I thought I wanted to be on this path. I really don’t, now that you tell me how much money.” And I also say you’re going to be living on airplanes, and a bunch of other things. She says, “You know, I like this.”

Tera: That startup is way less money. You’re buying some equipment. You have a lease space. You know? It’s much more likely that you can use local financing for that. Your choices about money are really different then. Business model and money are-

Jennifer: Interesting, Tera.

Tera: Yeah. What your business model path is and what money is appropriate and needed are really intertwined with one another.

Jennifer: Then you had also mentioned this idea of, that you got financing out of the gate, but that that’s not necessarily the norm, and certainly not with bigger numbers. How established, how much of a proof of concept does a food brand need to have before they should start looking for financing?

Tera: I think, I mean, one of the things that we’ve been doing a lot of around the country is to make … the barriers to entry in food are a lot lower than they used to be, because we’ve be doing these shared-use kitchens. You know?

Jennifer: Mm-hmm (affirmative).

Tera: Commercial kitchens. They’re very available around the country, so it is much easier to get a product made and make it in an environment where you could actually sell it, even at very low volume. Right?

Jennifer: Mm-hmm (affirmative).

Tera: Proof of concept can happen easier now. Getting to the stage of proof of concept, and by proof of concept, ideally, I’m talking about the whole business model, not just the product. You have product. It has a label. It’s a compliant label. You’ve gotten a store to take it. You know? You’ve got some sales at a farmers market. If you could get to that stage, you have demonstrated not just that you can make a good product that theoretically could sell and that you could theoretically sell, but you have demonstrated that you’re capable of doing all those things. Right? That seems to be a place where it is possible to start this journey of raising money.

Jennifer: This journey, which is the perfect word for it, how … Sometimes I will get a panicked call from an entrepreneur who is realizing that they’re running out of cash in three days and is struggling trying to figure out how they can keep this business afloat. How long does this journey take? I’m sure that’s different for everybody. But if you in your perfect world were talking to somebody, would you say you want to start six months, a year, or three years? How far out should folks be planning to determine, A, if they’re going to need financing, and then, B, getting all those pieces together that would be needed for that financing?

Tera: Right. I think it takes six months to do this under normal circumstances. I’ll talk about some ways to accelerate that. But I mean, in order to start to successfully raise money … Now, I am not talking about a loan from your mother. Right? Because mom is probably going to do this no matter what, if she can. I’m talking about actually going out beyond that. You need to have things documented. Right? You don’t just go in and say, “I need X amount of money.” Right? There’s a lot of documentation. You need a pro forma, which is that forecasted income statement, balance sheet and cash flow statement, sources and uses of capital table, debt schedule, and it’s forecasting out for three years. It’s showing your capital requirements for three years. This is not something that most entrepreneurs can do on their own. You can’t just make this up. Right? It has to be related to what’s going on and grounded in reality.

Getting all that put together, and then a narrative to support it, that’s what a business plan, in theory, does, takes people a while. It takes about six months, I would say. That’s with people being pretty efficient about it. But that pro forma looks out more than just six months. Right? It’s going out for a minimum of three years. Ideally, people are documenting in such a way that they raise the money that they really need for the next three years. Right? If they beat their numbers, if they beat their plan, they typically need more money sooner, because they beat their plan. Right? Then, they’re going to go through it again and do another pro forma with a whole bunch of more documentation. You know what I mean? This money raising process is a continual thing, actually. It never really goes away as you grow your business.

Jennifer: This raising money … because you also mentioned about trying to raise a million dollars or working to raise a million dollars in the recession, I would expect that how willing people are to either lend money or give money for equity is much different in a recession than at the height of an economy. Macroeconomic factors come into play as well, right? As entrepreneurs look to raise money.

Tera: Oh. Oh, yeah, absolutely. I think out here in the Midwest right now, our conventional farm economy is really in a depression, which is very difficult, I’m sure, from the vantage of point of where you’re calling from in a place like Seattle to even get your head around, when the economy feels like it’s booming the way it is, there is this incredible downward spiral going on in commodity agriculture. That means that a lot of small banks, rural banks, all the Farm Credit people are really locked down and conservative. Right? Some of the value-added farm people that we work with are having a very hard time raising money from lenders, because they’re much more conservative. It’s total macroeconomics. Yeah. Raising equity, too. When we started Tera’s Whey, we started up the plant in the pit of the great recession. Half of the people who said they were going to supply me didn’t. All of the people who had written nine non-binding letters of intent to purchase didn’t, because the economy was just rapidly imploding. We had to create a whole bunch more stuff. Then, we launched to Whole Foods, and they took us nationally. That saved the business in a lot of ways. Right? Because it was such a strong … It was a resounding message that the market wanted this product.

But then I had to go raise a whole bunch more money in the recession. That means talking to more people, and it means working 10 times harder, which is hard to imagine is even possible, when you think you’re already working 10 times as hard. Uh. You know what is other interesting thing I think is it depends what part of the country you’re in. Here in the Midwest, we don’t have nearly as many accredited investors as you guys do on the West Coast. We’re much more conservative here about money, everything related to money. In a place like this, if you have a lot of money, the last thing you want to do is drive a fancy car, because you don’t really want anybody to know. Raising equity, it’s not cool to go to a pitched event for a social thing here, like the people who are angel investors don’t do that here, which is really different than the coasts, especially the West Coast.

My joke about this is that when I sold Tera’s Whey, people in the East Coast were always saying, “Hey, yeah, how much money did you make?” That was the first thing that would come out of their mouths. On the West Coast, people would say something like, “What a cool idea. What a great brand. What is the next brand you’re going to do? You know, can I invest in your next company?” Here in the Midwest, people would look at me and literally say, “Ooh, are you all right?” I was like, “Yeah, I’m all right.” You know? It’s just around here, you start a company so you can have your son take it over. Right?

Jennifer: Yep.

Tera: Yeah. It’s just an interesting thing about money, and added money. But on the other hand, we’re much more accustomed to manufacturing businesses out here, and so the lenders here are really geared up, with the exception right now of the ag lenders, are really geared up to lend to food businesses, because they are manufacturing companies for the most part. More so than the coast. It’s interesting.

Jennifer: That is really interesting. It was interesting to hear you say that, because I am in Seattle, but we spend a lot of time in the more rural agricultural parts of Washington state. Then, my family is also from Wyoming, which is certainly more ranching. It is always interesting just to see not just the differences in industries, but as you mentioned, the differences in the attitude towards money is very different. Then, do you find, because certainly being here in Seattle, I had to laugh when you were talking about pitch events aren’t social events, and here you’re getting invitations all the time, like, “Hey, come have a glass of wine and hear these pitches.”

For folks, especially for folks who might be listening who are living in more rural areas, I mean, do you have any tips on how do they start that process? I mean, because yeah, they don’t have these big investor networks. They don’t have investor events. I would imagine that it is harder for them, or potentially more challenging, to start down that road of raising capital.

Tera: Yeah, it is. There are a bunch of things about that. One of the things is that I tell people that one of the tricks to this for everybody is deal alignment with what investors are interested in investing in. This is particularly important in agriculture, because typically, in agriculture and food that is related to agriculture, like a supply chain business. Grass-fed beef might be a good example of that, where you can’t just suddenly triple the size of your herd. It takes a couple years for an animal to be ready to be slaughtered. Right?

Jennifer: Mm-hmm (affirmative). Mm-hmm (affirmative).

Tera: There’s this delay. That hockey stick growth in the top line sales that a lot of investors look like is just not … It’s not biologically possible in agriculturally tied food companies, never mind agriculture. They have this other thing, where not only are there no sexy events, but there are also a narrower universe of investors who are even interested in this.

What I tell people is be really clear about what kind of money you need. That’s number one. I tell people in rural areas and ag-related things, that the people who understand you the best are probably the bankers. You want to make sure that you are maximizing your ability to use debt first. I’m doing this big grass-fed beef brand, just as an example, and I need to raise two million bucks. I’m pulling this out of my head. Right?

Jennifer: Yep.

Tera: Right. I say, “Okay, um, we got a plan now that says you need two million bucks, and we’re going to go to … the FSA has programs, and Farm Credit has programs, and we’re going to cobble all this together. And that’s now 1.5 million. So, you only actually have to raise 500,000. Then, the next thing I tell people is the people who are most likely to invest in you are people who know your business, who are close to your business.

You start networking, and networking at farm events. There are associations, like the Cattlemen’s Associations. There are breeders associations. You want to know people who have done really well in the industry, because those are people who know the industry, and then you start getting in front of them, and you ask them. They say, “Well, maybe I don’t … I’m not set up right now because of some other stuff, but maybe you should talk to Joe.” Or maybe that one guy will go, “I really believe that you can do this, and so I’m going to talk to my four buddies, and we’re going to have dinner together, and then you’re going to come and look at your cattle.” You know?

Jennifer: Yep.

Tera: It’s a very personal networking dependent thing. But somebody who has a business in ag that’s going to scale relatively in a linear way, right? Because of this cattle thing, biological thing, you could do that same networking process with people in Seattle, in software, and they won’t get it. You know what I mean?

Jennifer: Mm-hmm (affirmative).

Tera: It’s a lot of time that is wasted because the alignment with the investors wasn’t there. The other thing I do encourage people to do is, when I did Tera’s Whey, we didn’t have all these accelerators and pitch events the way that we do now. Some of these are big national events. If there is an opportunity … If you think that you might fit, go ahead and apply. I say that because I do a lot of judging on big national pitch events and local ones, small, local ones. There are always a team of judges looking at these things, and even if you’re not invited to pitch, that means that 10 people who are connected to investors or investing or something have looked at your stuff. Right?

Jennifer: That’s a good point.

Tera: Yeah. Yeah. It’s a way to get the word out about what you do. Right? That I think people don’t realize. I think the other thing I would say about that is this is why you should take the time when you do apply to one of those to be really detailed. I mean, I get it, they usually have these forms that you have to fill out and stuff. But the people who are judging don’t know your business at all. If you’re really not using that opportunity to really lay out what your business is about, then you’ll get skipped over, because there are so many people applying usually.

Tera: Yeah, it’s really important. People spend a lot of time working on their pitch deck, and then they blow off the application, and they never get the opportunity to get to the pitch deck. You know?

Jennifer: Yeah. That’s a great point. As we wrap up today, I wanted to ask. Folks who are listening, and who have been really interested in what you’re saying and talking about working with companies to help them raise capital, what type of companies do you find work best with Food Finance Institute and the consultants and services that you and your team offer?

Tera: Yeah. What’s cool about what we’ve been doing is I’ve been building out this network of people around the country who know how to work on money with food companies in various scales. What we mostly do now is refer out. People will come to us and say, “You know, I’m in Seattle, and I want to … I’m doing this great food brand thing, and I … I really need to … It looks like I’m going to need to raise some equity.”

We will forward them on to people who we we’ve either trained or worked with or something, who we know are good at doing that kind of work. Then, if it’s somebody who just wants to do a small local thing, we have a handle usually on what places to go for that, too. I hold a thing that’s … I call it virtual office hours … on Fridays, where I have half an hour calls with people. It’s just open to everybody. It may take a while get in the cue, but I will get on calls with people, and pretty quickly I can give people a sense of what the big business model questions and issues they’ve got to get sorted out in order to raise money. Or if they’re having trouble raising money, I can do the same thing and get them like, “Uh, this is probably why you’re having trouble.” You know what I mean?

Jennifer: Yeah.

Tera: I can help them a lot pretty quickly. Then, they have to do the groundwork on their own, or with some help from somebody else. We’ll refer. The other thing that we’re starting to do … I’ve developed … I call it a roving bootcamp, because I partner with other local organizations, and by that, it might be a non-profit, or it might be an extension office, or it might be a small business development center, to do a bootcamp, where I come in and I run a bootcamp. I work with a select small group of people. It works best if it’s only about 10 people, and it’s a combination of training and consulting, to deal with this all this capital ready stuff. Then, again, they work with on the ground people then as follow on. That does accelerate that six months.

Jennifer: That sounds like a great opportunity.

Tera: Yeah. Yeah. It’s a great opportunity. I like doing it in conjunction with a partner organization, because these are people who live somewhere who are going to need ongoing help that I … I don’t want to staff up and be an empire. I just want to see things go forward. Right?

Jennifer: Mm-hmm (affirmative).
Tera: Part of the going forward is building up the capacity of the local technical assistance providers to do this work. I think that this is a cool model for doing that.
Jennifer: Again, for folks who are listening, so you can find out more about the Food Finance Institute at foodfinanceinstitute.org, and as always, in the transcript for this podcast, we’ll include links, as well.

Tera: Perfect.

Jennifer: It should be easy to find. Because this is a wonderful resource. Tera, thank you so much for talking with us today.

Tera: Oh, thank you for having me. I’ve really enjoyed it.

Jennifer: Oh, very much appreciate it. Thank you.

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