Ask a Financing Expert: Jarred Maxwell, Foodshed Investors
The world of food business financing is an immense one, and it can be scary for entrepreneurs to navigate it alone. Enter Foodshed Investors, a formerly Austin-based but newly national investment network and advisory services company. Since their 2015 inception, they’ve helped facilitate funding for 60-70 companies through two channels: an angel investor network, and their knowledge of the funding ecosystem for small food businesses. We sat down to talk to Jarred Maxwell, a principal, about the diverse sources of capital available for entrepreneurs.
What does FI do?
We started off as just an angel investor network, and we still do that function. But one of the things we’ve done from the beginning is to help companies realize the entire funding ecosystem, and tap into that ecosystem. A lot of people think, ‘I just need to go talk to angels to get some money,’ but that’s going to be the most expensive money, so it really should be your last resort.
An example of that: we had a company come to us and ask for angel funding, willing to give up equity for seed capital, and we decided that they were actually a way better fit for a USDA Value Added Producer Grant. So we put them in touch with a grant writer that we know, and they got a $250,000 grant as opposed to taking on equity financing.
So that’s how it started out: helping businesses put together a fundraise and find out where to get the money they needed. But then, as we went along, especially in the food space and the further upstream you get, we realized that entrepreneurs needed more advising and guidance than they really did money. After realizing that was a need, we decided to go fill it, and built our the advisory side of what we do. So we do everything from a virtual business partner role to fundraising readiness.
You’re different than other kinds of investment groups since you’re associated with Slow Money, correct? Is it true you wouldn’t be looking for the same kind of growth that another investor would?
The reason that we got into the space and have found ourselves successful is that there isn’t anybody else looking at people that aren’t trying to go be the next greatest and biggest thing. We actually don’t want to work with companies, for the most part, that have that mindset. We want to work with companies that want to do good things, increase the supply of local food in their community, and support business that produce those local foods in the community. I don’t really care if you ever end up on Whole Foods’ shelf. That sets us apart from lots of other investors. We are focused on sensible, responsible growth.
The FI website is very rich with resources. Where else should someone start to gather information about food business financing?
Don’t just go on the internet – there are many resources at the city, county and state level for economic development. An example is that in Austin, they have a loan fund through the city. They will loan a small business what equates to $30,000 per full-time position that is created as a result of the funding. So if you’re doing something to grow your business, and for that growth you’ll be able to employ an additional two full-time employees, the city will loan you up to $60,000 interest-free towards that activity. There’s all kinds of opportunities like that, that people don’t know about or think to look for.
They think, ‘I need money to grow my business, let me go to the bank or call an angel group,‘ when really there’s economic development groups, there’s community development financial institutions in every region, and there’s lots of grants that go unclaimed. We’ve tried on our website to list all of those components of the funding ecosystem for food businesses.
What does a good relationship between an investor and an entrepreneur look like? What about a bad one?
A good relationship involves trust, alignment, and information sharing. Something we tell folks to think about whenever they start to talk to investors is that they need to do just as much diligence work and research into those investors as those investors do to them. They may be bringing someone into their company as a partial owner, and that’s not something you can get out of quickly.
You really have to build up that relationship back and forth with a lot of understanding, trust, and transparency. This includes insuring that the investors are aligned with your vision, growth trajectory and long term goals for your company. Every time you have a bad relationship with an investor, it’s because one of those – trust, transparency, and information – isn’t there (or everyone’s goals have gotten out of line).
What does due diligence into a potential investor look like?
If it’s possible, try to talk to other founders of companies they’ve worked with before. Find out what it’s like to work with them. Find out how hands-on they are. Especially in food! Food is a space where there’s a lot of dumb money coming in. It’s a hot category, and there are a lot of people who don’t know anything about food who are trying to invest because it’s trendy. Dumb money isn’t going to help an entrepreneur that much.
Very few just need dollars. Most need network connections, mentoring, and oversight. That’s where diligence comes in – to make sure the investor can bring those things to the table, in a way that isn’t disruptive or toxic to the company.
Do you have any advice for how food businesses can set up their operations or financials from Day 1 to set themselves up for success?
Yes! Use an accounting software from Day 1. Don’t use a shoebox method, don’t just count receipts at the end of the month. You really need to show a true understanding of the financial drivers of your business. One of the farmers we work with can tell us how many dollars of revenue, and his cost, and his eventual gross profit, from each linear foot of radishes that he grows. That’s the level of understanding that an investor is going to want to see. They want to understand how it is that you’re going to take that money, do whatever it is you say you’re going to do, and then eventually return that money.
A lot of people just say, ‘I just need some money to buy more bottles that will lower my production cost in my bottling runs, and therefore I’ll make more money and I promise I’ll pay you back.’ We’re looking for hard numbers. Know how much you’re paying per bottle, what a broken bottle represents as a percentage of your cost of goods and production, how you’re going to sell those additional bottles. You can’t be too specific.
Excel spreadsheets are great early on, by which I mean the first four months. But then you really do need to switch over to some kind of accounting software. We recommend highly that someone actually hire a bookkeeper from day 1. They’ll pay for themselves over time, as they will allow your financials to become a tool that helps you run your business, not just a hassle.
During an investment deal, are there third parties involved, and who pays those fees?
If you go with the crowdfunding method, which we recommend quite a bit, the portal handles everything for you. They have a legal staff and others who oversee and help you do reporting. Their fees range from 5-10% of whatever the raise is.
If you do a traditional angel raise, you’re going to need a lawyer to help you draw up the term sheet or review a term sheet that comes from the investor’s lawyers. You’ll probably need to spend some time with an accountant or a CPA. Depending on how tricky the raise is, if you get into equity and things like that, you need a CPA because there can be really terrible unintended tax consequences.
And that’s probably about it. Your lawyer will wear a lot of hats, like reporting with the SEC after you close. There’s rules that you have to follow during your raise depending on which exemption you’re using. You’ll end up running a large lawyer bill, and that is paid for by the company. Usually, you’ll roll that cost into the raise. If you need $100,000 and you know it’ll cost $10,000 to close, you’ll go raise $110,000.
What are the qualitative aspects that an investor is looking for in an entrepreneur?
It varies by investor. For me, the financial piece is about 20-30% of it. The remainder is the entrepreneur and the team. It’s infinitely easier for someone who’s done it before to go out and raise money for something they’ve been successful at in the past. I want to see that the entrepreneur, or someone on the team, has done this before in the same space. Your past experience and what you’ve been able to do means a lot.
If a company comes to us and says I’ve got this hot new ready-to-drink product, we’re going to try to grow it and exit it to Nestle. If that’s your plan, you have to have someone on your team who’s done something with that kind of massive and rapid growth before. That in itself is a totally different funding mindset, raise, and beast from someone who sells to the farmers market and wants to grow enough to get into their local retailer.
Once an investor and a company have agreed on a deal and are engaged in a relationship, how does it evolve and what kind of reporting is required?
It depends on two things. One is the confidence of the financial understanding of the entrepreneur. If we have an entrepreneur that isn’t really great with financials, we want them to report more often, because we want to try to help with those. We’ll give feedback in more of a teaching capacity.
Larger investments require more reporting as well. If we’re investing $1m in something, we want much more reporting than when we give someone a $20,000 loan. It also depends on how you do your raise! Crowdfunding reporting requirements are different.
And our readers are welcome to reach out to Foodshed Investors for your services?
Absolutely. All the way from strictly putting together a raise to a virtual business partner relationship. To give you examples of what we do, we’ve done a full financial deep dive and restructured someone’s books and financial management. That was a few thousands dollars a month, which is absurdly cheap in comparison to other services.
But we also have a few farmers that keep us on a $250/month retainer so that if they have a question, they can pick up the phone. Farmers who are doing it on their own, it’s nice for them to have somebody to bounce ideas off of. That’s a service we offer for an extremely nominal fee – to have us around for whenever and whatever they need.