Armanino Blog

5 Tips to Make Your Food Startup Stand Out

July 26, 2015

Food is the new frontier for innovation.

Thousands of food and beverage startups, not to mention established big-name players, are tackling some of the greatest challenges of our time: Growing and delivering nutritious and tasty food to an exploding population in ways that are environmentally sustainable, affordable and convenient for the consumer.

But innovation comes at a price. Whether growing, processing or distributing food, these companies require hefty investments in land, warehouse space, test kitchens and processing equipment—not to mention payroll and other standard overhead categories.

The good news is that seed money is popping up everywhere. In 2014, 21 food and agriculture funding sources launched worldwide; 26 launched in 2013. But with so many strong food and beverage upstarts—especially in Northern California—how do you stand out from the pack?

Investors Reward Strong R&D
Many young companies are attracting capital because of their sound scientific research and development as well as their strong brands. As of May 2014, three-year old Hampton Creek had snagged $30 million in funding. In December 2014, the company raised another round of $90 million. Today, Hampton Creek’s flagship egg-free product, Just Mayo, is on shelves in Whole Foods, The Fresh Market, Safeway, Publix, Kroger, Target, Walmart and other major retailers around the country.

So what is it about Hampton Creek that has investors lining up? For one investor, Jean Pigozzi, it's the science behind the food as well as the company’s appeal to a growing base of young, health-conscious consumers.

Soylent is another recent success story. Just two years ago, software engineer Rob Rhinehart published on his blog his 30-day experiment in food replacement. After a record crowdfunding campaign that raised $3 million to begin production, a subsequent venture capital campaign secured $1.5 million to develop the proof of concept. In January 2015, Soylent hit the big time with $20 million in Series A round funding.

Soylent’s biggest investor, Andreessen Horowitz, was attracted to the company’s passionate online community. “Soylent is a community of people who are enthusiastic about using science to improve food and nutrition…If you look at Soylent as just a food company, you misjudge the core of the company,” wrote Andreessen Horowitz partner Chris Dixon in a blog post announcing its investment.

Soylent and Hampton Creek are two rising stars that have taken many of the right steps to achieve sustainable growth. But Silicon Valley has seen more than its share of rising stars burn out.

So what can food entrepreneurs learn from the successes and failures of startups that came before them?

“Business is its own wild animal. One wrong move and it can eat you alive,” writes turnaround specialist Chris Baskerville in his Quora article The Top 5 Reasons Startups Fail. Here, we’ve tackled each of these top five pitfalls, along with our take on how food companies can best position themselves to circumvent them.

1.     No business plan.

Enthusiastic entrepreneurs often believe so strongly in the strength of their ideas and their product that they think the market will reward them based on that (perceived) value.

Today, a growing number of food companies are being launched by passionate individuals who ardently believe they can change the world. But without a clearly articulated business plan, these dreamers are likely to fall victim to the other pitfalls on our list.

Our recommendation: Start with the end in mind. Without a business plan, you don’t have a business; you only have a job. Successful entrepreneurs take a long, hard look at their anticipated business models and ask themselves (or a trusted advisor asks them) some critical questions:

  • Who is the target consumer?
  • What makes this product or service better than other products or services already on the market?
  • What need does it satisfy?
  • Why should the target consumer pay for this product or service?

2.     Capital shortfall.

When you’re about to fly a plane, you don’t settle for having 90% of the fuel you’ll need for the trip. So why would you launch your company on a shoestring and believe you can make up the difference later?

Our recommendation: Calculate the amount of capital that will be required to cover infrastructure and fund day-to-day operations during the early years when cash flow will be tight. Remember that investors expect a clear plan for how the funding will be used. Soylent’s plan for its latest round of investment includes expanding manufacturing and shipping capabilities, as well as improving its product and dropping the price. “The company is profitable and doesn’t need additional capital (our favorite kind of investment), but decided to take money to invest in long-term R&D,” Dixon wrote. Who wouldn’t invest in that kind of company?

3.     Expanding too soon.

Startups that make it through the infancy stage often suffer from a common delusion: They believe they are ready to run before they are even walking at a steady pace. During an interview on MSNBC, investor Steve Case of Revolution Growth Group said that expanding too quickly is one of the worst mistakes a startup can make.

Revolution invested $22 million in Sweetgreen, a chain of farm-to-table salad shops with locations in D.C., Virginia, Maryland, Philadelphia, Boston and New York City. But Sweetgreen has taken a “staged, measured, walk before you run” approach to its growth, Case says.

“Our goal with the funding is not to just put it into expansion and just start accelerating,” says Sweetgreen founder Jonathan Neman. “It’s really to build the team, build the infrastructure, invest in our communities, and then when we are ready, be able to expand.”

Our recommendation: When considering expansion into a new market, take the time to get to know suppliers and potential employees, as well as the target customer base, in the new market. For food companies, relationships with local farmers are crucial, Case points out. In particular, the company needs to ensure it has sufficient market demand “so you really can work with farmers in a region to make sure you have the right product to meet the needs of consumers.”

4.     Excessive reliance on debt.

Leverage: Without it, most businesses would never get off the ground. But unless it has a solid plan for repaying those loans, the business may never regain its footing. Many a business has seen cash flow that is sorely needed to cover payroll and accounts payable diverted into ballooning interest payments.

Excessive debt also can kill a potential investment deal. A rising debt-to-asset ratio signals to investors and other underwriters that the company may be struggling. Debt covenants also can restrict what the company can do with its capital, so shareholders are likely to scrutinize this section of the balance sheet.

Our recommendation: Consider whether it is possible to achieve your growth goals without taking on debt. Chipotle Mexican Grill is one example of a company growing aggressively without any debt. (Granted, between 1999 and 2006 Chipotle was a subsidiary of McDonald’s; but now the fast-food Mexican restaurant is its own company.) Today, Chipotle sources its capital requirements for new restaurant construction from its cash and investment balances, as well as cash flows from operations. Most food growers, processors and distributors can’t afford to purchase the real estate and equipment required to launch or grow their businesses. But debt financing might not be your only option. Based on your business model, other sources of funding might include equity financing, such as venture capital and even a crowdfunding campaign.

5.     Poor strategic management.

Entrepreneurs are infamous for going into business because they have a great product. But what about all the other “Ps” of marketing? Do you know how to “promote” that product to your target market? Do you know how to “place” your product—both in the physical realm and online—to get the greatest visibility? What about how to “price” your product competitively and achieve a strong rate of return for your shareholders?

Our recommendation: Don’t confuse knowing your product with knowing your business. Your CPA can bring you up to speed on fundamental accounting principles for business owners. Other sources of training on topics such as operational management and marketing include your chamber of commerce and online courses such as those offered by Wharton University of Pennsylvania. (Check out Business Insider's list of the best free online business courses.)

Don’t Neglect the Details
The food and beverage industry holds substantial upside potential for innovative, well-managed companies. But, as with any startup, a number of pitfalls await the unwary.

One final recommendation on how to avoid those pitfalls: Be meticulous about the details. It’s easy to get so wrapped up in perfecting your product and pursuing investor funding that you neglect important operational and compliance issues that can cost the company dearly in the long run.

Are you maintaining current and accurate accounting records? If your company issued stock warrants to shareholders, do you know how to account for those equity instruments? Are you aware of any sales and use tax liability on big equipment purchases? Did you know that such a tax liability can easily reach tens or even hundreds of thousands of dollars?

Remember, no one wants to invest money fixing pre-existing problems. Make sure you attend to the details today that will keep your business strong and make it attractive to investors and to the next generation of owners.

July 29, 2015

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