09: Finance
Getting Started with Financing
Building a food or beverage business takes more than just a great product idea and passion—you need capital to bring your vision to life. Figuring out how much money you’ll need and where to get it can feel overwhelming, but it’s a crucial step to ensuring your business has the runway to grow.
I started TeaSquares with $10,000 in savings, moved back in with my parents (I was in my early 20s), and reduced my expenses to a few hundred dollars per month. At the time, this was enough to develop a prototype and figure out how to sell it. Ten months into the business I raised our first early stage VC investment of $100,000 and we were off to the races.
In this chapter, I’ll cover how to get started with financing, explore the different options available to food and beverage entrepreneurs, and help you figure out the right strategy for your brand. By understanding the basics of financing, you’ll be better equipped to make smart financial decisions that set your company up for long-term success.
How Much Money Will You Need?
Before you can figure out how to raise money, you first need to know how much you’ll need. It’s a classic chicken-and-egg scenario: you want to raise capital to grow, but to raise it, you need to show evidence of past growth.
Start by mapping out your startup costs and your operating expenses for the first year. This includes everything from manufacturing, packaging, and marketing, to salaries, rent, and legal fees. Think through the different stages of your business: launching, scaling, and ongoing operations. For food and beverage companies, this might also include costs for certifications (like organic or non-GMO), insurance, and distribution.
A good rule of thumb is to raise enough capital to cover at least 12-18 months of operating expenses. You don’t want to be in a position where you run out of money before your product gains traction.
Some typical costs to consider:
- Manufacturing: How much will it cost to produce your first batch?
- Packaging: What are your costs per unit for bottles, boxes, or wrappers?
- Marketing: What’s your budget for getting your product in front of consumers?
- Personnel: Do you need to hire employees or consultants?
- Sales & Distribution: What are your trade spend requirements to get into stores?
Estimate a monthly burn rate (the amount of money you’ll spend each month) and make sure your total raise covers that for your entire runway.
Financing Options: What’s Out There?
Once you have an idea of how much money you need, the next step is figuring out where to get it. There’s no one-size-fits-all approach, and your financing strategy will depend on your business model, growth stage, and personal goals.
Here are a few common options to explore:
- Debt Financing: This means borrowing money and paying it back with interest. It includes loans from banks, Small Business Administration (SBA) loans, and lines of credit. Debt financing can be appealing because you retain full ownership of your company, but it does come with the burden of repayments.
- Angel Investors: These are individuals who invest their own money in exchange for equity in your business. They can be a great source of capital if you’re in the early stages and aren’t quite ready for venture capital. Angels typically take a hands-off approach but can offer valuable mentorship and connections.
- Venture Capital (VC): If you’re aiming to scale quickly and need a large amount of capital, venture capital could be the right fit. VCs invest in high-growth companies in exchange for equity. However, be prepared for the pressure that comes with venture capital—investors will expect rapid growth and returns.
- Pitch Competitions: Many food and beverage brands have raised money through pitch competitions. These contests provide a platform to pitch your business to investors, often with prize money for the winners. The key is creating a compelling pitch that explains why your brand is unique and has strong growth potential.
- Equity Crowdfunding: Platforms like WeFunder and Republic allow you to raise money from a large number of smaller investors in exchange for equity. Equity crowdfunding can be a great way to build a community around your brand while raising funds, but be aware that it requires a lot of time and effort to run a successful campaign.
- Bootstrapping: Many entrepreneurs start by self-funding their business. This may involve using personal savings or reinvesting profits back into the company. While this gives you full control over your business, it can be risky if you don’t have enough capital to weather the inevitable ups and downs.
First Steps: Your Financial Foundation
In the following chapters, we’ll dive deeper into specific topics related to financing and managing your money:
- Accounting: Setting up systems to track income, expenses, and taxes.
- Forecasting: How to create financial forecasts and projections for your business.
- Cashflow: Managing your cash so you always have enough on hand to keep running.
- Debt: Understanding how and when to take on debt, and how to manage repayments.
- Angels / VC: Exploring the pros and cons of equity financing.
- Pitch Competitions: How to win money by pitching your business.
- Equity Crowdfunding: Running a successful equity crowdfunding campaign.
Getting your financing in order is the first step to building a successful food or beverage business. With a solid plan, you’ll be ready to raise the capital you need and hit the ground running.