For startups thinking about funding an early stage business, debt isn’t usually the first thing that springs to mind. High growth companies who have yet to break even don’t always qualify for typical bank loans, and on the off chance you do, finance often comes with strings, like the need for personal guarantees.
But, as the cost of doing business becomes increasingly expensive, a growing number of entrepreneurs are looking for sensible alternatives that can mitigate dilution and give early stage businesses time to build equity that may be worth more to founders and investors in the future. Venture debt is a long used and widely accepted investment strategy. It’s proven particularly popular in the tech sector and with interest growing across the spectrum of startup businesses.
We invited Gigi Lee Chang, Founder of Plum Organics and Managing Partner at BFY Capital, to share her experience with us. As a successful entrepreneur, startup advisor and venture debt investor, Gigi offers a unique perspective of the food ecosystem, so we asked for her take on the F&A industry and why she believes startups should consider venture debt along with all the other financing options out there.
You specialize in venture debt – providing loans to early stage companies. Can you tell us what that means exactly and how it differs to equity funding?
At BFY Capital, we offer loans from $1m to $5m to startups with at least $4m in top line revenue – usually over a period of four to seven years. Venture debt differs from typical working capital lines of credit because capital isn’t limited to a factor on your inventory or receivables. It functions like equity capital and can be used to support growth efforts, but with significantly less dilution.
The analogy I like to use is: a line of credit is like a credit card, venture debt is like a mortgage. With venture debt you get a lot more capital to work with and you have a longer period to pay it off. This allows early stage businesses to scale and retain upsides like control, without diluting ownership. And just like equity funders, we work in partnership with the companies we invest in providing mentorship, functional and operational expertise, and unique partnerships in areas like marketing and sampling.
What do you look for in the companies you invest in?
I look for the same indicators and qualities as any investor. Things like market opportunity, motivated employees, attractive growth potential and a strong management team with good financial discipline.
From a debt provider’s perspective, it’s important for a business to demonstrate that their growth plans take fiscal responsibility into consideration. At BYF Capital, we look for companies that think beyond top line financials and people who understand the role finance plays as a key performance indicator across all of their business functions.
What advice do you have for startups weighing up their investment options?
There’s a lot of investment activity in the F&A space currently. That’s good news for startups, but it also means competition is heightened, and young businesses can expect to have to work harder to sell their ideas and achieve success.
There’s a lot of consolidation happening in the retail partnership and strategic acquisition space too, so companies need to consider and plan for how these macro industry factors will affect their survival and growth.
It’s more important than ever for young companies to be open to transformation, because the pace of change is fast in the F&A industry. Past trends give way to new movements, technology is constantly breaking down boundaries and investors and corporates are always on the lookout for the most interesting and innovative ways to work. As a result, it’s agile businesses that are built with the ability to adapt, that are most likely to succeed.
There’s no hard and fast rule book anymore, but one thing does hold true. Founders need to make decisions and choices that are right for themselves and their companies. That starts with understanding your priorities as early in the process as possible, ensuring you are much better equipped to find an investment partner that aligns with your core values and business goals.
To help get there, I recommend asking the big questions upfront:
- What does success look like for you?
- What’s the end goal?
- Do you want to have an exit lined up or stay in control of the business?
- What kind of partnerships would your business benefit from?
- What expertise and experience do you want your investor(s) to have?
What unique role do you think FoodBytes! plays in the F&A innovation ecosystem?
FoodBytes! has proven to be a valuable community builder for early stage companies and ecosystem partners. It’s a place where like-minded people come to collaborate, so you’ll find founders, corporates and investors in every corner of the room at their events, sharing ideas and resources that have the power to create real change.
The ideas aren’t always fully formed or presented as stand-alone solutions either, which is interesting. As one of the FoodBytes! NYC 2018 judges, I was inspired by how willing businesses were to connect and take good ideas forward together. Entrepreneurs in the FoodBytes! community understand that no single device, product or platform will solve everything. It’s about big picture thinking, working out how your business contribution fits within the F&A landscape and makes the ecosystem better.
There’s no doubt, collaboration is essential if we want to take on bigger challenges and affect lasting change. As an investor, that’s the kind of community I appreciate and enjoy being a part of.