Funding Startups in the Current Market
COVID-19 has fundamentally altered the landscape for food and ag startups seeking capital. Startups have seen deals fall through and investment opportunities shrink as they work to keep their businesses afloat. Dan Kurzrock, co-founder of FoodBytes! alum ReGrained, said it best: ‘It’s okay not to be 100 percent confident. To have concerns, and to lean on the community, and others, to get through this.’
While formidable challenges persist, institutional investors are beginning to consider forward-thinking opportunities that address real needs during the pandemic. Entrepreneurs are finding alternative funding paths, as well as ways to pivot their businesses to build resilience. FoodBytes! by Rabobank brought together investors and entrepreneurs to discuss how startups can navigate this new landscape.
Over 150 people from 24 countries joined us to hear our discussion with Richard O’Gorman of the Rabo Food & Agri Innovation Fund, Tom Spier of Boulder Food Group, Dan Kurzrock at ReGrained, and Sean Peters of DryGro.
Watch the recording and read on for top takeaways for F&A startups seeking to raise capital and lower their cash burn, as well as perspective on where our industry is headed.
Pitch a Decisive Vision for Your Company’s Value Proposition in Context of COVID-19
Our panelists echoed this advice: address COVID-19 head on when talking to investors. Reframe every conversation and pitch around the pandemic. Offer a clear vision for your value proposition in the current landscape and how your company plans to weather the storm.
Sean Peters of DryGro discouraged startups from shying away from the realities. ‘It would be a critical error to go into a pitch and not mention coronavirus. Address it head on. Take a look at your model and see if there are ways to pivot to better serve markets.’
Richard O’Gorman of the Rabo Food & Agri Innovation Fund reported that he’s receiving a lot of proposals. He said: ‘There’s a very distinct difference between those with a very clear value proposition and how it’s going to manifest through the coronavirus crisis and out the other side, and those not focused on that.’
Tom Spier of Boulder Food Group cited two examples of strong pitches that made a clear case in context of COVID-19: an immunity brand that is seeing its sales go through the roof during the pandemic, and a company working on ghost kitchen technology that is relevant now and in the future as social distancing impacts restaurant design.
Look at Ways to Pivot or Refocus to Drive Revenue and Lower Burn
Spier encouraged companies to highlight how they are pivoting in the face of the pandemic. ‘If you have a clear and decisive plan on how to pivot, that can potentially give investors comfort and create a reason to get involved,’ he said.
Dan Kurzrock of ReGrained explained how his company, which planned to scale based on upcycled ingredient partnerships with large CPG companies, changed course to focus on the fundamentals: increasing sales, decreasing costs, and reducing budget for longer-term R&D.
‘We had the luxury of being able to focus on long-term thinking, heavy R&D, machinery and projects that were going to take several years to see revenue. All of a sudden, the mentality had to shift to survival mode,’ said Kurzrock.
As COVID-19 forced their R&D projects with CPG companies to be reassessed or slowed, the startup shifted focus to its consumer-facing snack brand and its direct-to-consumer channels. ReGrained is now focusing on where the company can drive revenue, including a new consumer product launch.
Consider Alternative Bridge Funding, Such As Equity Crowdfunding
Some startups are pursuing alternative forms of bridge funding that they may not have considered prior to the pandemic. ReGrained shared how the company turned to equity crowdfunding to adapt during the COVID-19 crisis.
While ReGrained had raised $700K through equity crowdfunding in 2018, the company had not planned to do another campaign. The pandemic created an unexpected opportunity to go back to the 700 investors who participated in the first round to help ReGrained get through the crisis. The company expects to fill the round with ‘existing investors that would have otherwise not have had the opportunity to double down on their investment and help us get through this,’ said Kurzrock.
Kurzrock also highlighted SEC changes expected in June that may increase the amount of money a company can raise through equity crowdfunding – a figure that currently stands at just over $1M. This may make equity crowdfunding more appealing to more companies in the months ahead.
‘It’s the democratization of capital – the ability for your customers, your community to invest,” said Kurzrock. ‘You spend more time getting a $10K check from someone who is actually an angel investor than you would from someone who can write a $100K check [with equity crowdfunding].’ In highlighting the potential upside, Kurzrock also cautioned that it can be complicated to set up the appropriate governance.
Spier and O’Gorman agreed that equity crowdfunding can be an interesting lever in this landscape. However, O’Gorman cautioned startups to have the proper governance and to be sensitive to how it looks in the cap table so there are no issues when they need to raise a bigger round with institutional investors. Spier suggested that capital from an institutional investor may be more valuable, as Boulder Food Group offers added value with their deep knowledge of CPG.
VCs Are Open to New Investments During COVID-19, But Closing Will Require More Time and Effort
For startups seeking institutional investment, O’Gorman pointed to investors’ increasing receptivity to companies who can clearly articulate a strong value proposition in context of COVID-19. He confirmed that investors were largely focused on bolstering existing portfolio companies in the first six weeks of the pandemic, but are now looking outwardly on a selective opportunity-by opportunity basis. Still, O’Gorman acknowledged that it will be much more challenging for companies starting from scratch than for those who already had a warm relationship with investors prior to the pandemic.
Spier offered this perspective for companies that do not have an existing relationship with investors: ‘We would consider a new investment in someone we’ve never met before. It’s going to take more time and it’s going to take a lot of effort on both sides to make it happen.’ Spier encouraged startups to stay in touch with investors via written updates and quarterly Zoom calls to build relationships over time. He predicts that video conferencing will be an effective way to get to know people at a time when travel and in-person meetings aren’t possible.
Advice for Virtual Pitching: Keep Story Tight, Focus on Financials and the COVID response
In offering advice to startups for virtual pitches, panelists re-emphasized the need to keep the story tight. O’Gorman encouraged startups to continue to focus on fundamentals while shaping their COVID story. His fund looks at the following triangle – now through the lens of COVID-19:
- Does the offering solve a meaningful problem?
- Do the founders and stakeholders share our values?
- Do we have visibility into the development of unit economics and the value of the proposition to the market?
With heightened financial pressure, Spier highlighted the reality that margin and profit are more important to investors than ever before. He advised startups to address historical financials head on because ‘investors are going to want to get right to that.’ He encouraged startups to bring as much financial information as possible, inside or outside an NDA.
DryGro’s Peters encouraged startups to develop strong responses for how the company is dealing with the pandemic. Be honest about the challenges of working remotely, find good contingencies and build any delays into the Gantt charts.
Forward-Looking Perspective: Funding for Female Founded and Led Companies
When asked about the challenges female founders face in securing VC funding and how that might shift with COVID-19, our panelists acknowledged the need to do more.
Spier said he was proud that approximately 50 percent of the companies in Boulder Food Group’s portfolio have been founded or led by women entrepreneurs. ‘While it hasn’t been a thesis for us, we’re certainly proud to have a diverse set of entrepreneurs to support,’ he said.
Said webinar host Anne Greven, Head of Startup Innovation at Rabobank: “It is unfortunate that research continues to show the challenges female founders navigate in securing funding. In 2019, only 2.8% of all U.S. VC investment went to startups with all-female founding teams. This is why FoodBytes! has diligently built a platform where we showcase a diverse group of founders and entrepreneurs and work tirelessly to build connections and provide equal access to investors and corporate partners in the network. In 2019, nearly one-third of all pitching founders at FoodBytes! were females. In the same year, we saw an increase in funding for female founders.”
Forward-Looking Perspective: Where Natural, Sustainable Specialty CPG is Heading In Light of Pandemic
With 70 percent of sales during pandemic buying going to 19 large companies, we asked our panelists what this means for specialty sustainable and natural CPG brands.
Spier suggested that smaller CPG companies consider how their categories are now much bigger or smaller due to COVID-19. If your category has shrunk, focus your story on how the category will recover as the crisis transitions. If your company is in a much larger category – such as frozen pizza which jumped from $5B to $7B during the pandemic – Spier argued you’re in a great position to compete for share.
ReGrained’s Kurzrock pointed out that the changes in consumer behavior – including the adoption of online grocery buying – is going to change the way CPG brands drive discovery and trial. Smaller CPG companies have historically driven trial through in-store product demonstrations and retail promotions that simply aren’t an option right now.
Kurzrock argued that the pandemic has created a significant opportunity to leverage direct-to-consumer and owned channels. ‘ReGrained has seen a huge jump in sales – and it’s not from retail. It’s from alternative channels that were previously on the fringes of our revenue strategy,’ he said.
DryGro’s Peters noted that partnerships with companies like Deliveroo or Hello Fresh can also drive product trial as people become less dependent on grocery retail.
Forward-Looking Perspective: How Will Record Unemployment and An Economic Downturn Affect the Trajectory of the Natural, Sustainable Industry?
At a time of record unemployment and economic instability, panelists commented on the tension between ‘value’ and ‘values’ — and how that will affect the natural, sustainable industry. In a nod to continued opportunity, Kurzrock highlighted the growth in the sustainable products market after the 2008 recession.
O’Gorman suggested that the debate between ‘value’ and ‘values’ is not settled, but that sustainability will continue to be a vital thread through all Rabo Fund investments.
Peters argued that providing triple bottom line products as a niche was never a good strategy for creating real change. ‘[The pandemic] increases our challenge to make sustainable products at the same price point to drive widespread distribution,’ he said.
To check out takeaways from past FoodBytes! by Rabobank webinars on rethinking the produce supply chain, tips on pivoting, and more, visit our blog.
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