When it comes to funding their business, startups have several options available to them from putting forth their own money (i.e., bootstrapping) to raising money through private equity — exchanging a portion of a company’s equity for funding — to taking commercial bank loans out. A startup might also catch the attention of a wealthy individual — an angel investor — who might decide to invest in a company for a portion of equity.
As new business opportunities arise, brands will often need a mix of these funding options and others to effectively grow their businesses, the panel explained.
Mother Kombucha grows without venture-capital funding
Mother Kombucha has focused on maintaining lean operations, effectively deploying capital, and staying away from private-equity funding to grow its business, said Tonya Donati, brand CEO and founder. The company is "in a constant fundraising mode" but "finds enough to stay afloat," she said.
“By building through profitability and margins over top-line revenue, we were not necessarily a good fit for venture [capital],” Donati said. “We have bootstrapped our growth with a combination of an angel round, patient debt, and crowdfunding.”
More recently, Mother Kombucha turned to a Wefunder campaign to complement a bank loan to fund innovating a kombucha-infused sparkling water. The company raised $170,000 in the round and gained an additional $100,000 from investors following the round closure, she said.
Donati is also exploring other forms of investor funding to further grow the brand, including revenue-based financing options and variable-based convertible notes. Revenue-based financing is when a company receives funding in exchange for a percentage of the ongoing gross revenues, and a variable-based convertible note is similar to revenue-based financing but allows an investor to convert the debt into equity at a later date.
“We're not looking to bring in a huge amount of cash that we're not ready to deploy. We're basically EBITA positive. We're not burning through a lot of cash. We really are being very conscientious about the money that we bring in and how we use it. We're deploying that money from the round to grow a new side of our business, while we continue to explore ... a combination of the revenue-based financing or variable-based redeemable equity, along with smaller convertible notes with patient investors through our community, whether that's a regional community or the community of natural and mission-driven CPG community,” Donati said.
Lil Bucks: Finding funding to break into Whole Foods, Target
Last June, sprouted buckwheat brand Lil Bucks received word that its granola clusters — Clusterbucks — were launching in Whole Foods, and Target was likely to bring on the brand, said company Founder and CEO Emily Griffith.
Since Lil Bucks was “going from 35 stores to 500 stores,” Griffith thought that it would be “simple math,” and that investors would be interested. However, investors largely were pulling back at the time due in part to high-interest rates, she added.
“Funding dried up both from angels, venture groups, all of it. ... For me, it probably took longer just because sprouted buckwheat, even now is something that the US isn't totally familiar with. So, I've been trying to sell something for a long time that people didn't really want and breaking through to where the timing is right with the market,” Griffith said.
While Lil Bucks had tried a variety of funding options in the past, including crowdfunding, loans, grants, credit cards, and other funding options, Griffith tried a newer type of funding agreement called a Cost-of-goods-sold (COGS) Agreement Retaining Equity (CARE) with an investor for the Whole Foods launch, which meant that she’d be paying an agreed-upon percentage of COGS quarterly to the investor until the full amount was paid back.
With the deal, she wouldn’t have to give up equity in her company, but she needed to ensure product velocities were growing at a rate to repay the full loan amount over time.
"The COGS Agreement [Retaining] Equity ... made a lot of sense because we did have unit economics with our product, and we have velocity data of how it's moving. So, we had an expected movement in the accounts were going into, " Griffith said. "We went to our investors and said we need $400,000 to execute these national launches, or it's not going to happen."
Wildway finds a win-win with a redeemable equity round
When granola and cereal brand Wildway needed funds, company Founder and CEO Kyle Koehler of Wildway decided to leverage a redeemable equity round, which allowed the company to repurchase the equity in the company over time.
“We're seeking capital and agreeing to repurchase that over time with a percentage of revenue. I think it's really a win-win model for both me as the founder ... and the funder. The [funder’s] ... return is not predicated on us exiting or raising larger and larger rounds of capital over time. Their risk is reduced over time with those cash payouts as well,” Koehler said.
