How to achieve investment ­readiness in the food industry?

When and in what form do you get investors on board? This is the key question for every founding team and every start-up. In the food industry in particular, it is important to set the right course and avoid mistakes right from the start.

As a rule, everyone manages to develop a good product and get listed with a major supermarket chain. Breaking into the market is usually not the real challenge, but staying in it is. The central question that every company founder faces right from the start is: how do I put my company on a secure footing? As a rule, everyone manages to develop a good product and get listed with a major supermarket chain. Breaking into the market is usually not the real challenge, but staying in it is. However, once these initial building blocks have been laid and a viable story has been ­developed, sensible fundraising and a long-term fundraising roadmap must be drawn up – and that’s when the problems begin.

Too many shares

One of the most common mistakes that young start-ups make is that they issue too many shares at a very early stage of their company’s development. This makes the start-up unattractive to early-stage ­investors. Some of the reasons for this are the fundamental question of the valuation of the company, the negotiating skills with early-stage investors such as business ­angels and receiving too few offers overall, meaning that a deal usually has to be accepted quickly. For many start-ups, this raises the question of how much capital they need and what the valuation their very young company, which is currently still in the red, is. This is because business angels want a share of the company in ­return for the money invested. The size of this depends on the agreed valuation. Even if there are numerous formulas for the valuation, important factors include a strong team with expertise in one or more sales channels and a product that is ­accepted by the customer. The figures must also be convincing and short-term KPIs help to present a positive case and achieve the desired valuation.

The time factor

The time factor puts start-ups under ­extreme pressure in the fundraising ­phase. “We need capital – now!” is the mantra of every founder. In order to ­acquire capital, you need a plan – which should be able to answer the questions: What are my sales channels, what are my target groups? You should be able to back up your hypotheses with solid market ­research. You should also be able to answer the question of which points in the business model are the “big unknowns”.

A strong founding team, a detailed roadmap and knowledge of the weak points will help you to achieve the desired company valuation with a secure negotiating position vis-à-vis investors. Of course, there are also 1000 formulas for company valuation, but the most common is the comparative method. This involves using financing rounds and valuations of comparable start-ups and applying so-called multiples to the respective turnover or upcoming turnover. In the food industry, lower multiples are more commonly used than, for example, in very fast-growing sectors such as fintech or AI.

The great advantage of this method is its simplicity. But in the end, you get the valuation that investors accept. The more credible your arguments are – i.e. the more detailed information you can ­provide about when and for what exactly you need which financial resources and what you want to achieve with them – and the sooner you develop a strategy that is underpinned by suitable market insights, the more likely you are to be successful when approaching investors. This is not about perfection and pretending to know everything, because a “trial and error” ­approach and honesty towards investors also play an important role. In addition, fundraising planned with sufficient lead time offers the opportunity to be in ­dialogue with several investors at the same time and to find the best deal or ­investors with the greatest added value.

Being concrete in the unspecific

Of course, it is difficult to be specific at a time when such statements are difficult to make – especially in the start-up phase. Particularly in the early stages, many KPIs are missing or there is a lack of experience in other sales channels, market research or competitor analyses due to staff ­shortages. And yet these shortcomings should not remain an excuse. Anyone who can at least present “test balloons” with more meaningful indications instead of pure speculation has a clear advantage. There also needs to be a milestone plan that sets out what is to be achieved and when. “We’ll do it one day” is not enough – “We’ll work on this and that in the next six months” is. Good milestone planning ­includes a product range strategy and ­sales channels, but also personnel plann­ing. It is also important to show when the next fundraising is due and to provide long-term figures in the financial planning. The aim is to provide a better picture of the potential development of the start-up.

Catching the right moment

There is no such thing as the right ­moment! Every founder has to decide for themselves how long they want to bootstrap and, depending on the business ­model, when more capital is needed and what a possible exit scenario might look like. Investors often get involved when there is a so-called proof of concept – in other words, the more veritably the start-up can prove that its business model, ­products and strategy work, the easier it is to convince investors. In this phase, more capital is required on the basis of ­experience and the business can be ­scaled up. Assuming these insights are in place, the start-up has a clear roadmap, the data room is ready (including all relevant ­documents), the contract for the financing round has been prepared and the lead list for the investor pitch and even the pitch has been practised extensively, then, in short, it’s the right time to talk to investors.

Building on experience

There are few products in the food ­industry that really fulfil a new need. It has become difficult to build truly ­sensible cases, even in the D2C sector – precisely because it is no longer cheap to buy customers and acquire them for the sales ­funnel. Therefore, a business and financial model must always be based on the ­specific knowledge and experience of the founders and a real case (execution) – and must not try to imitate any approach that has worked for someone else.

The dream: a good team!

An investor pays particular attention to ensuring that the relevant expertise is present in the company. Entrepreneurs impress with their experience and expertise and the investment decision is always a sign of trust in the founders. A start-up therefore needs a core team that thinks and acts entrepreneurially and is highly energised and ready to overcome any ­difficulties. Teams with large gaps in key positions are therefore often avoided!

This article was published in the current Plattform Life Sciences issue „Circular Bioeconomy 4_23“, which you can view as an e-magazine via the following link:
https://www.goingpublic.de/wp-content/uploads/epaper/epaper-Life-Sciences-4-2023/#0