“It’s very, very difficult as an investor to take on the additional cash burn” that many entrepreneurs likely will experience as they navigate coronavirus challenges, including supply chain struggles, retailers pushing back resets and product reviews and convincing consumers to try something new at a time when the data shows they would rather reach for an established brand or product they already know, said Richard O’Gorman, the managing director of Rabobank’s Food & Agriculture Innovation Fund.
In particular, investors currently are very hesitant to take a chance on a company that is “starting from scratch now,” versus those that are in scale-up mode and already were in discussions with investors before the coronavirus outbreak, O’Gorman told attendees at Rabobank’s FoodBytes’ May 20 webinar on funding startups in the current market.
The exception, he added, is if entrepreneurs are able to communicate to the investor a “very, very clear value proposition today about how it’s going to manifest through the coronavirus crisis and come out the other side.”
Tom Spier, the founder and managing partner of the Boulder Food Group, agreed, adding that while many investors are shy to embark on new relationships and deals right now, if an entrepreneur has a “decisive plan on how to pivot [to account for the pandemic], I think that could potentially give investors comfort and give folks a reason to want to get involved.”
For example, he said, while he doesn’t see much opportunity for restaurants currently, “if the opportunity was geared toward probing with their technology, their way of approaching consumers and outlining a path forward” then “just about anything’s fair game.”
“We would consider a new investment in someone we’ve never met”
Likewise, while the inability for investors and entrepreneurs to meet in person during the pandemic is a significant hurdle for forging relationships, it is not insurmountable thanks to video conferencing, Spier said.
“You can get to know people quite nicely on Zoom or Blue Jeans,” he said, noting that with the technology “we would consider a new investment in someone we’ve never met before.”
But, he added, “it’s going to take more time and I think its going to take a lot of effort on both sides to make it happen.”
This doesn’t mean weekly video conferences, but it does mean regular written updates and “maybe on a quarterly basis requesting a connection with a Zoom call to provide and update and making sure that they get to know you,” he explained.
Perfect your pitch
While video conferencing is a good stand in for in-person meetings, the rules of etiquette are different and demand entrepreneurs to be more polished and sensitive of investors’ time.
“We’re all busy. We’re all trying to make decisions and, you know, come with as much information that you can and put your best foot forward with as much information as you’re comfortable sharing whether outside of an NDA or within one,” Spier said.
Drawing on FoodBytes’ work coaching startups on pitching, the Rabobank platform’s manager Nina Meijers added that investor presentations during the pandemic and after “should be as tight, tailored and practiced and rehearsed as it would be on a pitching stage because [on video calls] you need to be that much more articulate [because] you don’t have physical people in the room and body language to read and passion to pick up on.”
Beyond the logistical challenges of connecting with investors during the pandemic, most of the standard rules of pitching continue to apply, O’Gorman said. He explained: “Ultimately, the fundamentals don’t change. When we were looking for portfolio investments, we’re still for it, but does the technology, does the offering solve a meaningful problem? Do the founders and stakeholders share the values that we share? Do we have visibility on the development of the unit economics and the actual value of the proposition to the market and the system?”
Consider all funding options
With many venture capitalists and institutional investors focusing inward and reviewing far fewer prospects than before COVID-19, entrepreneurs strapped for cash might consider other fundraising options, said Dan Kurzrock, the co-founder of the upcycled ingredient company ReGrained.
For example, he said, ReGrained is exploring a second equity crowdfunding round, which allowed the company to raise $700,000 in 2018 from nonaccredited investors who purchase equity in much smaller amounts ranging from $100 to $100,000.
“Equity crowdfunding is a really interesting model,” that can allow companies to raise money quickly, but also can be difficult to navigate from a governance perspective and to set up correctly, he explained.
When Regrained first used the method it did so because it was “on mission for us,” Kurzrock said, explaining, “It’s the democratization of capital. It’s the ability of your customers, for your community, to invest.”
And while he said he is proud of the company’s first equity crowdfund, he notes that he probably wouldn’t do it again if not for the extenuating circumstances created by the pandemic because it is so labor intensive upfront.
However, he said, ReGrained has about 700 investors that participated in the first equity crowdfunding round, and the ability to ask them to re-up to help them survive the pandemic is a unique opportunity.
Spier echoed Kurzrock’s warning that equity crowdfunding can be difficult to structure and while a handful of companies are very successful, many more do not hit their targets. He added that institutional funding also brings knowledge that is not available from crowdfunding and that insight can help “accelerate your curve.”
Function as if funding is coming
While there are still options for fundraising, Kurzrock encourages entrepreneurs to run their businesses as if funding will not be available during the pandemic or a potential economic downturn following the outbreak.
“We always said, let’s assume we aren’t able to raise any more money,” and therefore need to focus on what will drive the most revenue to carry the company through this period, he said.
“It’s important for all founders to have a really well-defined vision of what your trying to do in the world, and now how your business is going to accomplish its mission and achieve profitability. But, now there is a need to reframe and take a more near term look inside the business and just operate to get through this,” Kurzrock said.
For ReGrained this means pulling back on long-term research and development projects to focus on driving sales of its CPG products and known ingredient applications. It also means investing more heavily in ecommerce and direct-to-consumer channels, and finding new ways to drive consumer engagement, trial and discovery.
Ultimately, all three agreed that the pandemic eventually will pass and while it is hard to imagine what the future might look like, the first step is getting there by surviving the current situation and any economic fallout from the outbreak in the coming years.