Business Intel: Finding the right investor requires compatibility

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Business Intel: Finding the right investor requires compatibility

1 Mar 2022

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Evan Bail

Evan Bail is a is a multimedia journalist from Overland Park, KS. Her passion for writing and media was developed at a young age through film and literature. She graduated from the University of Kansas with a Bachelor of Science in Journalism. In her free time, you can find her playing tennis, spending time with her family or walking her dog at the dog park.

KANSAS CITY, MO —The baked goods segment of CPG has been attractive to investors over the past few years, including legacy acquisitions. From an investor or acquirer perspective, these companies have the capabilities to deliver ingredient mix (grain/gluten-free, nut-free, allergen-free, dairy-free, etc.); on the shelf or frozen; decadent; nostalgic or nutritional products to a diverse consumer set. That offers the investor or acquirer several lines of vision as to how the brand can grow, be successful and bring to the investor a healthy return on their investment.

The first step for emerging brands and small businesses to attract investors is establishing strong business fundamentals. While there are many strategies that will indicate a founder has established such practices — from managing costs and operations to managing people and marketing — managing cash flow and having a weekly analysis meeting with your team and/or advisors is essential.

Cash flow is, of course, a critically important factor. Reviewing cash flow on a weekly basis provides the opportunity to investigate those key indicators to keep your business solvent and growing: revenue growth, cost margins and cash runway. This gives an indication of how long the current cash in the bank will last at the weekly cash burn rate, indicating when additional funds will be needed. Additional funding into the business could be needed before this point, to fund and support new distribution, increase capacity or develop new products to stay competitive.

So, when it comes to finding investors, the rule is to start now. Depending on the size and type of the company and investment, this could take many, many months. Do online research of trade publications and news sources to find those investors interested in your segment. Network with other brands and co-founders, as well as third-party providers like distributors and co-packers, to get names of possible investors.

For smaller companies, local angel groups and grant foundations may be available, though these can be overly bureaucratic and slow. There are many organizations and people that offer long lists of possible investors. Many of these can be discovered on LinkedIn and other online providers. Be mindful that these lists are very often not scrubbed or targeted, so they can be cumbersome and time-consuming to use, with little reward.

Ideally, your best contact is always a referral, so the bottom line is to network.

Finding the right investment partner is like finding any other partner in business and life: seek compatibility, agreement on long-term goals, and an environment of open, honest and thoughtful communication. The earliest investors from friends-and-family rounds, crowdfunding or angel investors will likely not provide much expertise or support to the business. As the business grows and investment stages and sizes become larger, and the investors become more sophisticated, they will seek more involvement and control.

While these investors will perform a detailed due diligence on your business, a founder should also perform due diligence on the investor; this is, after all, a two-way street and a partnership. Ask for references, research their portfolio, and find out more about their involvement with other investments. Ask others important questions, like how the investor has interacted in good times, and how they were in bad times.

All businesses run into issues from time to time, so you will want investors who can help problem-solve and find solutions. Understand what contacts an investor brings to the business, such as buyers, distributors, co-manufacturers or even next-stage investors.

“While an investor may have the funds, there is a difference in the value the investor brings if their capital also includes specific business knowledge or experience that can help grow the business.”

Finally, and perhaps most importantly, assess what type of business skills, knowledge or experience they will bring to the business as a resource. While an investor may have the funds, there is a difference in the value the investor brings if their capital also includes specific business knowledge or experience that can help grow the business.

In early investment rounds, the founder generally has some ability to negotiate terms because a founder is usually securing multiple small investors to fill an equity round or convertible note offering. These investors are less sophisticated, will be less involved and make their decision with less technical analysis.

In larger and later rounds, even the most successful business has less negotiating power. Larger, more sophisticated investors will rely heavily on the technical analysis to determine valuation and terms that will provide a return on investment. They will intensely analyze the business pro forma to determine what they expect to happen in the coming years, and then present terms. In many cases, those investors and firms have strict guidelines as to the offers and risk they will take on, so they will not be open to a great deal of negotiation. The amount of risk they see will also determine the amount of involvement, control and oversight they expect.

Raising capital is a full-time job, on top of the full-time job of running a young, growing company. Finding the right investor, and the right investment, takes time. Start early with making contacts and keep potential investors up-to-date on your achievements to build important relationships. Watch your cash flow to know the lead time you have for your current cash position. Remember, most businesses fail, not because of a bad product or poor management, but because they run out of money. It is important to always think about the next round and making contacts that will help you raise capital across the various stages of growth.

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