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Gwen Peake
The Sustainable Entrepreneur News
What Investors Want from You and Your Natural
Foods Business
Enlisting investors and obtaining funding may be one of your most high pressure endeavors. You have your vision. You know your product and company make a positive difference in the world. But will you succeed at convincing investors to be as big-hearted with your business as you are?
When it comes to dealing with investors, I invite you to relax about at least one thing: Know that on a personal level they’re going to like you. They appreciate your passion and ideology. You won’t be turned down for any funding based upon a lack of integrity, passion or a personality flaw.
What’s Under Scrutiny
That’s not to say that your business acumen won’t come under scrutiny. Investors tend to follow the game plan of “back the jockey, not the horse.” In working with them, you need to convey an ability to get things done and create confidence you’ll execute on your vision. You’ll need to prove you’re capable of managing a business, growing revenues and handling expenses.
When starting out, natural foods entrepreneurs typically turn to those people who can’t say “no” to you – your friends and family. As your company grows and those sources of funds become exhausted, you may find yourself pursuing angel, strategic or financial investors.
Angel investors oftentimes organize themselves into groups to share research and pool their investment capital. A typical angel investment is in the range of $25,000 - $1.5 million.
The strategic investor is a larger food company that wants your brand so they can enter a market more quickly.
The financial investor is a buyer who gives you resources and strategic advice. Financial investors tend to augment company management.
What Investors Pay For
Bob Burke, co-author of the “Natural Products Field Manual” reports that investors pay for:
- Growth
- Positive cash flow
- Gross margin
- Traction in a number of channels
- Value of brand
It’s important to ignite investors’ imaginations with the possibilities for your business’ growth while also setting forth achievable and realistic growth projections. Being credible (in all ways) is critical for an investor to back you and your brand.
Investors are more comfortable when most of your business’ core offerings are already developed. They want their capital to be used primarily to accelerate the business. There will be parts of your business that are “yet to come” such as new products and channels, but these will not attract investors as much as what you have already.
They also want to see strong same store sales as evidence of velocity -- that people tried your product and got it again. They don’t want to fund losses.
Be Compelling in Every Way
Since you’ll be meeting with potential investors in person, you want to be as compelling in person as you are in writing. You need to be ready for any kind of question and understand your business inside and out.
Entrepreneurs oftentimes underestimate how much money they’ll need. Have a ready response to the question: “If you got a bigger chunk of money, how would that change your plan?”
Simplify Your Finances, Keep on Top of Two Key
Numbers for Your Business
Pardon my making an assumption about you…I presume a love of tracking financial data isn’t what attracted you into becoming a natural foods entrepreneur. There are probably plenty of other activities you would prefer to poring over the books.
Since you’d much rather be developing product, telling your story and dreaming up your wildly successful future, let’s narrow down your financial duties. There are two numbers you must absolutely keep on top of. They are your:
- Gross margins
- Velocity
Positive Cash Flow Is Key
Happiness, from your business’ perspective, is a positive cash flow. In running your business, you soon discover that making a sale or earning a profit is not the same as generating cash. Gross margin is crucial to that positive cash flow.
Maintaining a High Gross Margin
Even if you don’t consider yourself a numbers person, you can calculate your business’ gross margin. To do so, you need to know your net sales figure and your cost of goods sold (COGS). When you subtract COGS from net sales, you have your gross profit or – expressed as a percentage of sales – your gross margin.
A gross margin of 40 percent or better is consistent with the profit margin followed by most natural foods businesses. If you’re not already at 40 percent gross margin or better, your next step is developing a clear path on how you’ll get there.
It’s easy to fool yourself that when your business grows, gross margin will automatically improve. Don’t fall into that trap. Get to at least 40 percent now.
Gross margin includes all the costs of getting your product to the loading dock. Brokerage, freight and slotting fees are not included. You want your profit after selling, marketing and variable costs are factored in to be 18 percent or better.
Importance of Sell Through
Consider these words from one financial adviser in the natural foods industry: “Getting into Whole Foods is easy. Staying there is hard.”
Once you get a good deal underway with a favorable gross margin, you want to make sure it continues. Now that you’ve made your way onto the shelves, you want your products flying off of them again and again and again.
It’s better to have 100 stores with high product sales than to be in 1,000 with uneven sales. Velocity refers to your “sell through” or same store sales. High sales per point of distribution are much more desirable than rapidly expanding distribution.
You’ll obtain the information on your same store sales from another source. You can track your velocity growth through:
- Whole Foods Vendor Internet Portal
- UNFI Supplier Insight
- SPINS Retailers Measurement
High Gross Margin and Velocity Feed Off One Another
Creating brand loyalty and high sell-through are keys to a well developed brand. They also contribute to higher pricing and gross margin.
Keep your finger on the pulse of what drives sales off the shelves. Who is your best customer? Why do they buy your brand? What are the unique needs they have that you meet? Where are your values in alignment with theirs? You’ll want to create and continually update the profile of your ideal customer using answers to these questions.
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