Getting a spirit venture off the ground requires dedication, vision, and most importantly, financing.
Before you search for funding, it’s important to have a clear vision of what you want to achieve with your brand and how much money it would take to accomplish it. It’s also important to be willing to put in the work to raise double that amount, because that’s often what it takes.
Finding the right investors to join you on this journey can provide more than just financing. The right partner can provide moral support, objective views, networks, industry expertise, and much more.
Whether your brand is in the pre-revenue or profitable stage, here is the best advice from the Park Street University archives.
Understand the Types of Capital Available
As an entrepreneur, there are multiple paths to finance your vision and the more you familiarize yourself with the options at hand, the better the likelihood becomes of finding the right match for your brand. Equity financing is one of the most common.
“That’s where you bring in somebody and they provide cash or something of value in kind. Maybe it’s equipment, maybe it’s sales and marketing, maybe it’s brands,” explains Jeff Clark, Senior Lender at Live Oak Bank.
It’s also the most expensive form of capital because you’re trading ownership and future profits for investment, but for a startup that is not cash-flowing, this may be the most realistic option.
Hard money is another option in the early stages according to Clark. Hard money comes in the form of high interest loans. If your company is not cash-flowing, the lender will naturally be weary of a default on your loan, so interest rates can be in the double digits, despite the current low-interest rate environment.
Conventional loans from banks are available if your business has been cash flowing for two to three years. Before handing out these loans, the banks must have sufficient reason to believe your business is sustainable because banks have to be successful in 99% of their loans. If banks miss their target, they can go out of business or regulators will force them to be purchased by someone else.
There are also government loans, such as SBA or USDA loans, in which government programs step in and allow banks to take larger risks on entrepreneurs.
Familiarize Yourself with Different Groups of Investors
Just as there are different types of equity to consider, there are also different types of investors to choose from. Andrew Beebe, Vice President of Arlington Capital Advisors, provides an overview of the different types of investors.
Individual Investors
These are friends, these are family, or wealthy individuals. They’re typically the first stop to be able to fund your business. “They love you, they love the idea, they’ve probably heard you talk about it for years, and they’re really proud to be with you on that journey,” says Beebe.
Institutional Investors
Your business can also look for institutional investors in the form of angel investors, venture capital, and private equity firms. These investors can provide the expertise and growth capital you may need, but it’s also important to note that they are diligent, strong negotiators, and they will have high expectations.
Strategic Investors
Strategic investors are typically a larger company within the same category that invest in a brand or company through incubator program, partial funding, or outright acquisition. They can provide professional expertise and support for your brand, and even integrate your business into their network. If you choose to go this route, keep in mind that partnering with a strategic investor is a long-term commitment.
“There are ways to be involved, even post-acquisition,” says Beebe. “Whether it’s marketing, whether it’s production, whether it’s still being the face and founder of the brand. There’s many different options that you want to consider as you look to talking with a strategic.”
Crowdfunding
Crowdfunding is a relatively new, but up and coming way to raise money, as well. This method allows consumers, supporters, and other individual investors to finance your venture directly through small investments. This can be done through traditional platforms like Kickstarter or GoFundMe, where a reward or perk is typically exchanged for a donation, but equity crowdfunding, in which small investors can become shareholders, is another option. Typically, this option is only viable for a company that’s been around for some time and has an established consumer base.
Consider Your Investor’s Point of View
An investment is a partnership and the best partnerships evolve when both sides are benefitting from the agreement. For this reason, it’s important to do the research to understand what the different types of investors are looking for in an investment.
For example, Live Oak Bank looks for good character and credit, industry experience, and cash flow. They want to see that you have sufficient working capital, strong leverage, and ensure that your net margins are profitable. Having team members with industry experience and experience navigating through downturns will also provide the banks with some confidence.
“If you’ve made mistakes, tell the banker,” says Clark. “That’s what I’m looking for. Somebody that’s not afraid to make a mistake, not afraid to admit they made a mistake, and won’t make that mistake again because they learned something from it.”
Banks will also ask for up to three years of monthly income and balance sheet projections. If you need assistance with these projections, Small Business Development Centers are available all across the U.S. to assist with putting together your business plan and projections.
In the case of institutional investors, they’ll be more likely to invest in a company that is up and running, with some success under their belt.
“We do not invest, from our standpoint, in pre-revenue companies,” says Kristen Bareuther, Managing Director at First Beverage Group “We typically invest in companies that are getting close to around $2 million in revenue. $2 million in revenue to us is usually when somebody has figured out what’s working, what’s not working, and how to make their brand function in one, two, maybe even three markets.”