Funding. The magic word in the startup world. Whether you’re in the plant-based space or the tech industry, the number of emerging brands grows exponentially year over year. With companies like Uber and WeWork setting valuation precedents never seen before, it seems like everyone is scrambling to get a piece of the funding pie. But what does it actually take to raise significant funds for your emerging startup? And what are investors looking for in your start-up to justify risking their capital with you?
The short answer -- a lot of things. In our experience, there are four fundamental principles we’ve identified that seem to guide about 80% of investors’ decisions for early-stage brands. We call them “Four T’s.” How can you leverage mastery of the Four T's to position yourself for funding success? Well, read on my friends.
1. Your Team
I'm a mentor with TechStars Sustainability Accelerator, and last year, helped pick some of the inaugural class of start-ups. Their 6-pronged criteria was simple (and ranked in priority of importance): Team, Team, Team. Followed by market, progress and idea. That's how critical your team really is for an early-stage venture.
Who is on your team? Investors want to feel comfortable knowing that not only do your team members have varied skill sets, but also that they hold some sort of competitive advantage for your business. What about them provides unique value that no one else has? Do you have the grit and determination (and moderate level of insanity) needed to move a mountain? Investors are paying attention to this.
Try to be diligent about understanding what everyone on your team (including your advisors) can bring to the table. You might be able to do this by asking each one what their “superpowers” might be, and having well-rounded vertical expertise (i.e. legal, operations, sales, marketing...) is also critical. Investors may ask you this, so try to be over-prepared to give deep insights about having access a well-rounded “dream team.”
2. Your TAM (The Market Opportunity)
What is the actual need for your product or service in the market, and how big is that opportunity (in dollars or people served)? Examples of your TAM or Total Addressable Market could be: number of Flexitarians, or the total dollar value associated to global butter consumption.
Don't be afraid to use a little math when defining your market opportunity -- but don't be egregious! At the end of the day, this is a projection. Investors want to see that you're in a market that implies growth and adoption (or is big enough to disrupt and justify their eventual returns). They will often look at your assumptions and how you made them to get a gauge on how you think and solve problems... so don't be afraid if your number isn't 100% correct, but also try to avoid giving them cause for alarm by targeting "100% of people who eat food" or something of the likes.
A key here is that your total addressable market is your theoretical maximum market opportunity -- i.e. if 100% of your ideal consumers. But there's a second, helpful extrapolation to include on your pitch deck is your "SAM" or Segmented Addressable Market. This number is much more relevant to your business operations. It involves filtering your customer to your target market -- i.e. rather than ALL Flexitarians being your market... you're targeting US-based Gen-X Flexitarian Moms. This might be your "SAM."
When considering your SAM, focus on which target consumers will most resonate with your products. This is critical to your ownership of a certain niche, and as investors know, "in the niches are the riches." Your logic here could resonate very well with investors and show them you are making a strong effort to understand your market... not just be everything for everyone.
3. Your Technology or Technique
We're talking about your product. And, specifically, how it is different and defensible from other brands like it in the market.
The food and beverage industry is extremely competitive, and it is so easy to copy other brands, buy the same ingredients from the same suppliers. Yes, brute force marketing and sales efforts can help your undifferentiated brand succeed in a broad, commoditized category. Yes, some of these brands also get funded. But damn if I tell you how much work and stress this can add to getting your voice heard by consumers and to make a profit.
If you're after share of stomach with consumers, we recommend finding ways significantly differentiate your brand. This could be something technologically driven and IP protected (i.e. Impossible Foods' heme), a proprietary process or usage of an ingredient in some unique way that the market hasn't yet seen. What can you protect about your brand, and what truly is your competitive advantage? IP protection not only means you could be sheltered from other people copying your business, but it may also position you very well for strategic partnerships and licensing deals. Being first to market with a new ingredient can give you an initial sales lift, but when 15 other competitors decide to copy you, what will keep you as the #1 brand in that category? Investors love seeing that you’ve created unique ways to generate revenue and distinguish your brand from the pack.
4. Traction
How much traction does your startup have in the market? This is a measure of showing product-market fit (and de-risking your company to investors who want to know if consumers really want your product or service). Traction can include sales velocity and high rates of sell-through in existing channels, existing or pending strategic partnerships, or even a collection of consumer insights that prove pent-up consumer demand. And if you're not in the market yet, investors will be looking for a sound market strategy that passes their initial gut-check.
These are just a few things that investors may be looking for when evaluating your brand for investment, but if you have these dialed in, you’re off to a great start in turning investors' heads and getting funding.
Sprouted Ventures is a market strategy collective that acts as an extension of your team to drive your marketing, sales and fundraising efforts for emerging plant-based food-tech brands.