Funding a startup business has become a mixed bag during the pandemic. Overall, the recession has raised the barrier of entry for incubators for entering the retail market. That’s made some investors a little more cautious — or at least more diligent — in partnering with emerging businesses or continuing to finance them in this environment.
“Some promising smaller brands have had to exit the market,” said Tom Vierhile, vice president of strategic insights, North America, Innova Market Insights. “It takes money to create and manufacture products and funding is likely to be much harder to obtain for smaller companies lacking a strong track record than multinational firms that can easily access capital.”
Just a year ago, financing was much more readily available. In fact, noted Steffen Weck, president of Food Business Consulting, easy money was flowing into incubators.
“There was a rush,” he said. “Anybody who had money to invest was investing in any little new startup they could get their money into. Throwing money at everything. Today, however, they had an opportunity to reassess their portfolio, and in the future, they’re more likely to fund brands and businesses that have gone through due diligence.”
However, liquidity is widely available, especially for more established brands.
“The money is out there, and during the pandemic, it’s been as aggressive as ever,” said Ron Savelli, a food and beverage consultant for private equity firms and veteran of the baking industry. “Believe it or not. I thought initially it would slow down, but the people I work with say it’s opened up more because there are a lot more business owners who are thinking about whether to sell their companies in today’s environment.”
Mr. Savelli pointed out that many private equity firms won’t touch incubators unless they have revenue stream or a high-potential new product that can be attached to a business they currently own. Startups — defined as businesses with under $1 million in annual sales — use venture capitalists or what he calls “angels,” which are private investors such as friends and family members of the entrepreneur.
Mr. Savelli cautioned incubators about giving up too much ownership to raise capital during the initial startup. Many private equity firms won’t invest in firms where the owners hold only a minority interest in the business.
That said, bringing on investors creates a whole new outlook for a company.
“Growing a company that you own is like chasing a horizon,” Mr. Savelli said. “You never get there. That’s your vision, and you chase it. The difference with private equity is that is you find your horizon in four or five years before you have to exit and divest it again.”
This article is an excerpt from the September 2020 issue of Baking & Snack. To read the entire feature on incubators, click here.