10 Things to Know about Venture Capital for Restaurants & Food Businesses
Have you seen the headlines of startups raising $10 Million, or even $100 Million in venture capital and wondered if this type of funding is right for you? This article is all about venture capital for restaurants, food tech startups and food businesses.
Disclaimer: This is not financial advice. The article is meant to provide a quick overview so that you can conduct your own research and seek legal advice from a legal professional.
Venture capital for restaurants & food businesses: What you need to know as a founder
1. What is venture capital?
Venture capital is money (and sometimes other resources like mentorship and networking) invested into a high-growth company by investors in exchange for ownership stake in the company.
So, if someone invests in your company, they will usually take a percentage of the company ownership.
How much ownership investors have in your company is something that you need to negotiate with the guidance of your attorney.
The goal is for the venture backed company to have a big exit, so that the investors make more money than they invested.
2. What is a venture capital firm?
A venture capital firm makes investments in companies.
The amount of money they invest into a company varies, but itās usually $200K+ to $5M+.
Venture capital firms invest money into several companies (called portfolio companies), expecting that most of those businesses will fail but hoping at least one will be acquired for a large sum of money.
And a large sum of money to a VC firm is $100M+, and as close to $1B as possible.
The firm, usually made up of general partners, limited partners, analysts, associates, etc, pools money from wealthy individuals and organizations and uses that money to invest in companies.
These wealthy individuals and organizations (limited partners) can include angel investors, universities, endowments, etc.
3. What is a venture backed startup? And why is it important?
A startup or company that identifies as venture backed means that a venture capital firm has invested capital into their business.
Being a venture backed startup isnāt as important as people make it seem.
The connotation is that a venture backed startup is growing fast, and has great potential to continue making money or to make a lot of money in the future.
But this is not always the case.
Companies will advertise that they are venture backed in hopes of attracting the best job candidates.
However, more job candidates understand that VC funding can (and does) run out and that a bootstrapped company might be a better option for them.
4. How does a founder or company get VC funding?
Usually, through many months, sometimes years of fundraising.
And fundraising is basically meeting with investors and pitching your company to those investors.
However, getting a meeting with any venture capitalist is quite difficult.
Some founders are able to connect with VCs or VC firms through their network. This is called a warm introduction.
Otherwise, you might have to write cold emails or submit information about your company through a contact form on their website.
And thatās just to get the attention of investors.
There are so many steps to getting VC funding for your business.
5. What is a term sheet in venture capital?
A term sheet is a document between the company founders and potential investors that outlines:
- Valuation of your company (how much your company is worth) before and after investments
- How much money the investors will invest
- Amount of control you have over your company and the amount of control that investors have over your company
- ā¦and a lot more
Itās non-binding, so the term sheet is not a contract.
However, the term sheet is often used when putting together the final legal contract that is binding.
Negotiating the term sheet is considered the hardest part of getting funding from VCs.
And your attorney should help you navigate this process.
Notice I said YOUR attorney. Donāt fall for the ālets use my attorneyā from an investor.
Pay for your own attorney because someone elseās lawyer will not look out for your best interests.
6. What are the best venture capital firms?
I have a problem with this question. Mostly because itās not a good one.
What does ābestā in this context mean? If I had to guess, it probably means the VC firm that will invest the most money in your business.
There is no best venture capital firm in general, but there are definitely firms that could be great for you.
Take time to figure out what you need as a founder, besides money.
Do you need help with hiring?
Are you interested in expanding into an international market?
Does your customer acquisition process need work?
Research VC firms you believe can help you, your team and your company grow in other ways besides providing capital.
7. What are the best venture capital firms for restaurants?
Again, this isnāt a good or useful question, because it lacks context.
Hereās a short list of VC firms that invest in restaurants & food businesses:
- Fearless Fund (invested in Partake Foods & Slutty Vegan)
- Pronghorn (invested in Hella Cocktail Co.)
- Collab Capital (invested in Goodr)
Notice that I listed Black-led funds investing in Black food, beverage and hospitality brands.
Letās talk about why this is important. Crucial, in fact.
8. VC & Black founders
Most founders, regardless of who they are and where they are in the world, will never be able to raise venture funding.
I mentioned earlier how difficult and time consuming it is.
Another reason is that most peopleās companies arenāt scalable – and thatās what venture capital firms care about.
And Iām going to tell you right now, that if you are a Black founder, your chances of raising VC funding are low. But not impossible.
According to data from Crunchbase, a publication about startups & startup funding, Black founders raised only 1.1% of all VC funding available in 2022.
To be fair, VCs are investing in fewer companies due to the economic downturn.
However, there is a history of Black founders receiving less venture capital.
I plan to cover this in a future article.
Still interested in VC funding for your business?
This article doesnāt even scratch the surface of all the things you need to know in order to successfully get VC funding for your restaurant or food business.
Remember that this type of funding is an option, but is it the best option for you and how you want to grow your company?
Could all the time youāre about to spend pursuing VC funding be used more wisely?
How can you bootstrap your company instead?
What are other ways you can raise funding? For example, through angel investors or crowdfunding?
If you think VC funding could be right for you and your company, then you have a lot to learn.
And there are people who can help you on your VC journey.
9. Please, get a lawyer
Seriously. And hire one early in the process.
If you are interested in raising this kind of money, but arenāt ready to start the process, talking to a few attorneys can provide clarity on the pros and cons of venture capital.
They can also give you an overview of the legal aspects that a lot of people donāt understand through a discovery call or a paid consultation.
Revisit my interview with Kai Nortey, CEO of Kube Nice Cream, where we discuss:
- her experiences with venture capitalists
- the decision to use equity crowdfunding
- How an attorney can help founders before, during and after fundraising
10. Connect with other founders
Whether they successfully raised funding or not, definitely connect with other founders to understand their experiences.
This is a great way to share information and to help each other succeed.
Like anything in life, your network is vital to your success.
And there might be a level of honesty that you may not get from investors.
