Funding Startup Growth: A Tale of Two Companies

The trend counteracting job loss from business consolidation is new business startups. As trained people are downsized, that energy and knowledge often result in a new business. Funding often comes from stock options or buyouts from changing companies, but that’s rarely enough. This robust economic climate has a ripple effect that has helped many entrepreneurs to launch or expand food companies. Here’s a look at two different funding strategies pursued by two equally energetic entrepreneurial companies.

• Networking Private Investors. Fran Lent was an executive with Del Monte Foods Corp. and a young mother when the idea of starting a frozen food company specifically targeting kids’ foods occurred to her. Her four-year-olds, Bradley and Hannah, were hungry and picky. She created an oven-baked chicken nugget in the shape of a duck and called it “Lucky Ducky Chicken.” Her kids loved it. So did parents looking for healthy foods that kids would eat.

Business planning, more products, and consultations with other parents followed, and a year later in 1995, Fran’s Healthy Helpings, Inc., was founded in Burlingame, Calif. She and her husband, an Internet entrepreneur, plowed virtually all of their life savings into the venture. This included $100,000 in stock options from her husband’s former employer. Lent networked with every women’s business association that she could find, seeking advice, mentoring, experienced advisors, key employees, and funding sources.

According to the National Foundation for Women Business Owners, the number of companies owned by women increased by 78% nationwide, with employment and sales in those businesses growing by 183 and 236%, respectively, between1987 and 1996. In fact, growth in women’s companies outpaces growth of all businesses by nearly two to one, according to NFWBO statistics. Strength of these new businesses is based on powerful networking.

Food companies need buildings, expensive equipment, raw materials, and hefty marketing and distribution budgets to establish a market. Most major food companies spend $250 million to build or extend an existing brand. Stock options notwithstanding, Lent needed an initial $1 million to get her company moving. Networking connected her with Baccharis Capital, a Menlo Park, Calif., venture-capital firm specializing in companies run by women, and later with Investors’ Circle, a small, well-capitalized investment group in Palo Alto, Calif., committed to socially responsible investing. Her plan and presentation produced the capital she needed from both groups.

With the necessary financial backing from both her personal funds and private investors, Fran’s Healthy Helpings will generate revenues of $2 million this year, based on distribution through more than 300 grocery stores in northern California.

• Tapping Local Capital Sources. Better nooks and crannies than the big brand—that was the vision of the Lopes brothers, Paul, Dave, and Rob, and their friend Jay Pateakos, when the group founded Atlantic Baking Co. last year in New Bedford, Mass. Their goal was to bake and market a better-tasting English muffin. The Lopes brothers had an advantage in knowing the market and the difficulties associated with creating a new brand—their family owns Central Bakery, based in Fall River, Mass., and had what they thought was a killer muffin recipe that had never been tried commercially.

After a small but positive local test market in which samples were featured at Eastside and Shaw’s supermarkets in the area, the startup team acquired a $70,000, 1960s-vintage production line from My Bread Baking Co., of New Bedford. Shipping it five miles to Atlantic’s leased warehouse and processing facility nearly doubled the cost. Gas, electricity, ingredients, and packaging materials added to the total before one muffin was baked.

In an effort to buttress Atlantic’s cash flow, the Lopes brothers sought $60,000 from the New Bedford Economic Development Council, a nonprofit public funding source financed with state and federal money. Despite their progress and solid credentials, the EDC turned Atlantic down. The next move was a loan from Fall River Five Cent Savings Bank, which provided $25,000, less than the company needed to launch but enough to maintain momentum. When the money ran out, Atlantic again sought $35,000 in funding from the EDC, and again it was turned down. The Five Cent Bank came up with another $45,000, this time backed by the Southeastern Economic Development Corp., a local pipeline for Small Business Administration loans. The federal government covers 80% of the risk, while Five Cent carries the rest.

By last April, Atlantic had expanded distribution of its European-style English muffins to 541 supermarkets but still couldn’t persuade the EDC to loan it $35,000 for expanded marketing. The council has a $5,000 limit for loans to “risky start-ups” with few assets. This was a deal killer, because the initial funding needs were far greater. The bank, however, had a year-old program in place for exactly the kind of local bootstrapping business Atlantic represented. In addition, Five Cent’s tie to the SBA allowed it to become a conduit for second-round financing as well.

Last July, in its third attempt, Atlantic finally secured $35,000 from the EDC after demonstrating its ability to grow the business. According to Pateakos, the founders did not want to give up control of the company to outside investors. The EDC approval paves the way for the founders to realize their dream.

While money is available for startups, entrepreneurs need to show extensive personal commitment of both time and money. The model must be sound and the executive team well experienced. Entrepreneurs must show as much creativity and drive in seeking funding as in starting and building the business. No matter how good the mousetrap, no one will beat a path to your door.

by PIERCE HOLLINGSWORTH
Contributing Editor