A $50,000 Cup of Coffee – The Funding Coach

Bard Coffee

I recently visited Bard Coffee in Portland Maine to meet with a serial entrepreneur. He needed help finding local angels to back his tech-enabled food company. What happened surprised us both, in a good way!

New Entrepreneur In Town

Steven had been successful with a tech startup in Seattle. He was Chairman and CEO of a company that improved the efficiency of computer networks. He raised $6 million for the company, which was acquired in 2015.

He ended up in Portland, Maine in 2016 as entrepreneur in residence for an accelerator, during which time he also started his own new business. The elevator pitch: the world’s first mobile food platform – delicious food, zero wait.

Steven self-funded the first demo of his very innovative food delivery model, in Portland Maine during October 2017. Portland is known as a foodie town. Over the brief 10-day test, customer response was strong.

Seed Funding Needed Next

Next step: raise $1 million to do a larger market test with production systems. The business model involves manufacturing innovative, branded mobile delivery systems that provide ready-to-eat meals from established restaurants to customers ordering with their phones.

It’s a tech-enabled food company, with manufacturing. Software products can often be bootstrapped, but manufacturing companies usually need significant capital – in the hundreds of $thousands – to launch.

Steven was able to round up $800,000 from Seattle investors who knew him. This is impressive, given that he was going to operate the company on the other side of the country. Usually angels invest “locally.”

The challenge: his pitch to the Maine Angels fell flat. I’d missed that meeting so I didn’t fully understand the reasons why. But he needed some local money to strengthen his connections to local customers, and provide face-to-face feedback.

As we sat at the large open table in the middle of Bard’s, I started talking through his business, his funding problem and potential solutions.

Pitch Imperfect

Maine Angels, like a lot of angel investment groups, tends to invest in companies a bit further down the road in development than Steven’s company. Angel groups like to see paying customer validation. That’s a surprise to many entrepreneurs!

But it’s not at all unusual because of the competitive dynamics of startups competing for funding. Angel groups get many applications per company funded, so those that are furthest along tend to beat out those that are very early, because some key investment risks have been reduced. 

SEE: How Do Investors Perceive Risk?

Also, there’s a subtle human dynamic I’ve noticed at the monthly pitch meetings. People’s hands don’t raise more than once a meeting. Steven was pitch #3 of the morning at Maine Angels, and I suspected that of the 20+ angels attending, most had already raised their hands for either pitch #1 or pitch #2.

If you’re pitching to an angel group, always try to be the first pitch of the meeting.

Third Wave Opportunity

As I learned more about Steven’s business, I realized that his startup was a great example of what AOL founder Steve Case calls The Third Wave.  The Internet is a broad enabling technology that now enables entrepreneurs to disrupt entire non-tech industries. Uber is a prime example: who’d have thought the internet would lead to taxicab disruption? And yes, Uber’s promise is broader than taxis but it started in a rather mundane industry.

In Steven’s case, the internet has enabled disruption in the restaurant business. Those restaurants who use his system can expand to new locations with dramatically lower capital expense, and could in fact serve geographies that otherwise had too thin a market to support a full bricks and mortar location.

I thought that the people who would fully appreciate the opportunity would not be tech investors, but rather, those who really understood the restaurant and food businesses. And we have a lot of those in Portland Maine!

Potential Solutions

First, I recommended talking to the owners of some of the most successful area restaurants. It’s a twofer sale for Steven: pitch the business to a potential customer, then ask to talk with their investors if they have high interest in becoming a customer.

Second, I thought about the successful Maine food business entrepreneurs who had exited. Several were members of Maine Angels, but I thought that approaching them individually would have a higher probability of success than through the angel group.

Steven had mentioned that he didn’t think he would need to pay to place his innovative devices in high rise office buildings. The availability of high quality fast food available at convenient times with zero wait would be a perk, a differentiator for an office building. I mentioned the names of a few commercial real estate developers as potential investors, as they would understand both the value of his business to office buildings, and the challenges to restaurants of expanding their footprints.

The fourth avenue I recommended for finding local angels was pursuing investors through local food products companies. While not as high in likelihood as the first three, these food products companies had investors who generally were interested in food related opportunities. I mentioned a few and recommended which entrepreneurs he should speak with. If these founders understood his business, they could make a warm introduction to investors – always the best way to rise above the noise.

And Then…

… a gentleman who was sitting at our large open table at Bard’s, across from Steven, asked if he could learn more. He was in the food business and wondered what we were talking about.

Without missing a beat Steven launched into the elevator pitch. This guy immediately understood because he knew the food business. He was a seafood distributor and part owner of a well-established seafood restaurant. He asked lots of intelligent probing questions.

Steven answered them all extremely well. He showed pictures of his food delivery device on his phone. He was specific about test results. He knew his numbers cold. The business made money just with delivering lunch with a reasonable utilization rate. Breakfast and dinner made it even more profitable.

After about 15 minutes of back and forth, this successful food businessman asked about the investment: is the minimum $50,000? That was a clue that he was no stranger to private equity investments. Yes, Steven said, the minimum was $50,000.

“I’m in for $50,000. Let me give you my information.”

Steven and I exchanged glances, then he quickly closed. As they exchanged emails and phone numbers, I asked the seafood distributor: are you an accredited investor? I was trying to protect Steven. You run afoul of lots of state and federal regulations by soliciting investments from people who aren’t accredited. It’s possible, it’s just a different and challenging set of rules.

Yes, he said with a sly smile, he was an accredited investor. That was another clue he was no stranger to this process. If you have to ask what an accredited investor is, you probably aren’t one.

Find Angel Investors Who Know Your Customers

My big takeaway from this unexpected happy outcome isn’t that you should be talking about your fundraise at the busiest local café. Although if you don’t have local competitors that might be ok!

Instead, the surprise angel underscored my instinct to look for investors among people who understand your customers, not necessarily those who understand the technology you are using to serve those customers.

There will likely be many Third Wave opportunities in the coming decade. Success will come not from having awesome technology, but rather from using awesome technology in innovative ways to solve real customer problems with innovative business models.

And while plenty of tech investors are wandering into industries they know little about, entrepreneurs might get better advice tapping into angels who really know their customers.

As we all know, building an innovative business is anything but a straight line. And solving customer problems is the core of every real business.

If your early investors really understand your customers, your chances of emerging successful when inevitable rough times happen go up exponentially.

Don Gooding

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