By Veronica Fil, Co-Founder and CEO of Grounded Foods

 

Six months ago, I was standing in my kitchen drinking a bowl of wine and arguing with my husband over the phone. He was in Los Angeles, meeting with a potential business partner who was ready to invest in a plant based cheese business that we’d created just a few months prior. The investor wanted 50% of our company—‘skin in the game,’ as he called it—in return for getting our very newly formed startup off the ground.

My partner was tempted by the offer. After all, it’s difficult to turn down someone who’s trying to give you money. But I wasn’t so keen; it seemed way too early to give away such a significant amount of equity. 

Meanwhile, the investor was applying pressure. He was ready to start negotiating numbers, and was waiting for us to make an offer. Naturally, his first question was “what’s your valuation?” As first time food business founders, we had no idea.

 

Understanding your points of leverage 

Most first time founders will understand the clusterfuck of uncertainty involved in assessing their startup’s value. While there are plenty of methods out there, not everyone with a cracking idea is mathematically-minded. Besides, what if you’re still in the R&D phase, or your product is not on the market yet?

That’s the position we found ourselves in. With zero experience in startup valuation, there were only three things that I knew for sure:

  1. It’s an art, not a science.
  2. If you’re a contestant on Shark Tank, whatever figure you pick will always be wrong.
  3. It’s all about leverage.

That last point stuck. In lieu of revenue—or any idea of the ballpark we should be working within—I decided not to calculate our value in a monetary sense at all. Instead, I weighed all of our points of leverage: qualities that justified why our startup was valuable. Here’s what I took into consideration:

 

Unique value proposition

How is the product unique? Is it special enough to be newsworthy or disrupt a category? Or is it just a nice hobby business to have…

 

Prototype 

How far have you gone in the R&D process? A prototype doesn’t necessarily need to be the final version of your product, but the closer you get, the more valuable your concept becomes.

 

Skills of team

What skills do you and your co-founder(s) bring to the table? Answering this question realistically will also give you a sense of what kind of investor you’re looking for. Think strategically—you don’t just want money, you want someone that understands the market and can fill gaps in your own team’s skill set.

In our case, this was a great point of leverage. My partner is a fine dining chef with more than 15 years of experience in food R&D, and had single-handedly opened and operated multiple highly successful restaurants. It meant we already had advanced in-house expertise when it came to product development, as well as a sound understanding of how we could adapt recipes at a larger scale. On the other hand, my own experience in consumer psychology, economics and marketing gave us a head start when it came to business strategy and branding.

 

Existing profile 

If you’ve got a public profile in a relevant field, emphasise it! For us, my partner’s profile as an award winning chef gave our products additional credibility. It also helped us to obtain media coverage when we announced the launch of our business (another big plus when it came to attracting investors).

 

Size of market 

Is your product addressing a well-known issue for consumers? If so, how many people are likely to buy it? Be realistic about the size of niche markets; just because your product solves a problem for you and your friends, it doesn’t always equate to a sustainable business. 

 

Mobility

When it comes to jumping on a career opportunity, it’s always going to be easier for someone with no kids, house or other responsibilities that tie them to a certain location. For example, when we joined the BIV accelerator, we were able to move to the other side of the world on extremely short notice—we just packed our bags, broke our lease and flew to New York with our poodle in tow. Unfortunately for many founders, that’s not so easy.

By no means should this ever stop you from pursuing your goals. But if you are in the position where you’re extremely mobile, it’s worth using it as leverage.

 

Scalability 

Regardless of how great your product is, how easy or expensive will it be to produce? The ability to manufacture at a mass level will certainly make your position stronger. Think about the machinery needed (existing or custom), human capital required (must it be handmade or can the process be automated?) and availability of ingredients (I remind you of the 2014 kale shortage as an example…).

 

Sales traction 

As soon as your startup has some runs on the board when it comes to sales, its value goes up. Consistency is key: there’s no better way than repeat orders to demonstrate that there’s a valid market for your products.

If it’s too early to be selling products, there’s other ways you can show traction. Emails from potential buyers, purchase orders, mailing list subscribers and even pilot trials (such as using your products at a special event, restaurant or store) can go a long way in convincing investors of the value of your business.

 

Adding it all up 

Thinking about our value in non-monetary terms made me feel much more confident about entering negotiations with our potential investor. In my mind, I felt clear about our strengths and weaknesses—and when discussions became heated, I was able to stand my ground without hesitation.

So what dollar valuation did we ultimately settle on? To be honest, a very conservative one. Like many founders, I didn’t want to scare the investor off with a high figure, but I didn’t want to lowball it either. So when I nervously blurted out the amount, I didn’t expect him to scoff at me. Nor did I expect him to reply “you’re kidding yourselves if you think your business is worth anything near that.” Needless to say, we didn’t go through with that deal.

It didn’t matter. Because a few weeks later, our little startup was valued at a lot more than that. Then we were on a plane to New York, on our way to meet the team at Big Idea Ventures, about to start a new adventure as the founders of Grounded Foods.


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