Barista Magazine

APR-MAY 2019

Serving People Serving Coffee Since 2005

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Taking on Investors Without Losing Your Beans By Tracy Allen MORE AND MORE coffee professionals are starting their own cafés by way of taking on investors. While this is often the only route to starting and growing a business, you still need to protect your invest- ment above all else. Jared Truby and Chris Baca met at a barista competition in 2005— the fi rst of many for both of them. A few coffee-industry jobs later they realized they wanted to go into business together and "make the world a better place by providing opportunities for people," says Jared. As of 2016, they've owned Cat and Cloud Coffee in Santa Cruz, Calif., along with another partner, Charles Jack. With two cafés up and running and two more set to open this year, it's safe to say their company is growing at a healthy rate. It's a good time to be in coffee. Word on the street is, coffee is a good investment. In 2018, investors poured a record $1 billion into coffee startups. That includes cafés and roasteries, and equipment and retail-product business models—but still, that's a lot of cash. As Jared, Chris, and Charles—and any business owner—can attest, however, fundraising is no easy task. You've got to do everything in your power to make your company look as worthy of investment as possible, with plenty of documentation, including a business plan and company story that outlines your progress and key achievements; results of market research that support your business expansion; in- dustry analysis and fi nancial forecasting; as well as your credit history and how much you've already invested yourself. Before approaching investors, develop your own term sheet that details the investment scenario that makes sense for your business, rather than passively accepting an investor's terms. Legal advice from a trusted source is invaluable during the investment process. Cat and Cloud has gone the route of Small Business Administration (SBA) loans and small-share individual investments (more on this later), but they also knew one thing clearly before they set out to fulfi ll their coffee dreams: the type of investors they wanted onboard and the relationship they wanted with them—what role each party would assume and how they foresaw working together. In other words, the big question is: Will you lead or follow? If you want to maintain leadership of your company, you must remain the majority owner and keep the investor as a minority. (This may seem obvious—but to some, sadly, it is not.) Most importantly, fi nd the right investor who is happy with this arrangement (not a back-seat driver). These investors should be comfortable with the risk and reward that you provide as a business owner who is motivated and passionate. Because it is in no one's interest to have an unhappy investor, be sure to agree at the outset to the nature and timeframe of exit, the need for future capital raising, and a clear indication of your strategic intentions over the mid- to long-term. Also, carefully negotiate the mi- nority investor's ability to block your ability to do what you want to do. As for Cat and Cloud's investors, "We love having them onboard, but they don't get a say in how we run the business," says Jared. "We are very clear about maintaining creative control. They get a forever return on investment and we will always consider their ideas, but they don't get voting stock." If you want to follow someone down new avenues of growth, it may be because you've taken your company or concept as far as you can, but you think your knowledge of the business makes it crucial for you to remain invested and involved. In this scenario, you remain part of the management team, but you are acknowledging that the investor(s) will gain some control as well—because you need their know-how. But again, think carefully before giving up a majority share of your business. Types of Investors Angel Investors Angel investors are often crucial at the earliest stage of a company's life—long before a bank would take interest. Usually they are wealthy entrepreneurs who want to leverage their net worth by investing in passion projects, especially startups that may have diffi culty access- ing more traditional forms of fi nancing. Many angel investors are successful entrepreneurs themselves, as well as corporate leaders and business professionals. Their investment is typically in the form of either a loan or a stock purchase. Sometimes, they also mentor or advise the business in which they are investing. While angels can open important doors and give critical advice‚ fi nding, wooing, negotiating, and building long- term relationships with them can be a fraught and confusing process. In some cases, these "angels" make high-risk investments in hopes of receiving a large return if the company is bought out. This type of angel investor is usually most active when the economy is strong or stable. If you have been approached by or are considering approaching an angel investor, ask the following questions: • Do they expect control in return for their investment? If so, how much? • What is their motivation? • What is their experience in the industry? • Does your company meet their requirements? Banks To qualify for a bank loan, it helps to have experience in the indus- try or a mentor who knows the ins and outs. You may have to put up collateral, such as a home equity loan, and as much startup cash as possible (meaning all of your cash). The bank typically requires a comprehensive business plan that includes: • A detailed description of the business • A description of the business's core products and/or services • Financial projections 88 barista magazine

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