Are Expenses Holding Back Food Startup Growth?

What’s the most expensive type of startup to launch? Though there may not be complete consensus on this topic, food and dining businesses are certainly at the top of the list. That’s because, unlike tech companies and their kin, today’s culinary startups exist at the nexus of advanced technology, costly equipment, and public service and health in a way that makes them costly to operate. Furthermore, the profit margin on food is traditionally very thin, making it harder to climb out of the red. The fact is, all of these expenses may be holding culinary startups back.

To succeed in the food world, founders need to be able to navigate a complex funding system – but funding is out there. Here’s what it takes to find the funds and keep costs down.

Assessing The Costs

Different types of food businesses have different requirements, but generally speaking, any company in this niche will need kitchen equipment, stock, money for licensing, as well as staff, and an office and office equipment for managing daily operations. And while there’s no such thing as a lean startup in any field, in the food world, working on a lean margin is just the state of things – but it’s hardly an aspirational goal in terms of how a business should operate.

To get a sense of just how hard it is to get a culinary startup off the ground, it can help to look at a successful company. The leading meal delivery service HelloFresh, for example, climbed to the top despite being part of a trendy, crowded field, and what made the brand successful was, in large part, access to funds – and for its backer, it was a small project.

Who’s behind HelloFresh that they can experiment with a startup? The responsible figures are German entrepreneur and headhunter Oliver Samwer who sought out a CEO, and with a network nearing a billion dollars, he took a chance. Most of us don’t have the opportunity to approach a startup as a novelty. Yet, simultaneously, Samwer and HelloFresh CEO Dominik Richter also took a “die to win” approach. You have to be all in – and that’s true of any food startup.

Finding The Funds

Since most culinary startups don’t have access to a venture capitalist to fund their projects, it’s time to consider where you’ll get your funds. One option is to look for a bank or other lender. For example, according to Jonathan Gold, Senior Funding Manager of Nationwide Corporate Finance, “Food startups often pursue both an initial loan as well as equipment refinancing due to the cost of kitchen equipment. By refinancing large appliance purchases, these startups can manage their costs while maintaining access to the tools they need.” It’s important to differentiate between funding streams for food startups since you may need to separate funding for office space or kitchen renovations versus funding for equipment, such as commercial ranges and refrigerators. Not all funding providers, more accustomed to working with traditional offices and tech companies, are equipped to manage the needs of food startups.

Another option for funding your culinary startup is by working with an accelerator. Programs like Union Kitchen in Washington, D.C. take 10% equity in startups that originate there, but they can also help founders make valuable connections with successful professionals who might invest in your projects. Often accelerator projects end up being backed by famous chefs with multiple restaurants to their name. Accelerator programs can also ensure that new founders are prepared for all the costs associated with starting a business. So many of the added costs – licenses, insurance, dues, and taxes – are overlooked in the initial business plan, and they can come as a shock to inexperienced founders.

Food businesses are all the rage right now, with lots of specialty startups in the health food sector, delivery, and other niche sectors, but many will fail before anyone knows their names – which means the competition for funding is even stiffer than it seems. To survive, then, you need a good idea, a plan, and grit that will carry you through endless funding applications, loan cycles, and more. It’s not an easy road, but it is a rewarding one.