Two businesses take different routes to funding their new businesses
Entrepreneurs have never had more financing options. A slew of alternative fundraising choices, such as crowdfunding and startup contests promising generous cash prizes, now complement traditional options like bank loans and friends-and-family financing. Minnesota Business spoke with two business owners who went two different routes for their perspectives.
Traditional financing: Fulton Beer
Back in 2008, when Fulton Beer was little more than a lark, the craft-brew industry was still in its infancy in Minnesota. The so-called Surly Bill — the law that paved the way for dozens of taprooms across the state — hadn’t even been drafted.
Fulton’s co-founders didn’t care. Two had decent day jobs: one in carpentry, the other in clinical research. Two were in grad school. In their mid-20s, none were blessed with exorbitantly wealthy families and couldn’t rely on generous credit lines. So, frugality was the order of the day.
The co-founders scraped together modest savings and a bank loan, says co-founder and CEO Ryan Petz — about $40,000 in all. They inked a contract brewing agreement with Black River Falls, Wisconsin–based Sand Creek Brewing, delaying heavy equipment purchases until they’d established a steady revenue stream.
By 2009, Fulton was selling beer under its own label. Three years later, it made history as the first Minnesota beermaker to open a brewery-adjacent taproom. To purchase the brewery-taproom building, Fulton secured just over $1 million from Waconia-based Hometown Bank and a clutch of friends-and-family investors, says Petz.
“We told prospective investors upfront: ‘If you’re looking to get a dividend every quarter starting next year, or to triple your money when we sell out to a big brewery, this is not the investment for you,’ ” says Petz.
Fulton took out another bank loan in 2013 to crank up a Northeast Minneapolis production facility ahead of a major expansion. Much of the brewery’s early debt has been refinanced on favorable terms, reducing projected long-term debt service costs.
Fulton closed a second equity round in 2017. While the funds aren’t earmarked for a single mega-project, Fulton has expanded into 10 new state markets, including five in the last year alone: Kansas, Ohio, Pennsylvania, New York and Florida. Each new territory means new distributor relationships, higher marketing spend and — of course — more of the equipment and ingredients that make each glass, bottle or can possible.
“This is a capital-intensive business,” explains Petz.
Fulton’s now among the state’s largest breweries. Petz’s biggest regret is the founders’ early mistrust of cash-for-equity fundraising. “Wanting to keep control over your business for a long time doesn’t mean you need to stay away from equity financing,” says Petz. “There’s a way to do that and keep everyone’s interests at heart.”
Alternative financing: Local Crate
St. Paul-based meal-kit company Local Crate sought alternative funding sources early. That puts it in good company — competitors such as Blue Apron and Hello Fresh have also gone that route, which is common for consumer-facing startups.
In 2015, co-founders Frank Jackman and Michael Stalbaum leveraged a small family-and-friends raise to finance a three-month beta test. Later that year, a successful Kickstarter crowdfunding campaign raised nearly $18,000, enough to bring Local Crate’s first kit to market and build a valuable lead list.
“Getting those extra dollars was huge for us, but we were also building a network of potential customers,” says Jackman.
Next, Jackman and Stalbaum entered their first startup competition: MN Cup. Though they didn’t advance, they met two key advisors: David Finch, a seasoned Minneapolis food entrepreneur, and Brett Brohl, founder and managing director of The Syndicate Fund and director at the new, St. Paul–based Techstars Farm to Fork Accelerator in Partnership with Cargill and Ecolab. Finch and Brohl both put up funds for Local Crate; other angels would follow.
“We were intentional about seeking knowledgeable capital: investors who could give us expertise and network access along with their dollars,” says Jackman.
Knowledgeable capital also emerged out of Local Crate’s run through the Land O’Lakes-sponsored Techstars Startup Next Food + Tech accelerator (predecessor to Techstars Farm to Fork Accelerator in Partnership with Cargill and Ecolab).
Local Crate’s second Techstars tie-up was more profitable. The company was one of 10 retail startups in the Target+Techstars Retail Accelerator’s second cohort, active last summer and fall. All Techstars Retail participants get $20,000 in exchange for 6% equity, plus $100,000 in convertible notes. During its Techstars Retail run, Local Crate accepted another $50,000 convertible note “from a member of the investor community,” says Jackman.
In April 2018, Local Crate announced a $1.4 million raise led by three Midwestern equity funds: Matchstick Ventures, M25 Group and the Syndicate Fund. “The raise helped fund Local Crate’s expansion plans into new regions starting with Illinois, California, Wisconsin and Iowa.”
While Jackman seems pleased with Local Crate’s journey, that’s not to say there haven’t been bumps along the way. His team delayed Local Crate’s Chicago direct-to-consumer expansion during its Techstars run, starving the company of revenue at a crucial time. In retrospect, says Jackman, it might have been smarter to devote more resources to direct-to-consumer early on. His advice for entrepreneurs considering alternative financing: Don’t get so distracted by big, shiny opportunities that you forget to do the less glamorous stuff.
This story appears in print in our July/August issue. For a complimentary subscription, click here.