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September 23, 2014

Thinking of Launching a Food Startup? Lessons From Two Tech Entrepreneurs

Boston has long been known as a tech hub, but there’s a green field of food startups sprouting up in the area. You could argue this is a food startup renaissance 12,000 years in the making! (hurray, agricultural revolution) 

Locally, I uncovered over 50 food-based startups across Boston, Cambridge, and Somerville (a rough count) -- and with Meetups, a plethora of food trucks, breweries, and distilleries, we are seeing spring-like vegetal growth in the space. These are a new breed of food companies, ranging in focus from cricket-based tortilla chips, to chocolate to fuel your workout, and even a fully-automated home garden… for your kitchen. 

Or, in other words, many of these companies are building around growing trends such as sustainable agriculture and functional foods (one of fastest growing segments in the food industry). 

I feel a particular affinity for food startups, for three primary reasons: 1)  Food literally sustains us as a species (albeit Soylent may be trying to usurp this), so there is a clear need; 2) People have an intense, visceral and personal experience with food that is hard to match in other sectors; 3) I am a part of one! (We here at CogniTea make a brain-boosting tea that helps promote a clear and focused mind, without the crash, jitters, or headache typical of coffee.) 

          

Given our backgrounds in mobile and tech, Alex and I have had a bit of a learning curve as we’ve transitioned into the savory world of food. And we thought it would be interesting to shed some light on the world of primary-producer based startups. 

          

Basic startup DNA is similar 

Aaron: All told, the genesis of business creation remains the same: Is there a clear problem or opportunity in the market?; Can you identify a growing trend or a discrete niche?; Do you have the abilities or can you cultivate a team to build the product? 

You still want to test your ideas in the market, get feedback, iterate and adapt. Technology has made this an easier process, with platforms like Kickstarter, Indiegogo, and social media helping you gauge market receptivity and test quickly. 

Alex: Building off what Aaron said, I’m surprised how rewarding it is - having a tangible product to give someone to touch, hold,  and taste is a great feeling. But it’s still all about getting out in the world and putting your product in someone’s hand. 

Also, managing a project is very similar across the board - from tech, to food, and everything in between. You have to organize, prioritize, and then execute.   

Starting in tech also allows you to think more about leveraging technology to streamline the business whether it is a CRM for interactions with your customers, social media engagement, payment processing, etc. 

But, there are definitely some stark differences 

Aaron: The fundraising model and startup cost is much different. Most CPG’s are raising rounds for the purposes of scaling (such as ramping up distribution to go nationally), so you see many food startups starting locally, expanding into boutique retail, building regionally (such as through retail chains), and then raising a large round to expand. This is usually a multi-year process, so the growth trajectory is extended over a longer period of time. 

For capital, crowdfunding has been a major boon for consumer companies in general, and it’s a powerful model as it helps you obtain feedback, gain real customers, and you can leverage funds raised for production. This leads to the drastic difference in startup cost, which I’ll let Alex touch upon. 

Additionally, distribution is a different animal. You have to consider how you want to grow, because this impacts your pricing and cost structure. For example, your margin requirements (the difference between COGS and Wholesale, and between Wholesale and MSRP, the price you pay as a consumer at a store) will vary depending on which sales channels you are looking to distribute through. You need to make sure your top-line pricing works so you can grow profitably, when factoring in layers such as a distributor or retail, which adds up fast. Oftentimes, people under-price their products with anticipation of bringing down costs over the long haul, which is a prevarious gamble when you need grow now. 

In terms of marketing and customer development, there’s often more of an investment on a consumers part, in trying a new food product. With apps or new software, the main impediment is often creating a new user profile, but to have someone consume something new is a slightly more challenging sale. This is where trust, word of mouth, and recommendations makes a world of difference. E-commerce sites like The Grommet are great for this. 

Alex: Overall, there are more moving pieces to consider and align. With CPG’s you have a lot of costs to factor in, such as raw materials, prototyping, production, shipping, distribution, etc. It’s not just a laptop and time, there are real costs in starting the company. One example is if you need to spending time at a commercial kitchen to develop new recipes. You also have regulatory standards to adhere to as well. 

There are also the operational challenges of sourcing materials, coordinating production, fluctuating pricing and availability (if dealing with commodities like raw ingredients). Inventory management is incrediblyimportant especially with a boot-strapped startup -- because cash flow is a huge consideration. In the early stages, it’s a balancing act of having cash tied up in product, anticipating future sales, and managing a lead time for new product. 

          

Anecdotally, I hear of new food startups weekly,  but with major investments in companies like DAVIDsTEA and Blue Bottle Coffee, we may just be witnessing the next hot startup segment! 

What do you think: Is this sector full of green pastures or a passing fad? Share your responses in the comments below! 

Aaron Gerry is the head of sales at CogniTea, a brain-boosting tea for entrepreneurs. He can be found running around the city (hurray runner’s highs!), hunkered down in cafes, or helping to build the CPG startup scene in Boston. You can connect with him on twitter @AaronGerry.