When Dan Kurzrock started pitching his company ReGrained to investors, it was a tough sell — for both sides. There was the common issue—it was an unknown startup from a relatively unknown twenty-something; the larger obstacle though, was that it was an unknown market.
ReGrained manufactures a patented ingredient, a protein powder from otherwise wasted nutrients from the malt in beer-making, that is high in fiber. For years, few wanted to risk money behind the idea of building a market for what Kurzrock had deemed an “upcycled” ingredient. Meanwhile, Kurzrock wasn’t thrilled with the idea of institutional capital pushing growth behind the scenes.
Democratizing its shareholders looked far more appealing. So, Kurzrock turned to crowdfunding. It had worked when he first launched ReGrained while at UCLA in 2011, raising $30,000 in a Kickstarter-type campaign. This time, though, Kurzrock tried something new: equity crowdfunding.
It paid off. By the end of 2018, ReGrained raised more than $700,000. In all, the company has raised $1.5 million through crowdfunding, after closing another round at the end of 2020, and recently launched its puffed chips at Kroger stores on the West Coast and on Thrive Market.
“We continue to be very non-traditional in how we raise money, which has its benefits and drawbacks,” says Kurzrock, a Forbes 30 Under 30 Food & Drink alum. “We’re going to see more and more founders doing this kind of funding. It’s pretty powerful stuff for access to capital, mission-driven companies, and diverse founders.”
Kurzrock has quickly become a resource for founders across the food industry who are considering going down a similar financial path. These asks have exploded through the pandemic, he says, when early-stage startup founders have found it even harder to raise from conventional sources like angel investors without regular pitch competitions and in-person expos.
The difference in equity crowdfunding (also known as regulation CF crowdfunding) — versus a platform like Kickstarter — is that it is federally regulated as if it were a mini-IPO. Whereas any money raised from a traditional platform would show up on a business’s balance sheet as reward-based revenue, equity crowdfunding rolls up all investors into one shareholding entity, without voting rights. The upshot: Founders retain control.
There’s never been a better time to try it, Kurzrock says, after the Securities and Exchange Commission earlier this week increased the limit that a company is allowed to raise from non-accredited investors to $5 million, from $1 million. That means investing in startups is no longer limited to the wealthy, at the same time that crowdfunding has become a viable option for bootstrappers who need capital but don’t want to get pushed into a supercharged VC timeline.
WeFunder or Kiva, which is popular among farmers, are now digitally powering these transactions and opening them up to anyone a founder can email or connect with on LinkedIn. A list of potential investors are sent the offering—it could be a private or public link—and they can invest via the platform, which may take a fee off the top. For WeFunder’s non-equity fundraises, it’s 7.5%; for Kiva, which crowdsources loans and runs as a nonprofit, it’s free.
WeFunder says around 20% of its $250 million funneled to companies comes from the food or agriculture industries, from natural foods brands committed to sustainability and craft brewers to third-generation family fishing boats that want to stay independent. At Kiva, more than 8% of the $40 million it has crowdsourced in the U.S. has gone to farms while 25% goes to food or beverage companies including food trucks and small restaurants. Both have seen demand grow recently.
Kurzrock shares his advice on equity crowdfunding—from the risks to what he wishes he knew from the start:
Forbes: What do you think is the most important aspect of crowdfunding that an early stage founder, especially in food, should know?
Dan Kuzrock: It’s pretty misunderstood, and I don’t want it to be overlooked as a way for companies to raise money. It’s an incredible way to actually market a cap table, but it’s also strategic. People don’t think about it as strategic capital but we have now over 1,000 people that we haven’t met who are now champions of the first retail launches, new products, collecting feedback. A lot of people never looked further than that because their lawyers tell them, ‘Oh, this new thing is risky.’ It’s worth a conversation with these platforms to really do the due diligence, because this is, more broadly, such a new frontier for fundraising for companies. A lot of people stop before they even get started with it, because of legal counsel.
Forbes: How expensive is it in comparison to other types of different structures?
Kurzrock: It should be a percentage, a single digit percentage, of the amount raised, because [the platforms] have costs to run, just like any tech startup. They make money when we make money and it aligns incentives that way. If you have an IPO or an acquisition or whatever, you know they get paid out. We were comfortable with that as a model. Some platforms actually get equity in the company, which I think is inappropriate.
Forbes: Let’s dig into that a little bit. Why do you think that giving equity away for a deal like this would be inappropriate?
Kurzrock: Because the strategic relevance of the platform itself exists for the duration of the period in which they’re facilitating the actual fundraise itself. Let’s just imagine that the terms are such that they were actually like a major shareholder in the business. I think it makes sense for them to make money for facilitating the raise, and to have something to lock in a longer-term carry, but for them to actually be an equity holder in your business, it’s just out of the lane of how they should be compensated.
Forbes: What are some other concerns that you look out for when you’re finding these deals for yourself or where you’re hearing from founders who are looking at this as an option?
Kurzrock: One thing that’s really important is you have to work to set this up and a lot of people think it’s all done. But it’s a marketing campaign in addition to a fundraising campaign. So you know if a company does not have the resources to actually bring investors to the platform, they’re not going to find the raise. It doesn’t mean you have to be a consumer-facing brand necessarily. It’s not like you just turn this thing on and if you build it, they will come. You should have a marketing plan behind doing it.
Forbes: You’ve raised two different rounds through crowdfunding, in addition to raising from private investors and strategic partners. What is your best tip for success at this?
Kurzrock: Set up everything at your own pace. What you can do then as you start releasing and selling, you can think of potential investors like concentric circles—the bigger and bigger groups of people on your customer list. And by the time there’s a base of validation, you can make it public. It can make a difference because there’s a psychology involved with something like this where the more validation you can get in front of, the better. And it also gives you an opportunity to check: Is your messaging landing? Do I need to optimize to learn? What else can we do?
Forbes: What’s another trick you learned?
Kurzrock: A lot of people also don’t realize that you can open up a parallel raise. So there’s regulations CF crowdfunding, which is for non-accredited investors, and then there’s regulation D crowdfunding, which is for accredited investors. By doing, both in parallel with the platform, they’re able to classify people into both of those buckets and the people that are accredited investors have a much higher limit. So if you don’t have that regulation D raise as well, and someone who comes in with $10 million in net worth, they’re going to be limited to a few thousand dollars, but they could invest $20,000 if you have it set up right.
Forbes: Are there drawbacks from your experience so far?
Kurzrock: You have to be willing to put the financials out there in order to do this, which was not for everybody. It’s important to be up front with expectations. If investors are looking for a quick return, they probably shouldn’t be investing in a super illiquid asset. These are still shares in an emerging business.
Forbes: What other questions do you get when founders ask you if this is the right path for them?
Kurzrock: A lot ask me what the minimum spend should be. I think it’s important to make the minimum approachable. For us, we decided that that was $250. It’s not $50. This is maybe what they would spend a few months on our online store if they really like it. They can invest for that amount.
Kurzrock: Is this a long-term option for the future in your view?
It should be part of the capital stack. When I think to do this well you know you should have a blended capital stack—you’re raising money from private investors, institutional investors, strategic investors. An equity crowdfunding that, if you can get it right, is a piece of a broader strategy, but not as the solo strategy. [Regrained, for its part, raised $1 million from angels before its first crowdfunding and has also raised from the investment arms of large food companies like MillerCoors, pasta maker Barilla in Italy and Future Food Fund in Japan.]
Just as a rule, you never want all your eggs in one basket, right? But with the world now able to raise $5 million out of the gates through this, it could be the source of capital for a company to scale. You want to hedge your capital sources as a founder because you might think that you’re going to raise a million for crowdfunding and maybe something’s just not resonating with your offering, because it’s too complicated or whatever it might be fine. The most important thing a founder can do is make sure that their business doesn’t run out of money. Most good ideas fail because they run out of money, and I think this is going to be one increasingly important and viable way for early-stage, mission-driven, diverse founders to raise capital.