5 Questions with Joe Dobrow, Author of Natural Prophets

Joe Dobrow, is a 20-year veteran of the natural foods industry and recently wrote a book called Natural Prophets that chronicles its rise and its pioneers who re-wrote the playbook for small entrepreneurs. Next week Dobrow will be coming to Impact Hub Seattle to talk about his book and host a food entrepreneurship panel and strategy slam. Tickets are just $9 and are available on Brown Paper Tickets.

Tell us about your book.

Natural Prophets is an entrepreneurial history of natural foods industry.  Few industries have been as influential and yet there has not been much written about it. It’s an entertaining history that is not very well known. We are lucky that this industry has grown up over our lifetime so we can hear directly from its pioneers.

I began my research to understand how these prophets were able to be so successful. Many of them were high-minded idealists, well meaning but honestly clueless. Despite steep odds, they survived and created a $100 billion industry that influences what we eat, where we shop, and have influenced other industries to be much more transparent.

You’ll be at Impact Hub next Thursday for a fun and unique event. What should attendees expect?

We will be feeding people’s stomachs and imaginations so come hungry!

There are two parts to the event.  One is a panel discussion with entrepreneurs who have built this industry in the Pacific NW.  The panelists will be from Theo’s Chocolate’s, Sahale Snacks, and Nature’s Path. This area has been a real center for food entrepreneurship and we have a lot to learn from them.

The second part will be a strategy slam. Companies will have 5 minutes to pitch their business plan.  Some of these companies are new, and some and some are well established but making some big changes to their business plan.  The panel and audience will have the opportunity to ask questions and weigh in on how innovative they are and how well they adhere to the philosophy of the triple bottom line

What inspired you to organize such an event?

Old style book events don’t work anymore. Traffic at bookstores is down – and you can’t autograph e-books! My background is in marketing so it was second nature for me to create a new type of event. Because this is a niche story, I wanted to get out into the community to find people who are interested in the topic and create an experience that is not so much focused on the book, but focused on the industry.

Joe DobrowWhat excites you about coming to Seattle?

Seattle’s hometown industry is entrepreneurship so it made sense to have an event that highlights entrepreneurs and put in a place like Impact Hub.  Seattle also has a very lively food entrepreneurship community. Having traveled across the country, I can say without reservation that there is something very unusual about it.

There’s extra significance for me personally as I’ve worked here in Seattle.  In 1999 as the head of marketing for Whole Foods, I was very involved in opening our first store here on 64th and Roosevelt.  There was a lot of nervousness about how we would be received as an outsider but the community welcomed us. It was one of the most exciting and satisfying store openings I’ve ever done.

What advice do you have for today’s food entrepreneur?

Patience and persistence is key.  This is really timeless advice and we can look at previous generations to see how it helped them. Stonyfield Farms was in business for 9 years before they turned a profit. Gary Hirsberger talks about his “hopeless infinite naïveté” that kept him going. He was constantly borrowing money from his mother in law and robbing Peter to pay Paul until he could find acceptance and scale that would eventually feed the growth of the company. Today it’s hard to imagine going 9 years without a profit and it may not be necessary, but having that patience and persistence is one of the eternal formulas for success.

The second piece of advice is more timely. As an experienced marketing professional, I want to tell you that social media is not enough. I hear from so many startup companies that don’t have a marketing budget and are relying on facebook and instagram, sadly overestimating the reach and impact they have. You still need to do the hard work of building a brand and building your marketing infrastructure. We need to think in more than 140 character chunks about how to reach our customers and how to understand their consumption habits.

 Event Details
Where: Impact Hub Seattle, 220 2nd Avenue South
When: Thursday, April 3rd from 5:30pm-7:30pm
Tickets: http://www.brownpapertickets.com/event/600850

Investing Without Zombies

BY MICHAEL “LUNI” LIBES – LUNARMOBISCUIT.COM

The results of an investment (in an early-stage startup) depend not only on the success of that startup, but also on the form of the investment.

A sophisticated investor is going to be nodding right now, thinking about liquidation preferences and other common add-on’s to equity investments. But at the same time, those sophisticated investors likely have a majority of their investments in a state where they are worth somewhere between nothing and a 1x return.  A state often called a “zombie” investment.

The root cause of “living dead” investments is not the high failure rate of startups.  Failure leads to truly dead companies.  These zombies are not only still running, but earning revenues or even profits.

The actual root cause is the traditional structure of equity investments.  Take a step back and look at the assumptions of such deals:

  • Investors buy P% of the startup for $X
  • The entrepreneur uses $X to earn $R
  • If $R is sufficiently large, an acquirer buys the company, returning the investor $10X

This is the basic formula for success as an Angel or venture capitalist.  The problem is that successful investors only see this story play out 1 out of every 10 investments, plus 2 investments with a $5X return, a few more with a $1X return, and 4 or 5 that are total losses.  Unsuccessful investors never see the $10X, and without that, have a loss across their portfolio.

I look at this and wonder why the investment structure is optimized for the least likely case, rather than the most likely case.  Is there not an alternate investment form that boosts the returns of the majority of deals above $1X?

Traditionally, the only other form of investment is debt.  It works for homes, cars, Fortune 500’s and the U.S. Treasury, but traditional debt does not provide enough reward for the risk of early-stage investments.  When debt terms are adjusted for investors, the results are too much risk for entrepreneurs.

Looking around the fringes of the financial world, I found a structure that does work.  Revenue-based financing (a.k.a. Royalty-based financing).  This comes in a variety of forms, but in general it works like this:

  • Investors provide $X
  • Entrepreneurs use $X to earn $R
  • Investors receive Z% of $R, until a total of $2X-$4X is returned

The two main variables here are the percent of revenue (Z%) and multiple of return.  Typically the revenue-share is 3%-9% of “top-line revenues”, a metric that is easy to define and compute.  The multiple is commonly $2X for growth-stage investments, and $3X-$4X for early-stage.

This basic structure provides a few benefits for investors.  First, it provides a built-in “exit”, one that doesn’t wait until the entrepreneur has build up enough value to either attract an acquirer or launch an IPO.  Second, it aligns investor interest and entrepreneurs, earn revenues.  Third, it makes no assumptions about when the revenues will arrive, nor requires negotiation on when to issue dividends.  Fourth, it leaves the company management free to operate in whatever manner they please, e.g. management worries about growth vs. profits.  Fifth, it eliminates “zombies” as either companies are alive and earning revenues, or dead (or soon dead) earning nothing.

In short, it provides a reasonable payment for the use of investor capital, while providing a relatively high IRR (with a big boost of that IRR due to the quicker repayments vs. equity).  Plus this structure boots the odds of at least a $1X return, as the investee begins repayments as soon as revenues are earned.

The drawback?  The upside of the investments are capped.  If the structure asks for $4X, then the maximum return is $4X.  However, there are multiple fixes for this issue: tack on some warrants, or toss in some traditional equity.  Do something that adds back in some of the upside.

I discovered this structure while researching the business model for Fledge.  Fledge, in addition to a business accelerator, is also an investment fund, one that targets “conscious” companies, a market with few exits and few comparables.  Fledge uses RBF for its investments, roughly as described above, and so far after 19 such deals, we think it’s not only the right structure for impact investing, but a potential fix for the broken venture capital market everywhere.

 

USDA Announces New Programs For Small and Mid-Sized Farms

northwest produce boxThere was more good news last week for small and mid-sized farmers with an announcement from Secretary of Agriculture Tom Vilsack about new efforts from the United States Department of Agriculture (USDA) to serve smaller farms.

This includes an expansion of the Farm Storage and Facility Loan Program, which provides low-interest financing to producers.  Since its inception in May 2000, the program has made over $33,000 loans, mostly to large and commodity farmers. The changes to the program will make it easier for diversified small and medium sized farmers to quality.  It also expands how the funds can be used to include produce cold storage and handling, with 23 new categories of eligible equipment including sorting bins, wash stations and other food safety related equipment. The loans will also have less strict security requirements, with loans up to $100,000 secured only by a promissory note. The USDA is also developing new tools to help these farmers and ranchers make better financial decisions when planning for their future, including a whole farm insurance policy that will better meet their needs.

While time will tell how these products perform in the marketplace, it shows a growing recognition among government officials of the importance of smaller, diversified farms.

Seattle Investing Group Models How to Start Your Own Fund

IMG_0011-1Last fall, the Seattle Impact Investing Group launched a unique collaboration through a Local Food Fund. The group brought together ten impact investors, both experienced and new to the field.  After three months of reviewing applications and business pitches, the fund agreed to invest $50,000 in each of three businesses: Viva Farms, a farm incubator in Skagit County; Better Bean, an innovative bean company in Multnomah County, Oregon; and Cattle Producers of Washington, a cooperative meat processing facility in Lincoln County. The Better Bean investment has been made and the fund is currently working through the details of the other two deals.

Elise Lufkin acted as manager of the fund and recently sat down with Slow Money NW to share their experience with starting their own fund.

First, why are you excited to do this work here in Seattle?

Seattle is becoming recognized as a leader in impact investment. Funds and firms are locating here because of the large impact investor community. National funds are starting to make Seattle a stop on their fundraising tours. Impact Hub has also brought a lot of entrepreneurial energy and buzz around social enterprise. All of these players are helping to creating a virtuous feedback loop that is helping everyone succeed. We are excited to play a small part in that.

This fund marked an evolution of Seattle Impact Investing Group. Why did you decide to evolve?

Originally we were a group of impact investors that got together to discuss our investments and provide support on due diligence. Members began to informally co-invest in deals and eventually a desire evolved to invest together more formally. We wanted to learn by doing together, with the understanding that none of us knew everything. A fund became a vehicle to drive ourselves to push our learning and hold each other accountable.

What were your shared goals for the project?

A healthy local food system is important to each of us, so it became the focus of the fund. Beyond strengthening our relationships through shared experiences, we wanted to create a model that others could take and customize for their own goals, hopefully improving it! While the fund is not about making the most money possible, financial returns are important if the companies we invest in are to be successful long term. It was clear for us that this project was not a philanthropic one.

We too hope that others will be inspired to start their own funds. So, how did you decide on the amount of money each person invested?

We wanted an amount that would be large enough so that people would come to the meetings but small enough so that if we lose everything people can still pay their mortgages. In hindsight, I don’t think it was the size of the investment that kept folks coming to the meetings, but rather their commitment to the shared goals.

Each investor originally pitched in $11,000, $10,000 to be invested in the business and $1,000 to cover the administration of the fund over its 10 year life span. In the end, each business needed a full $50,000 to be successful so each investor pitched in an additional $5,000.                                                                                                                

Beyond the financial commitment, what was the time each member agreed to meet?

We met in person every week for at least two hours, sometimes three. From the beginning it was clear that this was going to be about showing up. It was a big commitment and people took it seriously. We had a one-month period in which we accepted applications and then three months to whittle down the applicant pool. We started with 39 applicants and selected 17 to interview over the phone. The 8 semi-finalists were given the opportunity to pitch the group in person and then the final 3 businesses were selected for deep diligence. In the end, the finalists had to be agreed upon by all investors.

Was reaching that consensus difficult?

Not really. We worked hard to ensure that everyone was heard, and we relied on the opinions of the members who were most familiar with the particular investment we were discussing. To move discussion forward we used a system of post-its as votes. Each person got a set number of post-its and was told to distribute them as they chose among the companies we were discussing. This allowed us to quickly eliminate the companies that no one was interested in, so we could spend more time on the ones still in contention.

Additionally, everyone in the group respected the opinions of the others, which made our discussions very productive.

What criteria did you use to guide the conversations?

We wanted companies that would be successful so we looked for the things all angel investors want – a good idea and the ability to execute on it. In addition to being financially sound, we were looking for companies who are providing a key piece of infrastructure in our regional food system. Each of the businesses we selected is doing that in an exciting way. And lastly, the size of our investment needed to be suitable to their needs.

How did you determine how to structure the financing?

Each deal is structured on a case-by-case basis, based on what makes most sense for the business and the entrepreneur. One of the loans is a basic loan with reasonable interest, one is an equity play and the other is a revenue-based loan. We worked with each of the businesses to come to those decisions.

What is your involvement in the businesses moving forward? Are you providing any ongoing business advising or support?

Each business that received an investment has someone from the fund that is checking in with them on a regular basis to see how the business is doing and to provide advice as needed.

There’s buzz that this fund catalyzed a lot more than the $150,000 invested through the LLC. 

Yes, all told the fund catalyzed investments of $1.5 million. This included monies directed by SIIG members to companies that didn’t make it to the final round and additional investments made to the selected companies beyond the $50,000 they received through the LLC.

So, will you be doing another fund soon?

Yes, we are exploring the possibility. We do not yet know what the focus will be. It may be food again, though it may be something else.

What would you do differently in the next round?

There was a healthy tension between giving companies the time and attention they deserved and the need to move forward in the three-month time frame we committed to. Ideally we’d slow the process down, though as we are volunteers, it’s hard for people to commit more time than they did. We would love to be able to spend as much time on the businesses we won’t be investing in as those we will. This would ensure better feedback to the business and would help us solidify our understanding of the system and where our money can be best invested.

Who should reach people reach out to if they want to learn more about starting their own fund?

For more information on the group or to access the materials that we developed, reach out to Ammen Jordan at ammen@energyfriendly.com.

EDITORS NOTE: The Seattle Impact Investing Group is currently researching investment opportunities that provide, through a fund structure, both social and/or environmental impact, and current yield. To learn more go here: http://www.seattleimpact.com/2014/03/call-for-current-yield-investments.html

WSU’s Farm Recordkeeping Workshop Will Help Keep you in the Black

Seeing the results of farming decisions often takes months, if not years. Good recordkeeping helps farmers capture this data so they can make decisions based on reality, not just hunches or memory.

If you are just starting to farm or would like to learn how to keep better records, join experts from Northwest Farm Credit Services and Moss Adams on Saturday, April 5th for a recordkeeping workshop. They’ll teach participants about three systems, including paper records, basic computer and paper, and Quickbooks.

To register, visit the Brown Paper Tickets site or download the form and mail it with your check. For more information on the course, contact Holly Thompson at hollynthompson@wsu.edu.

Where: WSU Snohomish County Extension’s Cougar Auditorium, 600 128th St SE Everett

When: Saturday, April 5th from 9:00am to 3:00pm

Cost: $40 per farm, which includes 2 lunches; additional meals are available for $10 each

New Publication Helps Farmers Navigate USDA Microloan Program

Farmers confused or overwhelmed by the United States Department of Agriculture (USDA) Farm Service Agency’s (FSA) new Microloan program process are in luck: the Farmers’ Legal Action Group (FLAG) recently relFLAG Publicationeased a guide, Farmer’s Guide to the Farm Service Agency Microloan Program.

This guide walks readers through what to expect when applying for microloans, paying off the loans, or dealing with any repayment problems. It also provides information on creating and following a farm business plan and how to appeal a denial of an application.

Many farmers who apply for the microloan program have never taken out a loan for their farming operations either because they  recently grew to a size that cannot farm without operating credit, or because they have been unaware that credit was available at this smaller scale.  This new program, revised in January 2013, makes loans up to $35,000 to farmers for farm operating expenses.

The publication is available free for download on the FLAG website or hardcopies can be purchased for $12.50 each plus shipping by calling their office at 651.223.5440.

Natural and Organic Foods Entrepreneurship Forum and Strategy Slam

Over the past three decades the natural foods revolution has changed what we eat, where we shop, and how we talk and think about food.  It also created roles models out of the businesses that dared to openly challenge the interests of American agribusiness and proved that principled business is not just possible, but profitable.

Natural ProphetsJoe Dobrow, a 20-year veteran of this now $100 billion industry, has written a book called Natural Prophets that chronicles the rise of the industry and the pioneers who re-wrote the playbook for small entrepreneurs. Next month Dobrow will be coming to Impact Hub Seattle to talk about his book and highlight how we in Seattle are at the front lines of sustainability and entrepreneurship.

The event will be unlike any other, with a food entrepreneurship panel discussion and strategy slam competition between some of the great new up and coming food companies in our region. Panelists will include local natural food luminaries Joe Whinney of Theo’s Chocolate and Edmond Santics of Sahale Snacks, among others. Tickets are just $9 and are available through Brown Paper Tickets.

We hope to see you there!

When: Thursday April 3rd from 5:30pm-7:30p
Where: Impact Hub Seattle
          220 2nd Avenue South
          Seattle, WA 98104

New Mobile Poultry Processing Capability in Puget Sound Region

ATTENTION Pastured Poultry producers (and those raising rabbit, waterfowl, game birds, etc.),

Exciting NEWS!!! NABC is currently having a state of the art Mobile Poultry Processing Unit (MPPU) built to serve the needs of all commercial scale producers in Whatcom, Skagit and Snohomish Counties as well as larger scale producers in King, Island and San Juan Co. The MPPU will be fully staffed with experienced operators emphasizing food safety and efficiencies to provide each producer with the highest quality product at a reasonable cost. The Unit will be equipped with the best available equipment to achieve a humane kill using a stun knife, effective scald and pluck, followed by evisceration in shackles (to avoid cross contamination), an organically approved anti-microbial dip (lactic acid), and air-chilled for top quality and the safest end product. In addition the MPPU will be offering custom cutting of product, vacuum packing, and professional, custom labels for each producer (with farm logo & name).

Once the MPPU is operational (estimated to be by late May), producers will be able to schedule services online through the NABC website. You will be able to choose your processing date, provide cutting and packaging specifications and be assured that all of your needs will be professionally met. You can specify how many birds you want packed whole, or choose the number to be cut in halves, or packed as breasts, legs & thighs, wings, and soup packs. Chicken feet and livers can also be specified, as well as gizzards and hearts if desired.

Each producer must obtain a WSDA Food Processor License, http://agr.wa.gov/FoodAnimal/FoodProcessors/, (only $55 annually) which will require a source of potable water. In addition, each farm must provide on-farm composting for offal, have a 220 V power source in proximity to the processing area, potable water, a receiving area for waste water (a suitable pasture or other well drained area that will not pollute a water supply or stream), and a level paved or graveled parking area for the 26’ MPPU to operate.

The cost for services is subject to change, but the objective is to provide for a cost effective infrastructure to serve the processing needs of producers while supporting the profitability of their enterprise. Since producers will be paying for the operating overhead of the MPPU the cost will include mileage, staff time, a share of depreciation and insurance, and the cost of materials and supplies. At this time it is estimated that a producer with 150 birds to process per batch including, for this example, 90 miles round trip travel, cutting-up, packaging and custom labeling all product will be paying approx. $3.60 per bird. Clearly fewer birds would cost incrementally more and a greater number of birds would cost less per processed package. Aside from providing for the WSDA Food Processor License as outlined above, the producer is only responsible for delivering their birds to the back of the Unit and, some hours later, picking up their finished product at the front door of the Unit, ready to sell!

Producers will be able to sell fresh or frozen product depending on the requirements of their market. They will, of course need to provide refrigerated and/or frozen storage capacity, but the legalities and safety of product storage will be covered by their Food Processor License.

NABC is offering a Poultry Production Workshop, repeated on three consecutive Mondays, specifically geared toward those producers that intend to utilize the services of the MPPU. Please see below or the attached flyer to register at: www.agbizcenter.org, Classes and Workshops under Business Services. Shortcut: http://www.agbizcenter.org/business-services/classes-and-workshops, scroll down to the specific workshop date that you wish to register for.

NOTE: Timely Workshop registration is URGENT! Please sign-up NOW… If we don’t get an adequate response we will need to postpone these workshops and then we’ll be into your busiest spring season creating further challenges for your time.

Pastured Poultry Production Course

DATE: Repeats on three dates:
March 10 ( Skagit Farmers Burlington Main Office)
March 17 (WSU Snohomish County Extension)
March 24 (WSU Whatcom County Extension)
TIME: 9:00 am to 1:30 pm

INSTRUCTORS: Drew Corbin – WSU Snohomish County Extension, Chris Benedict – WSU Whatcom County Extension, Harley Soltes – Bow Hill Blueberry Farm, Fred Berman – NABC, Sera Hartman – NABC
FEE: General admission: $55
Workshop materials included.
***Pre-registration is required.

This workshop is for both current producers considering scaling up their production and those investigating entrance into this promising sector of the poultry industry. Presenters will discuss how to safely, profitably, and legally raise meat birds. Learn about the pros and cons associated with raising meat birds and how to effectively evaluate the enterprise before getting started!

Topics include:

  • Breeds – select the best fit
  • Chick sourcing and creating an on-farm hatchery
  • Husbandry tips for commercial-sized production
  • Poultry nutrition overview
  • Building a healthy pasture
  • Risk management, licensing, and processing requirements

Comprehensive classes to provide the tools and know- how necessary to develop and launch a new value- added product into the market place! Want to learn more? Contact the NABC office:

Phone: 360-336-3727

Email: info@agbizcenter.org or visit their website at: www.agbizcenter.org

New Report Highlights Opportunities to Increase Farm to Institution Investment

King County hospitals, schools and childcare facilities are currently spending an estimated $75 million on food purchases, and engage almost all of the county’s 116,000 low-income children at least once a day. Yet most of this food comes from outside of Washington state.

Recognizing this as a major opportunity for regional farmers to increase their sales and to combat childhood obesity, Robert Wood Johnson Foundation convened a collaborative project last spring to research how to increase the consumption of healthy, Washington grown food in King County institutions.

trayThe research provides a market analysis of King County institutions and the food production industry, assessing the challenges and opportunities for each market segment. It looks at how to align financing, proposing potential funding mechanisms and partnerships as well as technical information to help stakeholders effectively engage.

The final report, Farm-to-Institution Strategies: Impact investing in health and economic development through the value chain of healthy regional food in the Puget Sound region, is now available for public download. If you are a farmer or practioner, you will find data to support finding investments or grants for your work.  If you are an investor, you will find supply and demand data and a sample portfolio of deals to determine how to effectively target your money.

For more information about the project and highlights from the report, visit Cascade Harvest Coalition’s website.

The Farm-to-Institution Strategies report is part of a collaborative project involving the Robert Wood Johnson Foundation, Cascade Harvest Coalition, Slow Money Northwest, Public Health – Seattle & King County, Washington State Department of Agriculture Farm-to-School Program, Health Care Without Harm, Northwest Agriculture Business Center, Viva Farms, FareStart, Kent School District, UW Medical Center, Virginia Mason Medical Center and Puget Sound Educational Service District (PSESD) Educare Early Learning Center.