Minus Twenty Podcast Episode 5: Raising Capital To Start Your Business

Updated: Jan 20, 2020

Starting any business requires money, often a lot of money. But where do you start if you’ve never raised funding before?

High Road CEO Keith Schroeder gives a fantastic “101 Primer” on how capital can be raised and some ideas on where to find funding. Should you start with friends and family? What should be their expectations? How do investments work? Can you get help from your local state? What’s a waterfall or a term sheet?  Once you raise your funding, what does the return look like?

This podcast is essential for anyone starting their fundraising process to help you begin to understand some sources of funding and some of the terminology you’ll run into. Keith draws from his own experiences knowing nothing about fundraising to having to raise funding for his various ventures.  As usual, he presents is a straightforward, no BS style.

Before you set out to find funding for your venture, grab yourself a beverage and take in these 30 minutes of essential listening on raising capital from someone who has been there and is still there today growing his business.

This podcast features High Road Craft Brands CEO Keith Schroeder and Walter Biscardi Jr., Executive Creative Director.

In addition to listening and watching the episode here, you can find Minus Twenty on most audio streaming services and YouTube. Full transcripts below.


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Full Transcript of the episode. Apologies for any typos.

Announcer 0:02

Welcome to Minus Twenty. The journey of an independent food business.

Walter Biscardi 0:07

Hey folks, welcome back to Minus Twenty. I'm Walter Biscardi.

Keith Schroeder 0:10

I'm Keith.

Walter Biscardi 0:11

And today we're going to be talking about financing your dream. You know you're ready to start a business. And now nobody does it for free. You got to have some money to get this thing started. Keith has started both restaurants and food manufacturing. So I thought we would start with how about some, like, ballpark numbers actually hold on. Let's start with first of all, you were a chef.

Keith Schroeder 0:41


Walter Biscardi 0:42

How did you learn about raising money raising capital?

Keith Schroeder 0:46

Interestingly enough, got my undergrad. While I was a chef and finished up my undergrad while I was a chef ain Business Management economics. Went to Business School. Grad school, got my MBA and still left having no un-godly idea about how I raise money for my small thing. And in my infinite naivete.

Walter Biscardi 1:20

And it is infinite.

Keith Schroeder 1:22

Infinite. I was told by someone, and I won't call them out because it would be embarrassing.

Walter Biscardi 1:28


Keith Schroeder 1:28

Who is a PhD level college professor who said to me, "You can't go out and raise your, your own money unless you're a public. Unless you're going public. It's illegal." And I thought to myself, that is the most ignorant irrational thing I've ever heard. I don't think that's correct. I'm certain that there has been private money raised to start small businesses along the way. unless everybody is breaking the law and the government doesn't care. I'm going to call the SEC. Okay, so I called Washington DC

Walter Biscardi 2:08

You did? For real?

Keith Schroeder 2:11

I'm so embarrassed to admit this. I called the SEC hotline. Hi. I just graduated with my MBA. They're like, well, they should take it back. And I'm under the impression that it is perfectly legal to raise money without publicizing that I'm raising money without

Walter Biscardi 2:42

Going public,

Keith Schroeder 2:43

Right. Well, not without going public like it's, it's perfectly okay for me to knock on doors and go raise some money. And the person said, first of all, and this is on our website, sir. But I'm Gen X and not millennials so we still know what a telephone is and want to talk to people. I'm a bit embarrassed? They said, just go File Reg D, sir. And don't waste my time again. Thank you.

Walter Biscardi 3:16

Thank you.

Keith Schroeder 3:16

Now I didn't know what Reg D was okay. I went to the SEC website. It was interesting because they said you can issue a private placement memorandum which I didn't fully understand what that was. We didn't talk about that business school. And raise money from accredited investors. And they didn't know what that was an accredited investor at the time, I think was someone with an income of over $200,000 a year, or net worth of over a million dollars, right. So the government is trying to keep small business owners emerging entrepreneurs from raising money from little old ladies on fixed incomes.

Walter Biscardi 3:52


Keith Schroeder 3:53

Right. You have to go to someone who knows what they're getting into. And if you do that, that's okay. Okay, and you don't have to publicize the specifics, so long as you file an exemption under Reg D. Right. And today there are more than there's Reg. A. So go find old reg D and it will point you to new Reg A. and effectively what you do is you tell the government I want to raise X amount of dollars, I promise to do it from accredited investors the legal way. And beyond that I'm not filing any other disclosures because it would be a waste of government time for such a small business to have to go through a complex regulatory process.

Walter Biscardi 4:37


Keith Schroeder 4:37

I was raising under well under a million dollars at the time. And so did that went and was able to do it, by the way all by myself, right? So, too often small business, folks, emerging entrepreneurs go out to these services that charge you what seems like a very little amount of money but zero is better than a little amount of money. It cost me nothing to file Reg D. Right. It cost me very little to go find a template for a private placement memorandum and read through it and cut and paste company name A an industry activity and disclaimers and then do that legwork up front and then for 100 bucks, have a lawyer look over it for three minutes and go Yeah, this is fine. And then we raised money and so that private placement memorandum forced us to network one to one with folks you can't put an ad in the paper a headline you have you have to go network really discreetly so effectively can't publicize it you have to go network your way to accessing capital. And with the help of some really smart people from my business school environment, were able to do so

Walter Biscardi 5:58

What what kind of business was wrong We're raising money for.

Keith Schroeder 6:01

So we were raising money for High Road

Walter Biscardi 6:02

So this was for High Road

Keith Schroeder 6:04

That was the first time that I had ever raised capital the the right way without just borrowing money from family or friends saying I'll I'll pay you back and keeping it super informal. This was the first time I had ever formally raise capital. So we are a C Corporation. So we went out and sold stock in the company.

Walter Biscardi 6:25


Walter Biscardi 6:25

So you literally learn how to raise capital through the SEC

Keith Schroeder 6:29

Through the SEC phone person yelling at me.

Unknown Speaker 6:34

That's great. So this is great, so you were raising money to start the original High Road which is a food service business obviously. Ballpark it you know, let's just say somebody wants to start a an ice cream company wants to start we talked about a barbecue sauce company. You have any like for food service manufactoring. Yep. ballparking it small

Keith Schroeder 6:57

Pilot. Hundred Thousand. Get in the game, half a million. Be able to scale to a million dollars in revenue. A million. General ballpark depends on what you're making if it's a raw meat product totally different game. Dairy will be anything highly regulated will be slightly more expensive because your equipment will be, have to be of a certain grade to do it properly

Walter Biscardi 7:33

But just just to give you guys just ballpark thumbnail hundred thousand, half million, million.

Keith Schroeder 7:39

I think it's I think it's a great way to you know, earmark or use Excel and say okay, I got 100 grand. What can I do with that and pay myself a little bit right. What's your baseline I live in a studio apartment eat Cheerios for the first year kind of budget. You know, make sure you earmark a salary for yourself. Too many entrepreneurs don't. And it becomes frustrating and it's hard to run. It's hard to be creative when you have poverty mindset. When you're broke, right, so you have to at least eat.

Walter Biscardi 8:17

To at least have a little salary for yourself.

Keith Schroeder 8:19


Walter Biscardi 8:19

Cover your costs, at least

Keith Schroeder 8:21

inexpensive groceries and thrift store clothing. And then and then take it from there.

Walter Biscardi 8:26

So let's talk through a few, so. Let's just say starting off with that `100,000. You get $100,000 to do that pilot program. Great place to start is what a lot of people call that friends and family. Yes, try to raise it there. So what are some of the obviously is great because you know, these people, what are some of the pros and cons to think about when you're getting into friends and family?

Keith Schroeder 8:46

Well, the odds are that you're going to light their money on fire and never return it to them. So this has to be money that they don't need. They have to look you in the eye and say I'm doing this because I love you and I support you. And while I love make some money someday I am considering this gone. And if they can't do that, don't take the money from them. If it can't be a quasi gift, right? If you're going to put a family member through pain and suffering financially, don't take their money. Don't even even if they want to please take it from me. I believe in you so much. I just I really have to get this back by next Christmas. Don't take the money. Right. You know, my, my, my mother and stepfather have always been willing to step up and be all in with me. I don't come from a very wealthy family, but I come from a normal upper middle class family and they're always willing to go into that earmarked money that you know, take it or leave it their fun money and, you know, here, here, we believe in you and it's more a gesture of we believe in you then here's sufficient capital to run a multi million dollar company, it's just we're in. Kind of like a parent paying for their child's college like placing a bet on you. Please take care of us when we're, in our final years.

Walter Biscardi 10:14

Straight up gut check honesty, yeah, taking money from friends and family, they need to understand they're never going to get up it back

Keith Schroeder 10:19

And you're likely to fail, right? And you're likely to fail. And that failure is likely to be painful and embarrassing, right? So all of that has to be on the table up front. And I would also say that you have to be ready and willing to fail. And if you calibrate yourself in a healthy fashion against that fear of failure, you tend to be more frugal, like, you should be terrified of screwing it up. Right? Like, all right, I know they said this money doesn't matter to them, but I would feel like a champion if I tripled their money. Right? Like I like and if that's the kind of stuff that motivates you, right. Like I I'm gonna wake up in the morning work for mom's mom's return every single day. And you know that that the day when she least expects it, I'm booking a, you know, a netjets flight to Barcelona and we're going to drink cava all day long and she's not going to know what hit her and I'm going to return the check to her on the flight. Like if that doesn't pump you up, seek cash elsewhere. Right seek cash from more dispassionate investors.

Walter Biscardi 10:30

Good that kind of leads me down the next path. So investors, what I affectionately call the good, the bad, the ugly. And one of the big things is to like who do you even trust when you get into that game? So advice for going down that path with investors, financial investors.

Keith Schroeder 11:48

Bobo move number one for new entrepreneurs is the desire to cling on to majority ownership of your business,

Walter Biscardi 11:59

That's not going to with investors,

Keith Schroeder 12:01

It's, it's, it's irrational to expect that's going to happen unless you're Mark Zuckerberg and you're not Mark Zuckerberg,

Walter Biscardi 12:07

no, no,

Keith Schroeder 12:08


Walter Biscardi 12:09

Brand new, you've never started a business before. Not gonna happen.

Keith Schroeder 12:12

And by the way, the investor is is protecting their downside risk, right. And so, if you're just getting to know somebody, they want to be able to put someone in your place, maybe they believe in the idea and the concept, but you're irresponsible or you lack the proper managerial skills like something might happen where you figure out you don't like running the business. The investor community should have the right to retain some power authority influence over the move forward of your organization. And if you don't like the feeling of that, then raise money from friends and family or save more money and own 100% of your business. But if you're in if if you have aspirations to grow something You're going to need an advisory group, you're going to need people who are financial experts by your side. And typically, investors have expertise with cash. And so there are different flavors of investor for a typical startup food business that's trying to get to its first million there are either seed capital incubator type organizations that oftentimes are built off of large consumer products companies. So General Mills, Unilever, Nestle, I believe, Mondelez, , and on and on, have all built incubator, oh Chobani have all built incubator investor investment vehicles, to help start new brands.

Walter Biscardi 13:55

So this is where they're helping to incubate new ideas. Yes, right with their money.

Keith Schroeder 14:00

Yes, and it's one in many, many, many, many, many that get the investment your timing has to be good, the industry that you're going after has to be good. Chances are you have to be kind of on the front on the leading end of a trend, whether it's better for you or plant based food or snacking, it these kinds of things tend to pop up every year or it's just a radically inventive twist on something that already existed ala Kind Bar when Kind Bar came to market, it was a big deal, right? And so Starbucks has an investment arm. And so there's that those are hard to land, you bet you better be a really good pitch person and your product better be extraordinary. The next tier are what they call family offices, right? So these are high net worth families, who are folks who want to ensure generational wealth for their for their families and and also deploy cash based on their family's priorities right. And so if you made a significant amount of wealth in the food business, it wouldn't be uncommon for a family office that got wealthy from being in food to invest in other small food businesses. Right?

Walter Biscardi 15:24

Any examples of like who would be a family office?

Keith Schroeder 15:27

So your your wealthier families have family offices. I would imagine that the Walton family that owns Walmart has its own family office. I know that from the Colier organization, they have their own family office. And so if there's a name associated with a multi generational, multi billion dollar type of business structure, typically, there's a family office that's been spun off. Now the challenge with that is they're not out there broadcasting for you to call them, right? So I'm pretty sure that Alice Walton is not going to get on Instagram and say, Hey, all you people who want to start a business today, give me a ring. Right?

Walter Biscardi 16:12

Not even on LinkedIn.

Keith Schroeder 16:13

It's very, very discreet, but there are small investment banks out there. There's entrepreneurial organizations, again, there are fellow food entrepreneurs who oftentimes have some kind of kind of connectivity, to family office investors, you'll have to pitch and it'll be 100 calls before you get one person. And so you have to be absolutely unequivocally immune to rejection. Because most will tell you "Meh"

Keith Schroeder 16:47

I mean, we have been "Meh" to a thousand people easily over the course of the business. Yeah, Keith we really, we you know, we like your business. Congratulations on all your success. But here on the 19 ways you stink and no thanks. You know,

Walter Biscardi 17:05

Those are the ones that respond. There's like 500 that don't you don't even

Keith Schroeder 17:08


Walter Biscardi 17:09

answer the phone.

Keith Schroeder 17:10

And by the way, the way that when you get the feedback relative to the ways that your business is not attractive to investors, that is not the time to go home and go my business is bad and I work hard every day. Write down all the feedback that they provide to you. Go look at go look at yourself in the mirror, go look at your your business model. Go take a look at the colleagues that you're running the business with everyday and gut check. Do you have the right partners. Do you have the right capital structure. Are you working with the right bank? Are you working with the right distributors, they're probing as a means of helping you and honestly sometimes, actually, every time every time the feedback is more valuable than getting a yes on the investment. Because if you're tenacious, if you're tenacious enough eventually you'll attract the investment.

Walter Biscardi 18:01

Oh, absolutely. Now we could talk for days just on investors, and all the pitfalls and this that and the other. Are there just a couple of little red flags. Obviously when, when an investor says, Keith, I love you, I'm going to give you a million dollars, there's going to be like a book that gets slid across the table that now you're going to start signing and all this is after negotiations and everything going on. Can you just give me like maybe two or three red flags that you either hear that you see that you like? Maybe this is not the investor that I want to go with?

Keith Schroeder 18:33

Yes. If they don't provide you a formal term sheet, that's a red flag. If so, if they don't provide you a semi formal indication of interest or an IOI. So you'll hear terms like IOI LOI, letter of intent, term sheet, to socialize, what the investor is thinking relative to their investment in your company, right? Then you'll start to hear about preferred versus common.

Walter Biscardi 19:06

So let's just start the Letter Of Intent. I mean, what what it basically says, Keith, I think I'm going to give you a million dollars and this is what the terms are going to be,

Keith Schroeder 19:14

I think I might want to invest in you and our initial thoughts based on the information you've given us, is a million dollars with an 8% guaranteed coupon and to X our money guaranteed after we pay back the senior lender, and here's what the waterfall could look like. If we exited at x price.

Walter Biscardi 19:44

It's basically like the life cycle of the investment, just a sheet little outline of what the lifeceycle of the investment is going to be. And you want to see that,

Keith Schroeder 19:51

You want to see that you want to see the general terms of what you're getting yourself into because oftentimes the investor will almost always structure so that they are as close to guaranteed to at least getting their money back as possible. And so if you don't execute as the CEO or entrepreneur, there are odds that the investor will get their money back and you will get nothing. And so that's important, the investor is not interested in splitting with you. The investor is interested in investing you in you such that you exceed your stated plan by many multiples, and then everybody is happy. But when you don't meet meet plan, it's where the investors disappointed but just gets their money back and the entrepreneur chalks it up as a fail. And by the way, there's nothing wrong with that at all that in fact, it's important. Entrepreneurs should fail, bounce back, learn from that experience. Go raise capital the next day for their next idea, right? It is too often and I did it myself when I failed the first time is I went and buried my head in a hole for a decade before I got back in the game again, and that's one of my great regrets in life is that look, I'm entrepreneurial, I'm gonna, I'm gonna miss from time, the time and I thought that miss was a referendum on who I was, as an individual, like, you're less than worthy. You know, you have no business, opening a business, you know, just go get a job and put your nose down and work hard. Maybe you're not the rock star you think you are, and went into like this 10 year hiding. And it felt terrible, right? And then going to grad school helped kind of draw that back out of me again, but there was a worthiness issue post failure that was deeply unpleasant.

Walter Biscardi 21:50

Yeah. So any other any other red flags? We can talk about this for, but I mean, I know there's so many things. to give them a couple of things.

Keith Schroeder 22:00

Yes, yes. Nothing should sound loan sharky or weird right the, the the nature of a conversation with an investor is very Q&A oriented, it should sound like the investor's curious, supportive. Again, just much like friends and family able to lose the money, right? This isn't their primary source of income typically when folks are investing at the angel or family office level, sub $10 or $20 million. This is I don't want to call it fun money, but it's a more adventurous high risk type. Investing.

Walter Biscardi 22:46

So, on a basic level for those people listening, watching, who are who are raising capital raising funding, it's easy to say hey, I'm going to get an investor I'm going to raise a million dollars okay. Keith, you've got that million dollars. Now, what does this actually mean? Because the investor didn't just give you the money. What is that financial distribution look like? That I'm expected to provide at the end, because getting that million is nice. You know, okay, I can I can buy my equipment, I can get the building, I can get a staff. But now you've got a million dollars over your head that needs to go back to the investor. What does that financial distribution that payback look like?

Keith Schroeder 23:25

It varies dramatically. And it's very important to ask the investor during at the point that you're socializing with them what their expected time horizon is. So a family Yeah, so a family office might be very patient, they may say, I don't even need this money in my lifetime. This, this is going to I'm going to pass this down to my children, the next generation. So if you stay in the game for 20, 30 years, I'm not going to be knocking on your door for cash, so long as the company continues to grow in value. So that that's 'A' I mean, that's a that's a rare investor

Walter Biscardi 24:02

I was going to say that must be rare.

Keith Schroeder 24:03

But but it's real okay and then there are investors who are in the 7 to 10 horizon again in terms of years and that tends to be a more an angel type investor and then your private equity incubator typically three to five and we prefer three and this is how fast we need to move.

Walter Biscardi 24:05

Okay, so let's just let's just use that 123 to five the money you've got, what does that mean in three to five years? What am I expected to provide? I know there's a lot of scenario but a typical scenario with three to five years what is that investor expecting to get from me

Unknown Speaker 24:37

The investor expects to while the investor may reserve the right to force the sale of the company in year five, right. So at that point, what the company will sell for whatever the company is worth, and the distributions will cascade according to the parameters of what what our often referred to as the definitive documents. So after you go through the term sheet process and you go into due diligence and the companies, the company or individual says I'm going to invest in you, your attorneys then work on the definitive documents and the definitive documents outline all the terms of the investment deal in the company. And if the investor has the right to force the sale of the organization and year five, say, okay, they market the company put it up for sale and distribute the funds accordingly. Now, if you're upside down, right, meaning the company sells for less than the invested capital, the investor takes 100% of the proceeds minus the senior debt. Okay. Okay. in a, in a situation where it's been a success, the investor gets their money back, plus the agreed upon return and the rest of the money goes into what's called a waterfall.

Walter Biscardi 25:47


Keith Schroeder 26:02

I love that term.

Walter Biscardi 26:03

Yeah. it's fun. Yeah.

Keith Schroeder 26:04

Yeah. Especially if it's a good day for that. Right. So in in that waterfall is your is basically your what's referred to as your cap stack, right? So these are all of the investors in order of what you call preference. So you might have sold some preferred stock. So it's the preferred stock plus their dividend followed by the common stock. And that all just cascades through based on the percentage of the company that those investors or management team folks who have earned in equity are and where they stand on that waterfall,

Keith Schroeder 26:42

okay, or in that waterfall.

Walter Biscardi 26:43

Okay. So that that's one option in five years, you have to show what if they don't force you to sell. Now you've hit that five year mark, kind of similar just without the sale.

Unknown Speaker 26:55

No, nothing happens to the money at that point. It just stays as equity. It's kind of like when you buy a stock through E*trade, right? If I buy Coca-Cola and hold, it's just there

Walter Biscardi 27:07

So the investor just simply just holding their percentage of the company,

Keith Schroeder 27:10

Yes. They just hold, now they can get diluted. So oftentimes as companies move on their the nature of their business changes as they shift and adapt to marketplace conditions. And so it is not uncommon at all for companies to go out to market to raise more and more and more and more capital, which ends up being very frustrating to the sort of uninitiated common stockholder because they get what's called cram down or diluted. Meaning new money comes in that new money is usually more comes from more sophisticated funding sources like private equity firms, and they advocate for significant preference for their money out because of the sheer force of the amount of money that they're able to invest so a PE firm that could come in and invest 20 million is going to be able to force more rights. Earn more rights demand more rights than your uncle who flipped you 20 grand to help get the thing started, right. And so it's it's important again to keep the early investors abreast of what's going on in your business on at least an annual basis. And then understand the word "accretive." Right? So oftentimes, "accretive" A C C R E T I V E. So if the pie is getting larger, right, so if, if let's say it when when you invested back in 2010 in my company, I gave you 10% of my business based on the valuation at that time. And then 10 years later, you own 1% of my business business. Right? And uninitiated investor might be what the hell Keith, you know, you took my money. And now I only have 1%. Yeah, but you have 1% of a 100 million dollar entity. that was able to exist because someone came in and invested 20 or 25. And let's talk about this in, in in, in in dollar terms. Your 20 grands worth 120 today. Oh, cool. Keep, me post and look forward to talking to you next year. Right.

Walter Biscardi 29:36

Keep them up to date on what's going on?

Keith Schroeder 29:38

Yeah, so dollars are more important than percentage all day long, even for you as a founder so I own less and less and less of a percentage of the business over time as I take on new capital. With that new capital comes new intellect, new ideas, righ,t new power, new prowess oomph. A better Board of Directors, more moxie in the marketplace. It's actually fun to be a minority holding shareholder of a more powerful organization. So, so long as your board of directors and investors want you to keep doing what you're doing, I could get fired.

Walter Biscardi 30:16

And we're laughing about that.

Keith Schroeder 30:19

I'm working very hard. Yeah,

Walter Biscardi 30:20

Yes, he's working very hard. A Board of Directors actually gonna be a great discussion in the future.

Keith Schroeder 30:25

Oh, yeah.

Walter Biscardi 30:25

Putting one of those together,

Keith Schroeder 30:26

I think good podcast.

Walter Biscardi 30:28

Any any last thoughts on just the basics of raising some capital for somebody who's never done it before?

Keith Schroeder 30:33

Yes, investors are not money hoarding horrible people. They're usually wonderful people who have worked hard sometimes people fear investors. There's nothing to fear in an investor. It's exciting for someone who has the capital to deploy it. With and on someone who they believe in, right, really, it what's better than seeing a fellow human being placed a bet on on a person. It's so much cooler than buying some stock or putting it in a CD or going to Vegas, but to say, Walter, I'm placing a bet on you. And, you know, it's going to require, you know, a phone call every Monday at four o'clock for a check in and I'm going to be on your board of directors, I am an enriched human being for having given being given the privilege to steward other people's money. That's really cool.

Walter Biscardi 31:32

That's pretty cool. That's pretty cool. It's pretty cool to watch the company grow and do what it's doing. So I think that's a good little primer right there for those of you making your first step, and I really hope you all do. Making your first step as an entrepreneur in the food business or whatever business you decide to go in. Pretty cool. So for Minus Twenty I'm Walter Biscardi

Keith Schroeder 31:52

I'm Keith.

Walter Biscardi 31:53

See you next time.

Keith Schroeder 31:53

Thank you.

Announcer 31:55

Thanks for joining us here on Minus Twenty

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