Have you ever seen that commercial, with the guy in the smart glasses on the steps of Congress, telling you there’s free money in Washington for the taking if you want to start a business? Well, it’s not exactly a lie, but it’s a pipedream.
I don’t know everything, but over the last 30 years I’ve worked in business management, struck out on my own, and have guided other businesses from the startup phase through large-scale expansions. I’ve seen the guts of hundreds of business plans and the ups and downs of entrepreneurship, and I’ve never met anyone who got free government money to start their business. The guy in the glasses on the commercial is selling a list of addresses to send applications to, nothing more. It’s a list of organizations that might grant money to the right cause, but it’s a gross exaggeration to think they’re giving money to coffee business startups—or almost any kind of new venture.
While governments occasionally establish programs for stimulating special development goals, such as inner-city growth, minority businesses and, once in a while, arts and creative businesses, they are always attached to larger social goals. Foundations have social goals too, and their board of directors and the IRS will be looking over the shoulder of any grant recipient very closely.
Government loans are a more realistic source of capital to shoot for, though still tough to get. A lot of agencies will lend money at a discount for job creation and related goals, but these are privileged, low-interest loans for development programs that are currently in vogue. And you still need to meet any underlying goals of the government agencies that set them up. For example: an agency with an historic preservation mission will need to be assured that your business helps them do just that.
As a coffee-business dreamer, you should probably forget about grants and low-interest government loans. Your great idea, while great, is not unlike those of other would-be entrepreneurs, and it’s not worth anything if you can’t find the funding to get it up and running.
There are roughly three types of startups that go searching for capital, according to their financing possibilities:
The (really) small startup just needs customers, not much financing. This tends to include service businesses such as your neighborhood dog walker to the sole-proprietor attorney to the one-person graphic art studio. Your coffee business might fall into this category if you plan to start slowly with small-scale office coffee service, roasting out of your garage, or .
The already savvy and well-known entrepreneurs-to-be have established track records in the business that can give them access to angel investment and venture capital. They are leaders in one way or another—as a standout barista, trainer, If you’re one of them, you know who you are.
The middle-ground folks who needs a big push to … get off the ground defines most of us who want to start a coffee business. If this is you, you’re in need of serious—as in five figures, but most likely six—of startup money, but you don’t have people pounding on your door to invest in your personal brand. If you’re in the middle-ground category, but don’t have assets to put on the table, don’t have friends or family with money, and don’t have a real track record for investors to buy into, then you’re in good company (meaning you’re among the masses). But you’ve also got your work cut out for you.
For some perspective, here are some rough start-up costs for retail coffee operations. These generally include recruiting, training management and hourly staff, build out and initial inventory:
Sit-Down Coffee Shop or Coffee Bar: $200,000 to $500,000
Drive-Thru Coffee Shop: Very Small $40,000 to $60,000; Large $75,000 to $300,000
Kiosk: $20,000 to $80,000
Coffee Cart: $20,000 to $30,000
How do you get this cash?
Define the odds for investors.
1. Can your start-up make it? For example, is your idea going to create such a compelling value to customers that your venture can gain a viable chunk of the market?
2. Will investors get a return? For this, you must specify how much capital you need and project future profits that will grow fast enough for investors to reap an attractive risk-adjusted return.
Define your strategy
If you want to convince potential investors that you’ve really thought about what you will do with the money, you have to define your strategy. A good way to do that is by specifying its five elements:
· Scope. Here you have to explain what product(s) you plan to sell, which customer groups your business will target, and which markets you plan to sell in.
· Value proposition. How are you going to convince potential customers that the benefit of buying your coffee product and related services exceeds the price you charge, the distance they must travel to you shop, and their thirst for competitors’ java?
· Economic viability. How will your new coffee business earn a profit? Charging a premium price for a unique product? Volume? Low operating costs?
· Steps along the way. A critical key to your business plan is demonstrating that you have your feet on the ground. To that end, clearly communicate the first steps you will take once investors’ checks have cleared. What will you do first, second, third and so on? For example, your first step is probably to build out your coffeehouse. Indicate who will oversee this enormous task and the people or contractors you’ll be hiring to do the work. Talk about your deadline for opening, projected sales for the first year and growth plans.
Make the case
This is the hardest part. Making a no-brainer case to potential investors depends on making them feel that not investing in your start-up will cause them to miss out on a big return that other investors would kill for. To do this, clearly communicate your background as an industry veteran and/or thought leader, or as a proven team builder and motivator, and a winner in just about everything you’ve done in the past. You get the idea.
If six-figure start-up costs above are out of your range, set your sites on a more realistic starting point. You can always grow from there, as long as your initial business model is solid. One of my favorite restaurants started out as a stand at a farmers market. It had a line half a block long on weekends, with people willing to wait 45 minutes for the best biscuits and gravy in town. Its owners now have two booming, successful brick-and-mortar restaurants.
Another route to financing is to recruit partners and co-founders. Somebody you know in the industry with a better track record (or simply a more established name), could be willing to jump onboard with your idea, and could help you expand upon it—with business savvy and investor pull. Plus, startups with a few partners can look more attractive to lenders because the talent pool is deeper and responsibilities are spread out. Most businesses in this in-between range are started by groups, not by individuals.
Don’t be afraid of investors. They probably don’t want to own your great idea or role up their sleeves and get to work. They just want to make a fair return on their money. Don’t think of them as co-owners per se, though their guidance and involvement could be invaluable—in addition to their cash. Think of them as people who are there to help you succeed—and as folks you want to pay back, fast, to avoid racking up too much of your payments in interest charges.
If you really can’t get your company going now, because you can’t pare it down and you can’t get it financed, then start down a path that eventually will lead you there. Work in a coffee business as an employee and keep your eyes open. Work hard, learn more at every opportunity, and look for potential partners that you could work with in the future.
If you do get financing, overestimate your capital needs. You will be surprised by how quickly expenditures add up and how much time it takes for a new business to catch on and build a regular customer base.
Plan on having six to nine months of working capital from the start. Many new coffee or foodservice businesses see a major downswing in sales after the initial excitement of the grand opening. This is when capital becomes critical. There can be a lull before word-of-mouth, advertising and creatures of newly formed habits create momentum for your business.
I’ve seen startups with cash in reserve that have started blowing it because they thought the honeymoon phase was business as usual. Never let initial success go to your head. Success is only determined years later.
If you’ve got a coffee dream, there’s a way to realize it. You might start by making a name for yourself as a star employee, then find some partners to join the party and make your niche—or regional chain—come to life. Just take it one well-thought out, perfectly planned step at a time, so you’ll be best equipped to find those willing to invest.