CompanyFirst talks startup investment strategy: 'I actually tell people raise less, and do it more incrementally'

By Mary Ellen Shoup contact

- Last updated on GMT

Related tags: University of Chicago, Polsky Center, startups, Entrepreneurship, investors

Startups looking for capital to fuel their next phase of growth may find there's a gap in the market for investors who are willing to write smaller checks, says Jason Starr, founder and managing director of Chicago-based investment firm CompanyFirst.

Speaking at the Polsky Center​ Entrepreneurial Outlook event series late last month, Starr shared that making the transition from farmers' markets and specialty stores to nationwide distribution at Whole Foods and Target can be one of the most frustrating experiences for an entrepreneur.

"Right when they start getting successful – they get on shelves, they start having a brand that people recognize, and then they go to raise their next round of funding and everyone tells them ‘you’re too early, you’re too small’,"​ Starr told FoodNavigator-USA.

"There’s this big gap where you can raise a couple hundred thousands of dollars and then everyone wants you to be north of $10m and take a $5m check. So, the biggest frustration is a lack of investors that are willing to participate in the $1m to $5m dollar range, both in terms of size of company and size of check."

Which is why CompanyFirst​ has a differentiated approach to funding early-stage startups, said Starr.

"We saw that gap in the market and we’re trying to go where others aren’t."

Focus on incremental growth

"I don’t think a lot of investors give this advice -- because they’re all trying to write as big a check as possible -- I actually tell people ‘raise less’ and do it more incrementally,"​ said Starr.

"What’s the easiest way to raise $1.5m? Well, $500,000 at a time. Then think incrementally about your business, and then I think that allows you to build a relationship with investors."

Feedback is essential

In those early days, startups and entrepreneurs should be focused on receiving as much feedback as possible on their products or business model in any form possible.

And it doesn't have to be anything elaborate, said Starr, who advises entrepreneurs to take advantage of local opportunities such as farmers' markets and small sampling demos at local stores to gauge how their product is resonating with consumers.

"Feedback is huge,"​ said Starr. "I always tell our companies it doesn’t matter what I think, it matters what the market thinks. So get in the market, spend time there, sample as much as possible, go into the store and see how many boxes are on the shelf."

Demonstrating product-market fit on an incremental basis works out to be a win-win approach for both parties, according to Starr. 

"I think it’s equally as good for both the entrepreneurs and the investors because we don’t have a crystal ball that says this product is going to be accepted by the market, we want to see it in the market. I’d rather people demonstrate that on a local or regional level first."

How to spot innovation

As an investment firm that makes smaller monetary investments in early stage startups, CompanyFirst has its antennae up in most areas of consumer products with an emphasis on the food and beverage category.

According to Starr, a startup doesn't have to be the next Beyond Meat in order to attract investment from CompanyFirst. 

"Coming up with something new and different is hard to do with consumer products – there’s only going to be so many Beyond Meat success stories, and that follows more of a tech trajectory than a consumer product trajectory,"​ he said. 

"For us, innovation is sometimes more on the branding side... We focus first on the brand and the brand landscape. We look at the innovation as a way to support the brand vs. the innovation being the selling point."

For the full conversation, watch the video above. 

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