There’s no denying that the artisanal food market is booming. From the increase in small, niche brands on supermarket shelves over the past year to the emergence–and almost-immediate success of–niche food delivery businesses like Good Eggs, Farmigo, Munchery, and Plated, small food companies seem to be thriving.
Except that with all of the demand for niche foods, supply is struggling to keep up. How can that be, with all these new brands and companies sprouting up all the time? It’s simple: Current agricultural and food distribution systems are set up to serve small companies and large companies well, but companies in the middle, not so much. An independent northern California pickle producer told me recently, for example, that the fields around him are filled with cucumbers, but he can’t buy any of them because they’re all under contract with Campbell’s Soup (owners of the Vlasic pickle line). A woman whose amazing hot sauce scored her a deal with Whole Foods told me recently she’d had to renege on that deal because instead of the 8,000 pounds of tomatoes she was expecting to get from the farm she had contracted, she got 800.
Most cottage food businesses start essentially the same way: One person, hand-making a product. They source their ingredients from the farmers market or maybe even grow them themselves. They go door-to-door talking to restaurant owners and chefs, neighbors, and grocery store buyers. Maybe they do a Kickstarter campaign and raise enough money to buy jars and labels, to quit their day job, and hire an assistant. They keep at it and they grow. These days they grow faster than in the past. Inc Magazine recently listed specialty food as one of the top 8 industries for starting a business today, and the most recent IBISWorld report on the best industries for startups included four niche-food businesses in its top 10. Report author Brian Bueno told Forbes that the growth potential for niche food businesses is partly due to popular culture’s current obsession with food. “But it’s also about consumers looking to purchase foods and products that satisfy a certain niche need, whether that’s for dietary purposes or just in search of some small luxury,” he said. “It used to be that these things were hard to find, or prohibitively costly, but not anymore.”
Specialty food businesses in the middle stage of their growth cycle–too large to source from the farmers market, too small to take on the volume of a Heinz or General Mills–don’t just have a supply chain problem. They also typically have an operations issue. They may need to figure out how to go from hand-making everything to mechanizing certain steps in their production process, without losing quality. Packaging might also become an issue. Distribution and quality control could be problematic. The average small food business owner has not run a factory or a distribution center before and the learning curve here is steep.
All of that, coupled with the fact that the demand for these products continues to hold strong and increase rapidly, makes niche food businesses prime targets for accredited investor crowdfunding. For these companies, funds are almost the least of their concern. While raising funds on Indiegogo or Kickstarter might net them more money than they thought they needed, they’d still be lacking the expertise to make that money do what they want it to do. Sourcing funds on an accredited investor crowdfunding platform on the other-hand, will also connect them with experts who can either help with sourcing and operations themselves, or refer them to people who can help. However, we must caution that not all companies successfully raise money and these are high risk, illiquid investments.
For investors, it may be an appealing opportunity: A successful business with a great brand and verifiable demand for their product that just needs a little help meeting that demand efficiently and economically. Just consider popular LA-based Vietnamese food truck Nom Nom as an example. In 2009 Misa Chien and Jennifer Green spent $25,000 to start their business. By 2010 they had two trucks and revenues north of $300,000. By 2011 revenue surpassed $1 million. The lesson is simple: If you grow it right, small food pays big.