Finance Your Growth Without Losing Control

By Marc Peperzak and Mark Retzloff


“Show me the money!” Everyone remembers this pithy line from the hit movie Jerry McGuire. For leaders and entrepreneurs in the organic products industry, we’d like to offer the following challenge: “Show me the financing!”

In our experience as organic industry veterans, being successful in the financing of the enterprise is absolutely critical to the success of the enterprise itself. We both have seen and done a lot in the realm of financing in the 30-plus years of our involvement in company startups. Our efforts, both together and separately, have resulted in many successes and, yes, a few failures. Right now we’re working together as the leaders of a startup organic company, Aurora Organic Dairy, and we can assure you that financing appears at or near the top of our to-do list every day.

For growing companies, the primary goal of any financing plan is to secure capital sufficient to meet the cash needs caused by rapid growth, frequently a point at which there isn’t enough free cash flow to fund the business. Companies that have successfully navigated the initial start-up phase in financing, which gets the company up and running, face a particularly challenging task in progressing from that initial phase to the second financing phase, which allows the company to progress to its next stage of growth and development.

Based on our experience in organic company startup ventures, we’ve discovered a few key concepts that increase the likelihood of creating a successful financing strategy. These concepts are centered in three areas that are particularly important for entrepreneurs: sound business planning, choosing the best financial products, and ownership and stakeholder issues. How the leader of a growing company navigates these three important areas will determine in large part whether the promise of the company will be fulfilled or fall short.

A Sound Business Plan Seals the Deal
Sound business planning is the cornerstone of a successful financing effort. Financiers will judge whether or not to invest by evaluating the strength of the business case presented in the business plan, and whether it’s delivered knowledgeably and convincingly by the company’s leader. Investors will be inclined toward a “yes” financing decision if the plan makes sense, if it is backed up by logical and extensive detail, and if the leader makes a knowledgeable and compelling case for the strength of the business model. For the leader, then, it is essential in working with the financial community to demonstrate a complete and total knowledge of the business plan, to prepare extensively for meetings with funders, and to have full, convincing answers for any and all questions about the business that arise during finance meetings.

The importance of sound business planning should be self-evident, but we are continually surprised by the poor quality and lack of depth of many of the plans we review in our activities as venture capital investors and as board of directors members. A poor business plan usually is marked by unrealistic projections, lack of depth and backup in preparation, and a lack of professionalism in its content and presentation. Conversely, a really good business has well thought-out, sober projections, a great deal of depth and backup in presentation, and a very polished professional look to the presentation. In addition, a good business plan demonstrates a thorough knowledge of the market, its potential and rate of growth, along with an in-depth understanding of the customer.

The business plan we developed recently for Aurora Organic Dairy resulted in successful financing that allowed us to launch the company. The Aurora Organic plan embodied several of the above principles. First, we took time and care in the creation of the business plan. Several different growth scenarios were considered, and we ended up choosing a path that was optimistic but sober.

To validate this plan, we commissioned a comprehensive (and expensive!) research study by a qualified third party, Bain & Company in Boston, to prove out whether our assumptions were valid. Bain’s “thumbs-up” on the validity of our assumptions was a huge benefit to us in building confidence for funders and getting the financing we needed for the company’s startup. We also enlisted a notable investment bank, Headwaters MB in Denver, to help us market the company to the investment community and to take our plan to the next level in professionalism and presentation quality. Finally, we sent the prospectus to many potential funders. From this initial funder list, we narrowed the field to three finalist firms. After careful consideration of the three finalists, we chose Charlesbank Capital Partners in Boston.

Our investment bankers at Charlesbank have become tremendously valuable partners in helping us build the company. Their investment perspective is stable and long-term, an important consideration for us. In addition, they have demonstrated integrity, professionalism and a thorough understanding of our business and our strategy. They also got very high ratings from their references, the leaders of their other investments whom we interviewed as part of the process. Finally, and not last by any means, we have excellent interpersonal chemistry with our bankers–that hard-to-define but all-important factor combining elements such as strategy, goals, values and likeability.

Balancing Equity and Leveraging Debt
The second major area to consider is the nature of the financing vehicles to use. As we all know from our accounting teachers, companies are financed by a mix of equity and debt. The trick for rapidly growing organic companies is to choose the right financing vehicles for equity and debt, along with the right mix of the two, to optimize financial performance.

Equity will be a significant portion of any organic business. Assuming that the entrepreneur has a sound business plan, equity capital is certainly available from a variety of sources, including private equity firms, venture capital firms, angel investors, friends, family and the entrepreneur’s own net worth. There also is the possibility of public funds via an initial public offering (IPO), but we would argue vigorously against this last option unless the firm is well above $100 million in total enterprise value.

For organic entrepreneurs, the key issue to resolve in terms of equity is control. Almost all of the equity options for a growing company, with the exception of using the entrepreneur’s own net worth, will result in a dilution or loss of control over the company’s ownership, strategy and direction. Because loss of control is so likely, the key is to choose equity investors who you trust to control your company—and a good portion of your life. We recommend that company leaders choose their equity partners with extraordinary discernment and care. As the old proverb reminds us, “Marry in haste; repent at leisure.” The penalty from being over-hasty in the selection of an equity partner is akin to choosing the wrong life partner. As a company leader, there are few things more frustrating than to feel that you have the wrong equity partner.

Like other partnerships, choosing a financial partner involves a courting process. The matching of companies and funders is a mutual evaluation, with the desired end point of having an excellent alignment of goals, values and beliefs, financial guidelines, timelines, risk tolerance, temperament, and fit or personal chemistry between the parties. In the startup of Aurora Organic, our system of moving from several initial funding prospects to the eventual partnership with Charlesbank was very much a process of mutual evaluation between ourselves and potential funders.

Despite the success we’ve experienced in finding our investor for Aurora Organic, we also need to acknowledge mistakes and faulty judgments that we each have made in the past choosing financial partners. In other businesses we have operated, there were poor choices in partners that had negative consequences for our businesses. In one case, a cascading series of bad decisions led the business seriously off course and lowered the long-term value of the company. The major problem we found with these partner choices was in the rift that developed between ourselves and our partners regarding strategy, goals, decisions, and the like.

Debt financing allows the entrepreneur to retain legal control, although the loan covenants required by lenders for debt financing amount to control of another nature. Debt also has the advantage that it is nearly always cheaper than equity in terms of the return required by the provider.

Debt providers require a lower return than equity providers, thus debt is “cheaper” money. The real art in using debt financing is creating a balance point that maximizes the leveraging power of debt while maintaining control and setting up the company with workable loan covenants. Finding this balance point–the optimum mix of debt and equity, leveraging debt for maximum use and creating workable loan covenants–is one of the most difficult jobs of the entrepreneur.

Choose Your Board Wisely
The third major topic relative to financing is choosing the right partners and stakeholders. We previously discussed the importance of choosing equity partners, which for us at Aurora Organic led to our partnership with Charlesbank. Just as important to the company’s financial success is the appointment of board members for those companies established as corporations.

In board selection for growing organic companies, we recommend staying focused. This means keeping the board small in membership size. A board of three or four members generally works best; expansion to six, seven or more board members becomes problematic. In addition, the company should limit the inclusion of outside board members, meaning those people who are not closely linked to the business itself but who bring a broader outside perspective. Such outside board members might suit the needs of General Motors, but they generally don’t provide much help to small, growing organic companies. Organic entrepreneurs don’t need broad societal representation; they need a focused “swat team” of insiders who can quickly set intelligent direction. Aurora Organic has a four-member board that functions quite well: two company leaders (us) and the two bankers from Charlesbank. We bring in the senior management team for strategic planning and daily management of the company, and no outsiders are needed.

The People Factor
One final word of advice to our fellow organic entrepreneurs: remember that financing is not a money issue–it’s a people issue. The people you choose for your key financial and stakeholder partnerships will have an enormous influence on the success of your venture. Wrong choices can lead to unfavorable outcomes; conversely, correct choices in your key partners will prove to be instrumental to your success.

We wish you well in your development of new companies and new financial growth opportunities in this wonderful and essential organic industry in which we all play a dynamic, mutually-supporting role.

Marc Peperzak is CEO and co-founder of Aurora Organic Dairy, a vertically integrated producer, processor and marketer of organic dairy products. He is also CEO, founder and majority owner of Aurora Dairy Group, one of the nation’s largest production dairy operations with dairies in Florida, Georgia and Mississippi. Marc was a co-founder and former chairman of Horizon Organic Dairy, the leading brand of organic dairy products. Marc is currently on the board of Headwaters MB, a leading investment bank based in Denver, CO. He can be reached at marcp@auroraorganic.com.

Mark Retzloff is co-founder, President and Chief Organic Officer of Aurora Organic Dairy. Previously, he served as CEO of Rudi’s Organic Bakery, was also a co-founder of Horizon Organic Dairy and co-founded Alfalfa’s Markets. He is a past president of the Organic Trade Association and received the industry’s award for Outstanding Individual Achievement. Recently, Mark became a founding member and general partner of Greenmont Capital Partners, a private equity firm that will invest in the
natural products and broader wellness industries. He can be reached
markr@auroraorganic.com.