It's a tough time to be a food startup. How Minnesota brands hope to reach the next level.

ANAHEIM, Calif. - It's easy to start a food business and almost impossible to succeed with one, especially now.

Money is tight. Costs are still high. Consumers say they want health and wellness, but their money says they are looking for deals and convenience. Small companies bleed cash even though they have to charge higher prices than major brands.

Any food companies that survive these growing pains over the next few years can probably succeed long term.

Belén Rodriguez plans to be one of them.

"We want to become a $25 million brand in the next five years," said the founder of Minnesota-based Quebracho, which makes frozen empanadas. "Quebracho wants to become a national, better-for-you convenience brand with multiple products."

But there comes a point in every food company's journey when even the best taste, branding and sales momentum runs into a lack of funding, distribution or economies of scale. This "chasm" is where most get stuck, and they either stop growing or they close their doors.

"There are certain products where you just can't get to that [level of sustainable sales], whether it's supply chain or ingredients, so you have to be premium. And then that puts a lot of pressure on your brand," said Rich Gammill, managing partner at Proterra Investment Partners in Minneapolis.

Minnesota has not seen many food startups cross that divide from premium — industry lingo for expensive — to mainstream. While Whole Foods and co-op shoppers can help brands reach their early potential, leveling up often means appealing to a broader audience with lower prices.

Even a well-timed sale can get a new customer to take the crucial first bite that, if everything else was done right, will keep them coming back for more.

"We're looking at a lot of promotions on the shelf to try to get people to buy," said Yasameen Sajady, CEO of St. Paul-based Maazah, which is aiming to top $2 million in sales this year for its chutneys, aioli and soon-to-be-released lentil dips. "Our challenge for the next year is how do we use our marketing dollars in the smartest way, and not spend all our money giving the product away?"

The $250 million acquisition of Angie's Boom Chicka Pop in 2017 was the last blockbuster deal for a Minnesota homegrown food brand, though many companies like Maazah and JonnyPops have a growing national presence.

"We've been focused on making sure we have same-store repeat sales … and we didn't want to get any bigger until we made sure it worked at a small scale," JonnyPops co-founder and CEO Erik Brust said.

"We love the community, and giving back, and employing people at the factory. I don't want to change that."

Quebracho recently partnered with a manufacturer that can supply 3,000 stores, a crucial upgrade from hand-filling the empanadas in a shared kitchen. Now Rodriguez and several other Minnesota-based food founders are looking for investors.

"Investors were throwing money at food companies in the pandemic, but that stream stopped," Rodriguez said. "It's unfortunate an early-stage startup has to look outside Minnesota for funding, but it's the reality."

No substitute for taste

Johnny Tran can't walk 20 feet at Expo West, the nation's largest food industry trade show, without bumping into someone he knows.

The director of 301 Inc., General Mills' venture-capital arm, is enmeshed in the world of food startups. In fact, 301 Inc. looks at 3,000 investment opportunities a year, with about 50 getting a close examination.

One clear trend has emerged in recent years: "A lot of companies are struggling or going under."

Tran said the food world has gone through a "shaking out" amid high inflation, high interest rates and more cautious investors.

"What's been tough for startups is they're typically at the higher end of the pricing spectrum, and they can't pass along price increases to cover costs," he said.

"Access to capital is tough," Tran added. "And with interest rates for startups around 20%, you're talking about running a business off of your credit card."

While food companies can wax on about taste, price, sustainability and wide distribution, the brands that are winning today have the best business fundamentals.

"Venture capital has subsidized a lot of these premium foods," Tran said, but that well has dried up. "Now people are making the tougher moves they probably should have made a long time ago."

The former head of 301 Inc., John Haugen, saw that discipline in the plant-based brand Aloha that his investment group, Semcap Food & Nutrition, recently backed with a $68 million investment.

Haugen and partner Ryan Newcom saw a path for Pennsylvania-based Aloha to reach a wide, mainstream audience with its high-protein, low-sugar bars, drinks and powders. "The fundamentals have been in place since early on," Newcom said. "But it always starts with the product, you have to have a great-tasting product."

While inflation-battered consumers have sought shelter in more affordable brands, Haugen expects "better-for-you" foods and formulations will rise again on shoppers' list of priorities.

"I do believe consumers are returning to some of those pre-pandemic health behaviors," Haugen said. "We're seeing increased focus on products with nutrient density. People do care about how these products are sourced."

Looking for the 'Liquid Death moment'

Minneapolis-based gluten-free cereal maker Seven Sundays has bridged the moat that food brands face on their long path to growth, and it was about checking the right boxes for consumers. Last year the certified B Corporation raised $6 million in venture funding and got its new upcycled cereal in Costco.

"We're a mission-driven brand just wanting to clean up the cereal aisle," CEO Hannah Barnstable said. "At the end of the day, the only reason we've gotten into Costco and all these places is we've created a product that tastes good."

On a balcony across the street from Disneyland, dozens of founders and key players in Minnesota's consumer packaged goods industry mingled at an Expo West event earlier this month.

Who gets to come back next year more successful?

"That's the billion-dollar question everyone wants to answer," said Zoe Levin, founder of fast-growing Minnesota tissue company Bim Bam Boo.

Entrepreneurs draw inspiration from others that grew quickly, like the canned water brand Liquid Death, which launched five years ago and is now valued at more than $1.4 billion.

"How do you make a Liquid Death moment out of whatever you're selling?" Levin said.

Few brands will ever explode like that, especially given the trend toward hyper-personalized offerings. Success for many companies is more likely to look like dominating a niche rather than notching a major valuation, Gammill and others said.

For Rodriguez, the ambition for Quebracho to be the first major Hispanic brand from Minnesota was only strengthened by her visit to Expo West. The competition will quickly catch up if she slows down now.

"There are a lot of great products out there that have compelling founder stories and flavor profiles," she said. "It's important to keep that in mind."