Experts have been warning entrepreneurs that access to the pool of startup funding is going to be tightening. One Idaho startup has found that one the hard way.

But Matthew Bishop, cofounder and CEO of Iron Mule Inc., is regrouping to take another shot at it.

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What is Iron Mule?

Iron Mule is a six-year-old Boise-based coffee roastery with several brands -- Café Mule, Direct Access, and Ironside Roasting Company -- that it primarily sells to grocery stores, Bishop said. Each brand has a different price point and a different positioning, he explained.

The company was looking to expand its Direct Access line -- which is intended to help provide more money to farmers through a profit-sharing program -- nationally, Bishop said. Iron Mule received $500,000 in seed round funding in 2020 to start the process.

In addition, the company took out a convertible note for about a half-million dollars, Bishop said. The note came due at the end of July, and Iron Mule needed to raise $1 million by then to pay it off. 

What Iron Mule was trying to do

But Bishop couldn’t get the Series A funding he’d been looking for, even though Iron Mule has been making its revenue targets. He heard the same thing from two of his larger corporate investors, as well as an additional company that wasn’t an investor: Things are tightening up in capital markets, nobody’s investing, and because they had other early-stage investments they had to double down on, they couldn’t make new investments.

The result is that Bishop has lost some equity in Iron Mule, which hamstrings the company somewhat moving forward, he said.

If Iron Mule had succeeded in raising the funds, the debt would have been converted into stock at a rate that was benchmarked off the additional $1 million. “’If you don’t raise it, then we as debtholders will have the option to convert to stock in your company or call our debt,’” Bishop explained. “’If we convert stock, it’ll be at a price per share that’s not really advantageous.’”

The investors didn’t call the debt but did take the conversion. “We ended up losing about twice the amount of stock that we otherwise would have,” Bishop said. “That affects our ability to continue to raise money and still hold on to meaningful amounts of our company in the long term.”

Dealing with the consequences

That doesn’t mean Iron Mule will go out of business, not by a long shot, but it’s a setback. “It's something that’s strategically limiting,” Bishop said. “We were hoping to use those funds to continue to promote ourselves in a national account. It’s very rough, because it puts things at risk we had already put into place.”

The company had used the half-million-dollar convertible note to gain national and regional grocery accounts and had extended itself to do so. Now, it’s short on funds to support and market in those accounts, Bishop said. 

But the good news is, Iron Mule no longer has the half-million-dollar note hanging over its head. “The only thing limiting us now timewise is we need to operate,” Bishop said.

So what now?

Iron Mule will survive, and Bishop is working on his next steps. “Our only options are  to significantly contract the business we’re doing or continue to look for outside funds,” he said. “We have to either look and look until we find investors who have an outlook that allows them to invest right now, or we’re going to have to manage our business in a way to weather this climate until more investors are willing to invest.” The company can survive without additional funding, but it can’t maintain its largest accounts without further funding, he said.

Bishop is still looking for Series A funding. “There’s not a smorgasbord of options,” he said. “We’re too small and too risky for massive bank debt. We do have some debt available to us from the bank but it’s of limited scale.” There are other models, such as debt that the startup pays back with royalties, but he said he’s not considering that just now. “It’s not off the table but it tends to be pretty expensive,” he said. “That leaves an equity raise as our best option.”

Meanwhile, Iron Mule is adjusting its product mix, emphasizing brands that have performed well rather than trying to grow brands that are less established, Bishop said. That means doubling down on its Café Mule brand with regional grocery placement. “It’s a brand that has performed considerably well for us for years,” he said. And while it doesn’t offer as much of an innovative social mission for farmers as the Direct Access brand, Iron Mule donates 25 cents per bag to trail maintenance, recalling the company’s start when it gave away coffee on Saturdays on Boise trailheads. 

“We will adjust our operations to make sure we have as long as it takes,” Bishop said.

Lessons learned

In retrospect, there’s things Bishop said he could have done differently, though changing the terms of the convertible note probably wasn’t one of them. “I like to reward investors willing to put real money in at an early stage when we’re trying to grow very aggressively,” he said. “I wouldn’t have thought it equitable to those investors to have significantly different terms.”

And Bishop said he doesn’t regret choosing the convertible note option in the first place. “If you are going to have a provision in the note that allows people to call their debt and not be forced into a conversion, you have to be willing to accept the consequences that it’s a risk,” he said. “It’s still a reasonable way to raise money at an early stage. Just because things didn’t work out for us, on the timeline that we wanted, isn’t something I’m going to grouse about. It’s still a very good mechanism.”

In particular, Bishop said he liked the fact that using a convertible note meant he didn’t have to set a price per share for Iron Mule when it raised those funds. “We needed time to grow,” he said. “The note did everything it was supposed to do for us. We just ended up raising money in a difficult climate.”

Bishop said his major miscalculation was focusing too heavily on individual investors he thought would contribute to a Series A who didn’t. “I became too fixated on those investors,” he said. “You have to cast a wide, wide net. It’s a percentages game. I’m certain there’s other investors who are happy to invest. I just didn’t reach them in time.”

Iron Mule’s advantage is that it’s always done an outsized volume of business with a very small team, Bishop said. “People believe in our brands, and like the culture of how we work,” he said. “That gives us the flexibility to scale up or down to some degree. We’re able to operate very efficiently and weather some down times. We have as long as it takes, really.”

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Sharon Fisher is a digital nomad who writes about entrepreneurship.

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