Restaurant Finance – The Crowdfunding Solution

Who Needs Banks When You Can Use Crowdfunding?

At this point in your life you have likely either heard of or been invited to take part in a crowdfunding campaign.  Whether it’s your friend, relative or some unknown with a cool idea – the use of the internet to raise venture capital has gone from quirky idea to bona fide over the past five years.  Worldwide, crowdfunding platforms have grown from $530 million in 2009 to a whopping $5.1B in 2013. And they show no signs of slowing down.

In Seattle, many have become armchair venture capitalists by funding several notable local food businesses such as Mike Easton’s Pizzeria Gabbiano, Big Chickie, Tin Umbrella Coffee in Hillman City and Sheri LaVigne’s Culture Club on Capitol Hill.  There was even an attempt to save our beloved Paseo’s through Kickstarter.

 

What Platform to Use?

2014 has seen a rapid rise in the use of platforms such as Kickstarter and IndieGoGo to fund everything from the infamous $55,000 potato salad prank to your favorite food pop-up or truck moving into a brick and mortar space.  Restaurants are even using crowdfunding to support specific portions of their business such as the soon-to-be-opened Mammoth in Seattle’s Eastlake neighborhood which is raising capital for its growler system.

There are now platforms dedicated solely to food-related startups such as Barnraiser.us, Foodstart, EquityEats and IconPark.  In general, crowdfunding can be separated in into two models – rewards or equity.  In the former, donors receive some type of reward from the entrepreneur such as a product or service.  In the latter, donors receive equity in the venture.

 

The Puget Sound Business Journal reported in November 2013 that steakhouse Millers Guild, founded by veteran restaurant owner Kurt Huffman was funded by nine partners who kicked in $500K plus an additional $41K raised via Kickstarter – $13K more than their goal.  Why did they use Kickstarter? Commercial lenders are hesitant to put funds into unique restaurants without a track record.

 

Seattle Restaurants Use Crowdfunding

Mike Easton experienced this firsthand when looking for funding for Roman-style Pizzeria Gabbiano in Pioneer Square.  Despite the fact that Easton’s Il Corvo is wildly successful, it had only been in business just under two years when he and his wife were looking for funds for Gabbiano.  This basically kept the couple from leveraging commercial banking so they instead chose to work with Community Sourced Capital (CSC); a local organization that crowd funds small businesses via zero-interest micro-loans made $50 at a time by individuals.

When asked about his choice to work with CSC vs. Kickstarter vs. traditional banking or partnership models, Easton had this to say: “I just didn’t feel good about working with Kickstarter.  There’s something about asking for a gift of money from people I don’t even know and that doesn’t sit well with me.  I feel like there’s a certain entitlement involved which I didn’t want to be obligated to fulfill.  I felt better about using CSC for our loan.  All the people who invested are getting their money back and, at the end of the day, I know that I’ve worked for every ounce of this restaurant.”

 

The use of crowdfunding platforms as marketing tools to engage the community prior to opening a restaurant is also an evolving trend.  Given that many pop-up and mobile food businesses have already built large followings through social networking, it seems rational for them to eschew traditional lending and partnership financing.  In many cases, these networks are key – leveraging your nation of loyal food followers and tapping into their networks help fund your move into the big time.  No loan applications, no schmoozing investment partners– just engaging with your faithful customers may be enough to raise the funds you need.

 

Crowdfunding as a Marketing Engine

I spoke with Lisa Nakamura (formerly of Allium on Orcas Island) who recently ran an Indiegogo campaign to help fund her new venture Gnocchi Bar.  She chose the platform over CSC for two reasons: one, she doesn’t have the Gnocchi Bar location secured yet which is required for CSC and two, you get to retain the majority of your funds even if you don’t reach your target goal.

 

While the campaign didn’t hit its overall target, Nakamura did see some positive ancillary impacts from a marketing perspective.  She said, “I was expecting friends to step up to the plate – and they did.  But it was also really cool and encouraging to see others come out of the woodwork.  I didn’t know them but they had heard about me – and they thought I had a worthy cause.  Whether or not they became contributors was irrelevant.  It was the excitement about this thing happening that was meaningful.  Every dollar people contributed was a dollar towards a marketing campaign. It helped get the word out about the project.  It was the most valuable thing about running the campaign – it brought Gnocchi Bar to wider audience.”

 

Is it for Everyone?

To be fair, not every crowdfunding campaign is successful.  Some estimates have nearly two-thirds of all campaigns failing to meet their financial goals.  And while it may seem like a simple way to raise capital, in reality it’s anything but.  Scott Heimendinger, inventor of the Sansaire immersion circulator once told me that running his Kickstarter campaign was akin to ‘having a baby’.  When I asked Nakamura about her process she said, “We did six revisions of our video and I learned that you really need to sell your story – not just what you’re doing, but why.  Why is it so important?  What makes it worthwhile?  Why you?  It was a great exercise to start asking yourself those questions and really clarify your business plan.”

 

The question for aspiring food business owners is: has crowdfunding become the de facto way for both aspiring and veteran restaurateurs to raise capital?  For those who have a dream, a following, and want to avoid the arduous process of bank financing it certainly seems to be.

 

*Portions of this story originally appeared in Seattle Weekly