Crowdfunding has become a popular way of using the internet to raise small amounts of money for both profit and non-profit purposes. As its popularity has grown, it has become an effective way for entrepreneurs, including restaurants, to raise serious start-up capital.
Regulation Crowdfunding allows companies to sell securities to the public—it was $1.07 million and is now up to $5 million in any 12-month period—without a formal registration of those securities with the Securities and Exchange Commission. The legislative framework was laid in Title III of the 2012 JOBS Act, and rules permitting crowdfunding took effect in 2016.
Companies must make their crowdfunding offering through an SEC-registered funding portal. Their offering is open to anyone, regardless of accreditation, although there are income and asset-based investment limits for non-accredited investors. The securities often take the form of debt, equity or a hybrid of the two, called revenue sharing notes.
Regulation Crowdfunding can be of particular use to small businesses, particularly restaurateurs, who may struggle to raise debt and equity from banks and investors. According to Abe Chu, co-founder of investment platform and regulation crowdfunding portal NextSeed, restaurants account for “about half of [their] campaigns.”
When Shoot The Moon, a Houston restaurant venture with a novel low-touch, high-access self-service beer, wine and liquor model hit a wall with their equity fundraising campaign, they turned to NextSeed.
Partners Kevin Floyd, Dax McAnear, and Jonas Herd, all veterans of the Houston restaurant scene, have been working on Shoot The Moon since 2019 when the Texas Alcoholic Beverage Commission legalized self-service bars (a hallmark feature). The trio planned to open their first location in Fall 2020, but were delayed by funding issues and Covid complications.
Part counterparty and part mentor, NextSeed helped the Shoot The Moon team craft an investment offering that would entice investors to their platform without draining the fledgling restaurant of needed revenue. They’re currently offering investors a 1.45x investment multiple in the form of a revenue-sharing note, which pays 10% of revenue at the company’s first location for four years.
When the campaign launched, Shoot The Moon co-founder Kevin Floyd said he would be “overjoyed” to reach $100,000, the minimum raise on their NextSeed campaign. They reached that goal by October 20, less than two weeks after the campaign’s launch, and are on their way to their maximum raise of $535,000.
“A lot of the money has come from NextSeed’s user base,” said Floyd. Shoot The Moon has a significant number of local backers, but they’re almost exclusively small-dollar donors. All of the company’s larger donors (>$1,000) are from out of state.
Part of the inspiration to crowdfund came from the success other Houston-area hospitality companies had with the strategy, particularly Buffalo Bayou Brewing, another NextSeed client, which offered “Free Beer For Life” as a backer reward. “You could make your money back without ever receiving a dime,” joked Floyd. While NextSeed hasn’t recommended anything so bold to Shoot The Moon, they helped them structure a compelling and competitive set of rewards.
A critical element of Shoot The Moon’s pitch is its replicable business model, which trades higher upfront costs for lower variable costs. Their low-touch service model and self-service bar keep labor costs low and shrinks shrinkage, while their commissary kitchen will make it easier to expand locally.
According to NextSeed’s Chu, a proven track record is another critical element of a successful crowdfunding campaign. Existing businesses or entrepreneurs such as Floyd, with multiple successes under his belt, make for appealing investments.
Creating a replicable business model was especially important to Floyd, who spent the last decade founding and operating highly unique restaurants. The Houston Chronicle once described him as “one of the chief architects of the past decade of the Houston beer and cocktail scene”—but single-location restaurants have their downside. “There are things you should do,” said Floyd, such as brand development and intellectual property protection, that are hard to justify on a single location. “You just don’t see a return.”
Although only one restaurant location is currently in the works, Shoot The Moon plans to open four additional locations in the next five years. In anticipation of this, they set their maximum raise at $535,000, half of the regulation crowdfunding limit of $1.070 million in a 12-month period. The SEC recently voted to expand that limit to $5 million. That rule will take effect in January 2021.
While COVID-19 has prevented the Shoot The Moon team from doing any in-person fundraising, their digital efforts—website, social media and webinar—have borne fruit. “Whenever we do something even a little interactive, we pick up new backers,” said Floyd. Floyd said some of Shoot The Moon’s largest backers have come from the webinar.
The impossibility of in-person fundraising is likely exacerbating the in-state, out-of-state divide. To upsell local donors, Shoot The Moon is planning on releasing a special, locally oriented reward tier at $1,000, featuring some of the perks currently available at the much higher tiers.
One of the biggest risks involved with crowdfunding is uncertainty over the final amount raised. “If I was solely dependent on the campaign I’d be highly concerned,” said Floyd. Shoot The Moon is mitigating this risk with a diverse array of funding sources: They’ve already raised more than $1.1 million in equity and are continually exploring new potential funding streams, be they additional equity, equipment financing deals or SBA loans.