More independent restaurant owners should consider crowdfunding to open or expand their restaurant business. What is crowdfunding all about and how does it work for restaurants?
Crowdfunding is a means of selling securities to the public without registering them with Securities and Exchange Commission (SEC). The capital raise is handled, though, by an SEC-registered crowdfunding portal, which means prospective crowdfunders must first convince the portal to let them do it.
The first step isn’t the application, it’s preparing the necessary documentation you'll need to convince the portal. Portals want to see business plans, financial histories, growth projections and balance sheets. The use a required disclosure document called a Form C. This is where the restaurant owner must disclose the employment history of all partners, the ownership structure and previous fundraising rounds. And, the applicant must pass what is called "bad actor" check.
While they’re preparing these documents, operators can consider whether or not they want to crowdfund. First off, it’s not a money spigot and they need to be able to pitch the deal to their friends, family, customers, and even strangers. Even then, it’s not a sure thing. Crowdfunders often need to get creative to get their fundraising campaigns over their minimum threshold.
Pitching friends and family is very important. In the words of Matt Melbourne, head of crowdfunding site Republic’s retail investment team, “momentum matters.” The best way to get it is by lining up friends and family to invest as soon as the campaign goes live.
The application process varies by portal. Republic and StartEngine, two of the largest crowdfunding portals, ask for information about the business’s traction and unique selling points. Both portals cater to high-growth companies—often tech startups—and restaurant owners should be prepared to upload a pitch deck with their application. Despite their tech focus, restaurant companies such as Pure Green and Citizens Coffee have found success on the platform, raising more than $1 milion each.
Selectiveness varies by portal. Per its website, Wefunder is not a “gatekeeper” that picks and chooses which ideas are worthy of funding. Small business-centric portals like SMBx and Honeycomb Credit are more selective, and proud of it. Republic advertises a 5% acceptance rate; StartEngine, less than 1%.
The type of security an operator wants to issue can be a significant factor in choosing a portal. All portals think their securities are best, but debt instruments, particularly revenue-sharing notes, work best for small operators. No one wants to sell 10% of their family restaurant, and worse, no one wants to be a part-owner in a 10% stake in that restaurant. Revenue sharing notes allows those restaurant operators to retain full control of their business and creates a clear path to profit for the investors.
Larger operators, particularly those plotting significant expansions, should consider equity. For context, Citizens Coffee and Pure Green, a juice and smoothie franchise, sold equity to crowdfunding investors when they had just five locations. Both pitched aggressive expansion plans on their campaign page.
While many platforms offer revenue-sharing notes, the crowdfunding portal, Mainvest, specializes in them. The notes are described by their “investment multiple”—the amount, expressed as a multiple of the initial investment, investors will be repaid. Wefunder recommends small operators offer at least a 2x investment multiple on their revenue sharing notes. The Monitor’s analysis of active campaigns on Mainvest shows the average investment multiple is just over 1.5x, and the average revenue share percentage is 1.9% to 5.5%. As an exampl, say you agree to a 1.5x multiple and agree to pay 5% of your revenue. That means you will pay out 5% of revenue until every investor has been paid 1.5x their investment.
Honeycomb Credit and SMBx specialize in debt instruments, or “bonds” in the latter’s parlance, that are essentially loans. According to the Monitor’s analysis of successful recent debt campaigns, the average interest rate is 7.9% on SMBx and 9.275% on Honeycomb. The restaurant operator would be responsible for paying back principal and interest over a period of time
Crowdfunding investors pay attention to the yield on the debt, said Melbourne, and the better the offer, the more likely they are to invest. That’s especially true on platforms like Republic, whose pitch isn’t tied to a perceived public good. As crowdfunding matures and investors become more professional, the importance of fair or even advantageous investment terms will only grow.
Investment terms are always a collaboration between the crowdfunder and their chosen portal. Some portals, such as Mainvest, leave them up to the crowdfunder, within reason. Others, such as Honeycomb, exercise more control over their platform. Crowdfunders should be prepared to negotiate to get the terms they want, but recognize that a more attractive deal for them is less attractive to potential investors.
Finally, the first move a crowdfunder should make when their campaign goes live (or ideally before then) is to line up their personal crowd to invest in the first couple of days. In an interview on Wefunder’s podcast Adventure Capital, Klaus Moeller, who successfully crowdfunded two restaurants on the platform, said, “It would be really smart to have 20% of the funds lined up,” so when the campaign goes live “it immediately looks like a success.”
In addition to impressing investors, momentum can unlock promotion from the portal. According to a guide published by Mainvest, the portal only begins advertising on a crowdfunder’s behalf once they raise 20% to 30% of their goal. Wefunder follows a similar system, and StartEngine and Republic use a more opaque process for determining which campaigns are featured on their homepage as “trending.”
As a baseline, crowdfunding allows operators to turn their social capital into financial capital. By telling a compelling story, leveraging the power of their portal and leaning hard on their network, operators can use their campaign to reach new audiences and generate new social capital, even as they monetize the old.
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