Crowdfunding Comes To Restaurants

The way to consumers’ hearts is through their stomachs – likely because unlike almost any other good or service, food is a non-negotiable purchase for 100 percent of human beings. Individuals have different preferences for what they eat that can vary widely – from vegans to those who will only consume the sustenance of their Paleolithic forerunners, but everybody eats multiple times a day.

Yet, that sure-fire demand for a product seems at odds with the sure-fire path to an investor’s checkbook.

An overwhelming majority of restaurants fail. The most consistently cited statistic is that 60 percent of them fail in the first three years, according to data released by the National Restaurant Association. One might say that those odds are at least better than the 90 percent failure rate of most startups, but the fact of the matter is that restaurants are perceived to be expensive liabilities – and entrepreneurs looking to wade into the restaurant business find startup capital hard to come by.

“I think bank robbers are more welcome by lenders than customers looking to finance restaurants,” one restaurateur wrote for Forbes. “We visited four banks, got outright rejections from three, one of them the same bank that we have had a perfect and significant lending relationship with for 20 years, each rejection because we used the dirty word ‘restaurant.’”

Attracting qualified investors isn’t much easier – considering that an accredited investor under current legal guidelines in the U.S. must earn more than $200K per year or have assets (excluding housing) in excess of $1 million and to launch the typical restaurant venture need as many as ten of them.

But those laws are changing – 15 states have opened up crowdfunding equity investment, and the SEC is currently creating a federal rules framework to expand the circle of who can invest. Thanks to a provision of the JOBS Act, purchasing equity in a small business will soon be open to any investor – within limits, offerings are open to anyone to invest 10 percent of their annual income or net worth in each deal.

EquityEats – a crowdfunding platform for entrepreneurs – is poised to take advantage of this forthcoming expansion in the investor base – and in so doing hopes to create an entirely new class of financier in the food services business  – the “investomer” – the person who buys in because they look forward, someday, to dining out.

“We have seen that those most engaged in restaurant crowdfunding are self-identified foodies, regardless of how much they invest,” EquityEats CEO Johann Moonesinghe noted on the firm’s blog. “Opening restaurants with the support of 300-500 investomers (investors + customers) sets entrepreneurs up for success from Day 1. Not only does this group of local people express interest in a restauranteur’s concept, but also they provide tremendous value as loyal guests for the life of the restaurant.”

Moonesinghe’s desire to build a platform for the investomer sprang – as so many entrepreneur’s vision does – from a personal experience.  As an investor in the Black Whiskey in Washington, D.C., and Eighty-Two in Los Angeles – he realized that other people might want to use their dollars to vote for a local joint if they could put in smaller than normal investments.

“People want to eat local, shop local, why not invest local?” said Steve Lucas, EquityEats VP of Communications & Strategy, in an interview. “With entry-level investments set at $2,500 or $5,000, people can call themselves a restaurant mogul after investing in 10 concepts.”

The desire to join the ranks of the world’s restaurant moguls aside, Moonesinghe says that bringing the crowdfunding model to restaurants essentially allows their partners to effectively kill two birds with one stone – effectively raise capital (in a way that offering “rewards” or “perks” a la a Kickstarter campaign generally cannot because they doesn’t generate a large enough flow of dollars) and also building a committed user base pre-launch.

“We really want 500 investors in each of these locations. We think that’s going to help the community aspect,” Moonesinghe noted. “Local people validate your innovative concept with their hard-earned money, and they will become irreplaceable brand evangelists and loyal regulars.”

Apart from offering a venue for investment – EquityEats offers a good deal of curation and guidance when it comes to potential partners. Restaurants on the platform are carefully – and in some cases creatively – screened for viability. Recently, while considering investing in a bakery, the executive team spent days canvassing D.C.’s coffee shops and pastry retailers taking close notes on customer/staff interactions that, in retrospect, their communications officer conceded may have been “odd seeming.”

They also have an intense focus on making sure the businesses that solicit investment do not launch undercapitalized – which Moonesinghe notes is an endemic issue in the business.

“[After calculating necessary working capital for launch] we then add an amount equal to three months’ working capital for the concept to ensure they have the resources to weather any storms. The total figure is the amount we require that an entrepreneur raises. If they cannot raise the full amount, they do not receive any funding.”

EquityEats also requires its restaurant partners to work with essentially a mini-board of their potential investors that apportion their funding out over time and offers their restaurant partners access to their proprietary software package that sits in the proprietor’s POS and feeds back analytics data in a clear, collated fashion.

“These are things that really big companies use to keep track of costs, but that smaller, independent restaurants might not have the know-how to do, or it might be cost-prohibitive to do on their own,” Moonesinghe said.

EquityEats also defers investor payments until after the restaurant is profitable – at a 75 percent rate until an investor’s original investment is paid off (and a 20 percent rate after that). EquityEats makes its money by taking 20 percent cut of the investor’s payout.

The business had its soft launch in D.C. in late 2014 with four restaurants. Since then, things have progressed – albeit not entirely smoothly. All four of the businesses struggled to meet their funding goals and two have been shelved for the time being. Part of this stems from the fact that EquityEats is still, in many cases, limited to working with accredited investors, as the SEC rule change has as of yet not gone into effect nationwide.

“We’re not worried. We’re optimistic, and we have to be,” Lucas noted. “We’re fairly young. … Entrepreneurship in general is a process of planning and adapting.”

And adapting to the idea of becoming an investomer could take time – but it also offers a promise for the regular investor – a chance to nibble on investing without running the risk of biting off more than one can chew.