Better Your Business

Want to open a restaurant? Now this funding is available

Saltwater Oyster Depot in northern California
Source: Ben Podoll
Saltwater Oyster Depot in northern California

Jason Demant, CEO and co-founder of the food-delivery service Bento, is a big fan of crowdfunding. The restaurant delivers fresh Asian dishes via an app in the San Francisco Bay area. So to power his company, Demant turned last year to the equity crowdfunding site Funders Club and investor start-up connection hub Angel List, both of which tap into wealthy, accredited investors. The company, which launched in March last year, ended up raising $2 million over 15 months, including contributions from other investors.

"We're looking toward the future," said Demant. "This is a concept that could work nationally and internationally. Los Angeles is next."

Bento aside, VCs and wealthy investors have mostly shunned restaurant investing, though. According to Crowdnetic research, only 30 percent of restaurants and specialty eateries who have turned to angel and VC investors have had successful crowdfunding campaigns. But the food game is set to change this week, once the long-awaited Title III JOBS Act is released. The new regulation will allow anyone to invest in start-ups, rather than just wealthy, accredited investors. Experts think that restaurants will find a foothold with small investors.

Restaurants aren't the venture capitalists' sweet spot, said Sherwood Neiss, a principal at Crowdfund Capital Advisors. "They want a unicorn, a big exit and low-hanging fruit," Neiss said. "They won't fund restaurants unless they're building a chain."

Restaurant failure rates, which are as high as 60 percent in the first year, also dampen VCs' funding interest, Neiss said. And so the only deals that get funded are ones like Bento, which are typically in California, according to Crowdnetic data.

The new equity crowdfunding rules will change that funding logjam, Neiss said, since investors can now invest in their own local restaurants. "Customers who are turned into investors have a vested interest in your business," he said. "Unlike banks, these investors will be marketing and sales agents. This will be great for food trucks and restaurants."

Some crowdfunding platforms are even offering eatable incentives to investors. EquityEats, a restaurant crowdfunding platform based in Washington, D.C, helps restaurants turn to their passionate foodie customers for funding help. A $1,000 investment reaps a $1,750 return in free food and beverages over five years. For $5,000, investors get $5,000 back and $5,000 in free food.

"Paying back investors with food means you can be more generous," said Johann Moonesinghe, CEO and founder of EquityEats. "They love that. They can also be brand ambassadors." If the restaurant fails, though, investors lose all their food credits and their investment, he pointed out.

EquityEats is also very selective. The crowdfunding platform only ends up working with 5 percent of the restaurants that apply.

Restaurateur Luc Chamberland turned to EquityEats last year when he wanted to expand his California restaurant Saltwater Oyster Depot. The rustic eatery features oysters and clams, harvested a few hundred feet from the restaurant, along with specialties, like smoked fish and salted cod. Chamberland ended up raising $175,000 in 90 days, and most of that money came from existing customers, he said.

"Restaurants aren't known as being safe investment vehicles," said Chamberland, who started the restaurant in 2012. "So you have to have a rich uncle, be self-funded or look to a traditional marketplace and show sustained returns."

Crowdfunding platforms have been another money-raising venue. But only about 25 percent of food companies that start campaigns on Kickstarter meet their funding goals, according to Kickstarter data. Indiegogo doesn't collect stats on restaurant or food crowdfunding campaigns. But some food and restaurant campaigns there have thrived.

Last year funding for restaurants on equity crowdfunding sites reached nearly $2.4 million, according to Crowdnetic. This year through May 5, $1.147 million has been raised.

Mercado, a food market and restaurant incubator that wants to spur local food artisans in western New York, raised $71,471 in 11 days during 2014 on Indiegogo. And Republic Restorative Distillery in Washington, D.C., a women-owned distillery and craft cocktail bar, raised $119,643 in one month last year.

Money raised by restaurants on Indiegogo ranges from $30,000 to $500,000 per campaign, said Alisa Cordesius, director of social innovation and design at Indiegogo. She added that the most successful campaigns offer investor perks, such as restaurant cookbooks, digital downloads of recipes or a special note from the chef.

"Restaurants have become harder and harder to finance," said Greg Wank, a practice leader in the food and beverage industry group at Anchin Block & Anchin. "There's so much competition in metropolitan markets. So people usually go to friends, family and then angel investors for money."

But equity crowdfunding is an extension of friends and family investments, he said. Equity crowdfunding will have its challenges, too. Restaurants must decide how they'll structure the investment and what return they'll offer investors. "Paying investors back in restaurant credits is best, since they only cost a fraction of an investment," he said.

The biggest reason restaurants fail, he said, is underestimating the cost to open, from hiring to stocking the kitchen to getting a lease. There must be enough funds to operate for several months. "You need a great operator who understands the nuances," Wank said.

Neiss cautioned investors and restaurant entrepreneurs that equity crowdfunding isn't a cure for failure.

— By Constance Gutske, special to CNBC.com

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