I have had a few entrepreneurs ask me about financing opportunities for start-ups using crowdfunding platforms since most traditional lenders have very little interest in new foodservice operations.
I had some familiarity with the crowdfunding model in the early days of its’ evolution when I met Douglas Ellenoff, of the law firm Ellenoff, Grossman & Schole in New York City. Doug is one of the earliest proponents of the concept and recognized as one of the major experts in the field. He is also a partner to Amanda Fugazy, a regular contributor to Total Food Service.
When the JOBS Act (“Jumpstart Our Business Startups”) was signed back in 2012, the intent was to make access to capital easier and less restrictive for small businesses. This was one of the few bipartisan pieces of legislation passed by Congress and has had broad support for a number of years.
Under Title III of the JOBS Act, also referred to as the Crowdfund Act, small companies could issue securities (sell equity / shares) to the public in ways that were not previously permitted. The hope was that average Americans would be able to invest small amounts of capital in small business ventures through a web based platform without the cost and complexity associated with the public securities exchanges. Hundreds or thousands of small investments would be pooled together to give the business the working capital it needed. The “crowd” makes it possible for good ideas and concepts to get launched even when the business or concept doesn’t appeal to conventional investors and banks.
The concept took hold as the public had increasing desire to seek solutions on line and a few different variations on the theme evolved. A number of Crowdfunding platforms were launched which developed creative ways of raising capital. Now small business opportunities were open to thousands of non-accredited investors and potentially millions of individuals seeking investment opportunities.
Not all platforms are created equal and offer different financial options for both the business and the investor. Some offer campaigns to solicit donations in return for rewards or discounted goods and services, while others seek investors to purchase equity in the company or provide various forms of debt financing.
The most popular method of crowdfunding is referred to as “Reward Based” Crowdfunding, which solicits donations in return for incentives or rewards that the sponsor provides. The leaders in this arena are Kickstarter.com and Indigogo.com. The business seeking money launches a campaign that has a stated goal for their capital raise. Typically the reward is a discounted product or service of the business that is offered in return for providing capital today. Food manufactures have been fairly successful doing this but foodservice operations have not jumped in heavily except with craft brewers and small distilleries.
A foodservice manufacturing company seeking manufacturing equipment which sells a retail product like “Organic Artisanal Salsa” might have a retail price of $10.00. In return for a $70.00 donation the crowdfunders get ten jars of salsa. Or a restaurant might offer a $100.00 gift card in return for a $75.00 donation. The hope is that the discount will be attractive enough to gain hundreds of potential donors. Many business owners consider this to be “cheap money” because they are raising capital without selling off an equity stake in their company, or incurring debt that needs to be repaid.
In reality, this type of crowdfunding is not dissimilar to alternative finance options that factor your receivables such as merchant cash advances or revenue based finance. These companies purchase future receivables at a discount by providing working capital immediately against sales you will make in the future. They may give the applicant $100,000 today for $125,000 worth of future sales over the following year. The same principal is at work as rewards crowdfunding, but without the work and uncertainty.
The second group of crowdfunding platforms provides you with working capital in exchange for a piece of your company’s equity. This is really an abbreviated micro public offering of your company’s stock. One of the biggest benefits of equity crowdfunding is access to larger funding amounts of $500,000 and more. While equity financing seems attractive to many business owners because it technically does not need to be repaid, it does come with many other costs and considerations. This type of financing is very rare for restaurants and is gaining in popularity with food manufacturing companies.
Revenue generating companies can access platforms that offer a variety of equity, convertible debt and traditional debt options such as Crowdfunder.com and LocalStake.com. The debt offerings are usually cheaper than alternative financing options from online lenders like Strategic Funding and Kabbage, but require more work in the application / pitch campaign.
Outwardly, crowdfunding looks like a simple process, but the reality is that it takes work and time for the company to create a compelling campaign and oft times produce the documentation necessary for a successful raise. My experience is that most restaurateurs and food entrepreneurs need their financing quickly. With crowdfunding, be prepared to be patient and wait.
Even though your campaign is well crafted and up there on a popular platform, it will be up to you to drive interest through social media and your own savvy. Many crowdfunding campaigns are heavily funded by people you already know and in fact some sites actively push you towards your family and friends to seed the round. Frankly, if that’s the case there is really no reason for you to channel their investment through the crowdfunding platform as they will charge you a fee for money they didn’t raise.
Lastly, you could be disclosing information about a hot opportunity or a great location that you want to snap up. Once you post a campaign, you have your ideas and strategy out there for the public to see and scrutinize and while most agree the risk of someone stealing your deal is small – it can happen. All things to consider before putting your business plan or product up on the web.
All business financing requires skill, creativity and a compelling story and business model. Whichever you choose, make sure you learn as much as possible.
If you have any questions or just want to discuss your business, please contact me at dsederholt@ragnarpartners.com
