Considering the roaring success of pledge-based crowdfunding sites like Kickstarter—500 restaurants funded and growing—and Indiegogo, it’s never been easier for aspiring restaurateurs to fund their dream venture. The same holds true for equity-based sites, including CircleUp and Fundable, that provide a different route by which current and prospective restaurant operators can acquire capital to get their venture going.
Crowdfunding fills the financing gap restaurants face between the usual startup methods—soliciting friends and family for funds, accessing credit card debt—and hard-to-get bank loans. But you’ll have to wait if you want to use the crowdfunding method approved as part of 2012‘s Jumpstart Our Business Startups Act (JOBS), also known as Title III. The Securities and Exchange Commission is still tinkering with the rules that will govern the Title III process. The pace has been deliberately slow. Earlier this year. SEC chairman Mary Jo White told the Wall Street Journal that completing the rules that will govern crowdfunding “are an important priority in 2014.”
To be fair, it’s a thorny issue for the SEC. The agency has to come up with a method that both streamlines access to capital for small businesses like restaurants yet protects investors from fraud. For example, one proposed rule would require small businesses that wanted to raise more than $500,000 to provide audited financial information to investors up front. The SEC’s estimated cost of such an audit: $29,000—a fortune for startup businesses of modest size.
The key difference here: With Kickstarter, participants who donate certain dollar amounts receive a promise of merchandise or a service when the business gets going. Kickstarter doesn’t monitor whether or not the business receiving the money actually delivers the promised perks. In contrast, those who invest via a JOBS Act platform will have an equity position in the business. These shareholders expect everything will be on the up and up, and that the SEC will investigate if it isn’t.
Once Title III is in place, existing and aspiring restaurant operators will be able to sell up to $1 million worth of shares in their proposed venture to anyone who wants to buy them. Restaurants can already sell equity in their businesses via online sites like CircleUp, as long as share buyers are “accredited investors,” i.e., those having $1 million in assets in addition to the value of their residence and having an income in excess of $200,000 per year. Title III will make equity investing accessible for those of lesser means. Few restaurants have gone this particular equity route so far.
Even when Title III gets rolling, expect Kickstarter to remain the go-to site for restaurant funding campaigns. The site recently passed the 500-project mark, and has even been able to fund larger-scale ventures. Ambitious Twin Cities-area restaurant Travail raised $255,669. Chef Kevin Sousa’s Superior Motors restaurant in Braddock, PA, holds the current record, landing $310,225 from 2,026 backers.
Smaller projects remain the bread-and-butter of Kickstarter’s restaurant fund-raising efforts. The site’s c.e.o., Yancey Stricker, recently told Eater how restaurant operators should approach a Kickstarter campaign.
“You want to start with just a very practical thing of, ‘What are you trying to achieve?’ If you're trying to renovate your kitchen or start the whole thing from scratch, there's probably an actual act of what you practically need to achieve. I would start doing that. There's some math that you can do. For example, the average pledge now on Kickstarter is $71. If you think about the amount of money you need, divide that by 71 and that would net out how many backers you might be looking for. I find that thinking about these things from the perspective of how many people can you get on board versus how much money can you generate is maybe an easier way to understand it and think it through. Maybe think about the size of your community."
Stricker adds that compelling rewards are key to any restaurant project. And he urges restaurant owners to think beyond free meals. “There are really creative things you can do [such as] letting people come in on a Friday afternoon and get cooking lessons from the staff or letting people go to the market with you and see how you source your produce.”
Good advice. If you need to get a feel for how well certain types of Kickstarter campaigns are structured, take a look at this interactive map of successful Kickstarter-funded projects throughout the U.S. and start clicking away. And let’s hope the SEC gets Title III going soon to provide another route by which ambitious restaurant operators can raise money to break into the business or expand their current operation.