Crowdfunding at the Table: Alternative Financing for Restaurants
This post was contributed by Graduate Assistant, Calla-Marie Norman
Lately, I’ve been thinking about what makes a restaurant work, what makes them become a place in a community, and what that sort of status can mean for them in a practical sense. Growth means different things to different people, different restaurateurs, and entrepreneurs - it could mean opening locations across the city or could mean looking inward and offering benefits and support to one’s employees, strengthening the internal community of the business.
In the short time I’ve lived in Pittsburgh, I’ve noticed small restaurants expand by getting out onto the street, adding a food cart like Bitter Ends Garden & Luncheonette did with their new Thyme Machine. By closing their dine-in space (because, y’know, pandemic) they still found a means of connecting with the community in an outward-facing sense. Conversely, I’m seeing some food trucks opening spaces, connecting with seemingly dissimilar concepts such as Secretos de Mis Abuelos, who are using Honeycomb Credit to crowdfund part of their renovation to join Hapa Hawaian in a brick-and-mortar space downtown.
I accidentally fell into the crowdfunding life, looking for some professional development opportunities and joining the team at Honeycomb last January as a part of their marketing team. I’d worked on crowdfunding campaigns in the past for nonprofits I worked for and thought that the idea behind Honeycomb, debt-based crowdfunding, was really innovative. As I learned more about the company, interviewed small business owners who funded through Honeycomb, I began to realize the profound effect that the funding process has on these businesses, beyond just the dollars raised. Little did I know that this internship would change the trajectory of my career at Chatham, as I decided to write my master’s thesis on crowdfunding for restaurants. (If you’d have told me a year ago I’d be working in a fintech start-up and loving it, I’d have thought you were insane!)
The thesis is, of course, still a work in progress, but I thought I’d share here some of the things I’ve learned about what the funding landscape looks like for restaurants these days, a breakdown of the different kinds of crowdfunding and how they work for restaurants, as well as what I think makes restaurants especially well-suited businesses for crowdfunding.
Why am I talking about crowdfunding?
Before I began thinking deeply about small food businesses and restaurants, I didn’t realize just how dismal the small business funding landscape really is. Especially for new businesses just starting out, it’s nearly impossible to get a loan through a traditional financial institution like a bank.
This is partly because community banks are consolidating and disappearing. As these small banks, which were the most common resource for small business funding, disappear, the large banks taking their place don’t often want to invest in “risky” small businesses like restaurants that need smaller loan amounts.
As a result, only 13.6% of small business loans were approved in 2020, and these numbers dip even lower as we look at loans approved for minority-owned businesses. For example, SBA loans to Black-owned businesses have dropped 83%. Furthermore, to get through the loan process, banks often require a lot from business owners: collateral, financial history, often things that people just starting out might not have, or be able to offer.
In this financial landscape, alternative means of funding like crowdfunding have not just become lucrative, but they’ve become necessary to ensure the vitality of small businesses like our neighborhood restaurants.
What exactly is crowdfunding?
The basic premise of crowdfunding is that a few small drops can make a big wave. Business owners join a crowdfunding platform and solicit contributions from their community in order to raise capital for a growth project.
Crowdfunding is really not a new concept! It’s been used historically to fund everything from churches to concert tours, as people have pooled their money together to make stuff happen. Other concepts such as microfinance and highly community-specific credit unions have also utilized versions of crowdfunding. In her book Farming While Black, farmer, and activist Leah Penniman gives the example of susu, a West African version of pooling money which the Soul Fire Farm utilizes as a means of building community economic power and self-determination.
In the tech world, there are four major kinds of crowdfunding: gift, reward, debt, and equity crowdfunding.
Gift Crowdfunding
Gift crowdfunding can be seen on a platform like GoFundMe. We’ve all seen numerous ones of these, usually small groups or individuals asking for help with highly personal financial situations, such as paying off medical bills or funeral expenses. Non-profits also utilize gift crowdfunding a lot, because it can be a great means of easily collecting small charitable donations. Even some small start-ups have tried gift crowdfunding, but it’s not particularly recommended for most businesses. Typically, there’s no real incentive to contribute to a gift crowdfunding campaign for a small business like a restaurant, unless there’s some other compelling factor involved like the business is a social enterprise. Because of this, gift crowdfunding campaigns for businesses typically don’t meet their goals or only raise a minimum.
Reward Crowdfunding
To add on another layer, there’s reward crowdfunding. This is the kind of crowdfunding you might be familiar with if you’ve ever browsed through Kickstarter or IndieGoGo. Here, people donate money, often in exchange for different perks, which incentivize higher levels of donations. For example, you chip in $100 to a local restaurant, and they’ll send you a t-shirt with the restaurant’s logo as a thank-you, but that’s basically the end of the relationship. This often makes it more difficult for small businesses, especially those in established industries like restaurants, to successfully crowdfund big raises.
There are some exceptions, like the (in)famous Kevin Sousa project Superior Motors in Braddock, Pennsylvania. At the time of their Kickstarter, Superior Motors raised the highest amount of any restaurant ever on the platform. This was largely thanks to Sousa’s celebrity status, his connections with local politicians, and the altruistic intentions of the project, which was supposed to bring foot traffic and jobs to an economically-disadvantaged area. However, the project fizzled out, despite its promises of “revitalizing” the neighborhood.
Debt Crowdfunding
Moving on, the next style of crowdfunding is debt crowdfunding. (This is what Honeycomb Credit does.) Think of our Kickstarter example, where you kick $100 to the restaurant running a crowdfunding campaign. However, instead of (or in addition to) receiving that t-shirt, you’ll also get that money back, plus interest, over a period of time. Restaurateurs who feel averse to asking for “handouts” commonly like this option, as it gives them the opportunity to give back to their community.
Debt, or loan crowdfunding, is a relatively new concept, as it only became legal in 2017, with the JOBS act allowing for Regulation Crowdfunding. This allows small businesses to offer securities to unaccredited investors. This means that anybody, as long as they’re over 18, can invest in a Regulation Crowdfunding campaign.
Equity Crowdfunding
Equity crowdfunding is the other form of Regulation Crowdfunding. It’s pretty much what it sounds like - you offer equity shares in your business that people can purchase. One food-adjacent business that is famous for equity crowdfunding is BrewDog, with their Equity for Punks Tomorrow crowdfunding campaign, which raised £30.2 million. Equity crowdfunding is really popular among breweries and distilleries, but I haven’t seen it used as much for restaurants.
Why are restaurants good for crowdfunding?
Restaurants are tangible
People who contribute or invest in crowdfunding campaigns often do so expecting to see a tangible result come out of it. It’s different from buying stocks on Robinhood, where most of what you see are just numbers on a screen. If you’re investing in a small business like a restaurant, chances are you can go on a walk past the space and see the progress being made.
This is why many restaurants that choose to crowdfund strategically run their campaigns to raise capital for these tangible projects: purchasing a food truck, opening a new location, renovating an existing space, adding an outdoor dining area or bar.
Restaurants are important community spaces
As the events of the past nearly two years have evidenced, restaurants are places for socialization, community identity building, and more. If a restaurant is going to bring something of value to a community, be it a third space, a community center, or simply just a place to relax, it might be something that investors / donors will want to get behind and help fund!
There’s this old adage by Peter Lynch: “Invest in What You Know.” The idea is called story investing - investing in a business that you have a background in, or are familiar with, and thereby having well-grounded expectations in a firm’s potential for success. And what do investors know better than the businesses on their block? Local Investing is a growing field, and has great potential for small to medium food enterprises.
If a restaurant is new, crowdfunding can be a valuable marketing tool
One of the biggest challenges that many restaurants face is simply getting their name out there - crowdfunding can help! Inviting customers to invest in a restaurant is an incredibly unique way of getting attention, as well as building relationships with customers.
At Honeycomb, we call this the transformation from customers into brand advocates. As soon as someone invests in a restaurant’s crowdfunding campaign, they’re no longer merely a customer. Instead, they’re now invested in the business’s success, so they’re more likely to rave about the restaurant to their friends, bring people to eat there, and encourage others to invest as well. Even if they haven’t actually invested ownership in the restaurant, they still feel a sense of ownership and obligation to the space, and they want to see it succeed.
It’s also worth mentioning that crowdfunding can potentially attract press attention if the restaurant is using newer or more lucrative crowdfunding types like loan and equity crowdfunding. This is especially true if they’re one of the first businesses in their market to use this sort of crowdfunding - it’s interesting and new, and local business papers will likely want to pick up on the story.
What’s next? What needs to be answered?
For my thesis, which should be done in August 2022, I’m planning to interview restaurateurs who’ve crowdfunded, and survey restaurateurs in general to find out opinions on all different kinds of funding for restaurants. I want to see if this hunch that the value of a restaurant to a community makes a difference in its success in crowdfunding, and if restaurant owners recognize this connection. My hope is that this work will provide some answers and credibility to a source of capital which I honestly find really exciting, and I think could provide some excellent opportunities for creating a more vibrant and equitable restaurant system.