2015 is the year that crowdfunding will eclipse venture capital as a funding source for entrepreneurs.
Crowdfunding was once a space dominated by technology startups, do-gooders, and indie filmmakers, but food trucks and small artisan food producers quickly moved in. It’s been steadily climbing up the industry ladder and is now a dominant funding source for every kind of enterprise from the scruffiest popup to the loftiest end of fine dining.
Restaurants have always been an iffy proposition with a 60% failure rate in the first three years of business, and banks and other traditional lenders have generally steered clear. Would-be restaurateurs often turn to friends and family members to help with seed money or else resort to raiding retirement savings and home equity, and maxing out credit cards. But in the crowdfunded world of startups, with an overall failure rate of 90%, restaurants look like a good bet.
Crowdfunding takes one of two structures:
Early crowdfunding platforms like Kickstarter adopted a rewards-based model. Participants aren’t lenders or investors but patrons. They pool money in increments as small as a few dollars and hand it over with no expectation of a financial payback. Instead, patronage is usually rewarded in the form of project mementos or perks— a $10 pledge to an organic nut roaster might net you a snack bag, or $200 to a pickle maker could get you a weekend brining workshop. Restaurants tend to reward patrons with fringe benefits like priority reservations, an invitation to the opening night party, or a year of free desserts.no collateral, no interest, and no financial payback
The newer crowdfunding model uses a more conventional equity-based mechanism in which investors receive ownership shares (or debt instruments) in the enterprise. It’s been slower to get off the ground because early offerings were in breach of various securities laws. It’s since been sorted out with new federal legislation, certain regulatory exemptions, and SEC oversight, and the space is evolving rapidly with about $2.5 billion under management in equity crowdfunding portals.
Crowdfunding is more than just an injection of capital.
It creates a pre-opening base of customers that largely self-identifies as ‘foodies’ and has a vested interest in the success of the restaurant. They tend to mobilize as brand evangelists, sharing on social media and bringing friends in to dine at ‘their’ restaurant. Crowdfunding has found some of its most enthusiastic investors and loyal customers in smaller cities where diners can be looking to fill a specific need in the community like a vegan option or a gluten-free bakery.