When I started out in business, there were essentially three ways you could fund a new venture: Obtain financing through a family member or friend, a private investor, or – as was most common – borrow it from the bank.
While the first two still remain viable options, the recent global banking crisis has meant that lending by banks – many of which in the U.K. were bailed out by the government – all but dried up. This led to conventional debt becoming extremely scarce, creating a void and making it nearly impossible for new ventures to obtain the financing needed to get their businesses off the ground.
It is out of this void that crowdfunding has grown.
Crowdfunding is not, by any means, a new phenomenon. There are cases throughout history of similar models being adopted, with well-known names like Mozart and Mark Twain using it as a way to raise money. The Internet, however, has transformed the way this funding structure functions. New businesses can now cheaply and efficiently attract a wide number of investors from a larger geographical area. According to Los Angeles-based crowdsourcing research firm Massolution, crowdfunding platforms raised a combined $2.7 billion in 2012. That number is projected to reach $5.1 billion in 2013, an 81-percent increase, the firm’s recent “2013CF Crowdfunding Industry Report” found.
There are now numerous websites dedicated to crowdfunding, including some dedicated specifically to restaurants and food trucks. In the U.K., we are a little behind the curve. Kickstarter – one of the most popular crowdfunding websites – only launched on this side of the pond at the end of last year, despite being in the U.S. since 2009. However, given the media attention and the ongoing shortage of available financing, it is only a matter of time before we catch up.
Restaurants are increasingly turning to crowdfunding to raise money. The Clove Club opened in East London earlier this year and was one of the earliest adopters. Restaurant chain Leon opened a bond that repays investors in £eon pounds, which can be redeemed in-store. Street food operators and pop-up restaurants are also turning to crowdfunding as a way to expand their operations. The Rib Man recently raised money to fund a commercial kitchen that will produce the sauces he made popular at London’s many street markets. I have no doubt that over the coming months there will be more and more examples of restaurants finding financing with this model.
In addition to the obvious influx of cash, crowdfunding offers numerous benefits to restaurants. These start right at the beginning with the crowdfunding campaign itself. Simply creating the campaign develops awareness and raises the profile of a new venture. Buzz can develop around a new restaurant even before the project has funding.
It also provides start-ups with the opportunity to test the market. While potential investors can’t actually eat the food, it is fair to say that if they believe in a restaurant enough to invest their own money, then chances are they would eat there. This helps develop a customer base, which will often help promote the restaurant, recommending it to family and friends – after all, they have an interest in it being successful.
Backers often see this form of investment more as a membership donation, with many not seeking a financial return. Therefore, following a successful crowdfunding campaign, the project creator also usually retains complete ownership and control of the business.
In the U.K., however, there is a threat to crowdfunding. In August, the Financial Conduct Authority, or FCA – an independent body that regulates firms and financial advisers – announced a crackdown on crowdfunding websites over fears that individuals aren’t fully aware of the risks before investing. While I agree that it is critical that investors are making informed decisions, the FCA needs to be careful not to stifle what is, to some operators, the only way to generate funds.
While we are still waiting to see how the FCA crackdown pans out, there is no question that this form of investment has transformed the fortunes of many fledgling businesses.
It is difficult to know whether crowdfunding will continue to be as popular once bank lending increases. That said, with so many people now choosing to invest in a more innovative way, it is unlikely that it will retrench to pre-recession levels.
In any case, with my maturing family of three children and six grandchildren, I feel I have been involved with crowdfunding for a long time already.
David Coffer is chairman of London-based The Coffer Group, a 40-year-old consulting firm specializing in the leisure sector and comprising Davis Coffer Lyons, Coffer Corporate Leisure, Coffer Hotels and Coffer Leisure Investment Advisory.