Stake and chips: Crowdfunding

Claire Dodd

Claire Dodd

29 February 2016

Food and drink businesses are more likely than ever to raise money through crowdfunding. Claire Dodd looks at the growth of direct online investment in the hospitality industry

Crowdfunding – a method that lets businesses skip the red tape and heartache of trying to get funding from the bank, and source money directly from customers and investors – has become the linchpin of expansion for many businesses, large and small. And hospitality businesses are using the medium to raise serious amounts of cash.

BrewDog, which seems to be almost continually raising money under its Equity for Punks scheme, recently celebrated a record-breaking £10m milestone. It raised the first £5m in under three weeks, with 526,316 shares offered with a minimum investment of £95 for two. James Watt, the company’s co-founder, said: ‘It’s like a football crowd cheering us on as we turn the key in the brewery lock each morning.’

Bournemouth-based Southbourne Ales is raising around £150,000 on Angels Den to fund a new 20-barrel brewery and taproom. Reserve Bar Stock Exchange in the City of London is funding on CrowdBnk to raise £70,000 in return for 18.92% of its equity.

The format is now a serious source of investment across the hospitality industry – for both large or small projects. Crowdcube alone – which describes itself as the world’s leading investment crowdfunding platform – has raised over £117m since its inception in 2010, across 322 successful campaigns, through 227,089 investors at the time of writing.

Food and drink is its second most popular sector after technology projects. The average investment sits at £1,890.71, while the average time to fund a project is 41 days, with 169 investors.

Crowdcube commercial director Matt Cooper says: ‘Our single biggest individual investment currently stands at £1m, showing there are serious investors out there who are attracted by the potential returns. Many mini-bonds, for example, pay investors a set rate of 8% a year, before returning their initial investment after typically four years. That’s far better than you’d get from the bank.’

Of course, there are other platforms, with individual strict vetting processes and access to investors; key considerations for businesses looking for funding. Crowdcube and Seedrs dominate the UK crowdfunding scene, accounting for three quarters of the market. Platforms such as F6S, CrowdBnk, SyndicateRoom and Angels Den are the next biggest.

Risky business
For companies seeking funding, the type of funds you want to raise are a big consideration. Do you want to raise hard cash in exchange for giving away equity in the business? Or do you want to raise debt? Some of the newest ways of crowdfunding involve mini-bonds, whereby investors loan set amounts of cash for set interest rates over a fixed term.

David Abrahamovitch is CEO and co-founder of Grind & Co. Launched in 2011 in Shoreditch with business partner Kaz James, the Grind brand focuses on coffee, cocktails and good music. After raising £1.3m through mini-bonds on Crowdcube, the company is looking to open a new flagship roastery, as well as adding to the four-strong estate.

‘We’re such a high-growth business at the moment that we didn’t feel it was right to take money on equity,’ says Abrahamovitch. ‘You’d have to put a valuation on the business, which is very difficult when you are as early stage and growing as fast as we are. Even in the last month, we’re up 25% on the month before. The reality is, you’d struggle to get that level of debt funding from a bank.’

Many mini-bonds pay investors a set rate of 8% a year. That's far better than you'd get from the bank

Matt Cooper

But of course, not all projects are successful. Fail to raise your target and, on most platforms, you won’t see a penny. What’s more, there are now limits on how businesses can spend the funds raised using some forms of investment.

The Enterprise Investment Scheme (EIS) is designed to help smaller, higher-risk companies raise finance by offering tax relief on new shares, but new European rules now determine how cash raised this way can be spent; buying existing businesses such as pubs to grow your estate is now not allowed. And of course, there’s the potential damage to your reputation.

‘I think there is a huge failure risk,’ says Grind’s Abrahamovitch. ‘It is very public. You put your numbers up there. You make a video. You have a forum and anyone can log on and ask you questions. There is a high risk of looking like an idiot. If you fail, you’ve failed very publicly. It would have been part of our story forever.’

Case study

Eric Partaker, co-founder of Chilango

London-based Mexican restaurant chain Chilango raised a then record-breaking £2.16m in mini-bonds last year on Crowdcube. It has now launched a new equity crowdfunder for £1.5m to fund plans for UK and international expansion...

‘Crowdfunding just made a lot of sense. We have about 20,000 people a week going into the restaurants, however our company is not yet producing enough of its own cash to grow at a rate that we would be happy with.

‘Growth with cash would be very slow. We had looked at borrowing money from investors. We had a minimum investment of £100,000 and no-one was willing to lend that to a company of our size.

‘The terms of the bond are interest-only payments of 8% a year, paid semi-annually over a four-year term. Those who invested £10,000 or more accounted for around £1m. Others invested between £500 and £1,000 per person. I had been trying to sell at £100,000 and success was £2,900 so there’s a pretty good gap.’

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