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Crowdfunding platform for budding restaurateurs debuts in the District

posted Oct 28, 2014, 11:33 PM by J Shaw   [ updated Oct 28, 2014, 11:53 PM ]
Camila Arango has a vision for the bakery she and her husband hope to open in the coming months. The pair of pastry chefs would serve fresh-made bread, croissants, tea cakes and macaroons, all to be washed down with brews of fine coffee.

But to move Bluebird Bakery from concept to reality, the budding restaurateurs are looking to raise hundreds of thousands of dollars from investors using a newly launched crowdfunding Web site tailored for food and beverage establishments.

“We’re putting a lot of heart and soul and effort into this bakery, and we feel this is a great way to get the community involved,” Arango said.

District-based EquityEats is to debut Monday with four Washington-based restaurant concepts, giving culinary entrepreneurs a platform to raise as much as $1 million from accredited investors before even signing a lease or buying kitchen appliances.

Crowdfunding started as a way for educators, artists and nonprofits to fund projects with small donations collected from a large number of people via the Internet. Online platforms such as Kickstarter and Indiegogo have processed millions of dollars to date.

An increasing number of start-up businesses are turning to the practice, sometimes offering an equity stake in the venture to those who put up money. District-based Fundrise has even applied the concept to commercial real estate development.

Crowdfunding has been lauded for not only providing entrepreneurs with a mechanism for financing projects, but a way to determine whether their idea resonates with others. Presumably, a restaurant that appeals to investors would appeal to patrons as well.

“The biggest thing we’ve said is it gives people money, but more than that, it shows that there’s interest for this concept,” said Patrick Vacca, vice president of restaurant operations.

Those investors receive 75 percent of the restaurant’s profits until they recoup the initial investment, then take 40 percent of all subsequent profits. Founders say the arrangement can be lucrative for investors while giving restaurateurs the flexibility of only making payments once they turn a profit.

“Typically in the restaurant business, most investors consider it a win to get their money back as quickly as possible,” EquityEats co-founder Johann Moonesinghe said. “Anything else you’re getting is considered gravy on the investment.”

Indeed, restaurants are largely viewed as a risky business proposition. Many of them close before ever turning a meaningful profit for reasons that can range from a poor location to tepid customer interest to even health violations.

“There are restaurants that fail,” Vacca said. “To say restaurants as a whole are bad investments is incorrect, but like any business, there are going to be certain investments that are bad.”

Vacca joined EquityEats from Philadelphia-based Starr Restaurants, the company behind D.C. hot spot Le Diplomate. He also heads up one of the four restaurant concepts debuting on the platform, a restaurant called Lighthouse that offers just four menu items: a whole grilled lobster, chilled lobster salad, burger and garden burger.

“We’ve never seen an instance when we’ve had this many people invest in a restaurant, so it’s important for us to know what these entrepreneurs are going through and what’s going through their head,” Vacca said.

EquityEats was originally conceived as a platform for the public to invest in local restaurants, but gaining the necessary legal approval in Maryland, Virginia and the District, let alone the rest of the country, was an expensive and time-consuming proposition, Moonesinghe said.

Only some states have made equity-based crowdfunding legal for nonaccredited investors; it’s still prohibited on a national level until the Securities and Exchange Commission approves rules to mitigate fraud and abuse.

Those who back restaurants through the platform must meet the SEC’s definition for an accredited investor, which is defined as having income greater than $200,000 for the past two years or a net worth of more than $1 million.

“Eventually this will be a place where entrepreneurs who have a great idea can post it to the site,” Moonesinghe said. “There will be [an online guide] that walks them through the financials and how to put the concept together, then investors in the community can invest in that restaurant.”

Investors have access to the restaurant’s financial statements through the EquityEats platform and the ability to provide feedback, however Moonesinghe said the entrepreneur retains control of the establishment’s menu, ambiance and other creative elements. Each restaurant can have as many as 100 investors.

Arango at Bluebird Bakery considered other options, including a small-business loan, but believes EquityEats investors will flock to the concept she and her husband have put forth.

“We have a really strong concept and my experience combined with my husband, we know what we’re doing,” Arango said. “I feel really confident about reaching that goal we have and feel like investors are going to be satisfied with the work we put in and the end result.”

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