Opening a brand-new restaurant is an exciting proposition filled with fun tasks like creating a menu and developing your brand. Coming up with the money to finance your dream business typically falls way down on the “not fun” side of the preparation list.
Figuring out how to finance a restaurant has to happen early in the planning process. Without financing, the concept won’t come to fruition. However, when a restaurant is in the idea-only stage, it can be difficult to convince people to invest cash.
“It was one of the most stressful parts of opening,” says Sahil Rahman, who opened RASA, an Indian fast casual in Washington, D.C., in December 2017 with his business partner Rahul Vinod. “Everyone knows someone who started a restaurant and it didn’t work out. So investors and banks are skeptical about giving money to people who open them.”
Rahman and Vinod decided they’d opt for an investment model where they would pay back everyone’s investment first, then continue paying a percentage of profits for the life of the restaurant. This is a common model, “and restaurant and real estate people understood this, but tech investors didn’t,” Rahman says. “We must have talked to well over 100 people. It was really selling our vision and getting people to believe in what we’re doing. It was a brutal process and took just over a year. It required a lot of confidence in our beliefs and what we were doing.”
Rahman first approached friends and family, but that source dried up quickly. From there, he and Vinod talked to everyone they could, attending events that other entrepreneurs attended with a pitch deck. If you stall in this stage, he says, it’s time to reconsider. Ask yourself whether the slowdown is due to how you’re selling your concept or the fact that the deal you’re offering is not attractive.
“Either way, you have to change or you won’t make any progress,” Rahman says.
He compares it to dating, and says the less desperate you are, the more interest you’ll find. “You have to make like you don’t need that person or their money. People really look for that confidence. It’s the hardest thing in the world because you desperately need that person to give you capital.”
Aaron McCann opened the first location of Williamsburg Pizza in 2012 and today has six restaurants. A few things fell into place for his first unit, he says. At that time, his chosen area of Williamsburg in Brooklyn, New York, had no pizza restaurants, and he found a space with very low rent. In addition, he was able to come up with 10 percent of the capital—around $16,000—himself. Each additional location has cost around $250,000, except for two that opened in retrofitted former restaurant spaces that required just $175,000.
Every time he opens a new location, McCann goes back to his original investors to give them first right of refusal, so he has the same people investing over and over, though some drop out or choose to give more.
“They’re free to commit whatever amount they can. If that doesn’t get it to 100 percent, I’ll go out asking new friends or old friends who have expressed interest,” he says.
Erik Oberholtzer opened the first Tender Greens restaurant in 2006 in Culver City, California, with two partners. The brand now has 31 restaurants in three states, but finding the money to open that initial unit was a challenge.
“We didn’t have our own money, nor did we know a lot of high-net-worth individuals at the time,” he says. “We quickly exhausted friends, family, and colleagues. Getting to people who could write larger sums proved difficult.”
So the group of founders pitched their concept idea to everyone who would listen, including people at social gatherings, on the beach, and friends of friends of friends.
By the second location, raising capital was getting easier because the first restaurant had garnered some early popularity.
With each new restaurant, Oberholtzer always went back to the original supporters and gave them first right of refusal. And, as time went by, he says, capital became more reliable and easier to come by.
Oberholtzer advises new restaurant operators to use the fundraising process to refine their business plan. “You will be challenged. Listen openly with a willingness to evolve. If you want advice, ask for money. If you want money, ask for advice,” he says.
