Throughout the last two years, the kitchens have seen over 35 small food businesses, including 26 which we directly helped launch and six that have graduated to a full-time space of their own (often in partnership with a fellow KI tenant). Additionally, we have put nearly 100 food businesses through Out to Launch: Food Business Boot Camp and helped hundreds more through workshops, talks and our detailed resource guides. As patterns in questions and challenges emerge, I will begin to highlight topics that I hope will provide valuable resources for small food businesses in Houston and everywhere.
Financing Your Food Start-up
A few things I’d like to make clear before we explore some financing tools: YOU will finance the bulk of your food start-up. Whether it be through dollars or through sweat equity, expect to put the bulk of the upfront investment. Food is a competitive industry driven by passion and very seldom sees innovative concepts. Once in every few million food launches there is a truly innovative concept that will pick up initial investors. It is better not to plan on being one of them. Think Kitchen Incubator is an innovative concept? We were 100% self-financed. So now that we’ve established that there will be no angel investors, grants or probably even bank loans, here are a few tools available to you.
Crowdfunding 101
Crowdfunding is exactly what it sounds like – pooling financing from the ‘crowd,’ most likely the internet. It often relies on a proven platform such as Kickstarter or IndieGoGo, but now, due to the Crowdfund Act passed by Congress in March 2012, can also consist of direct sales of an ownership in your business for up to $1M without complicated SEC filings (click for more information on the JOBS Act).
Different crowdfunding resources exist depending on the scope of your project. For example, Kickstarter, one of the most popular platforms, seeks to fund specific projects or ideas rather than company start-ups. This is great for food businesses which tend to (and often should) start small. Someone seeking to launch a franchise restaurant, for example, would get turned down by Kickstarter. A pop-up restaurant, however, is a perfect fit. While looking at funding sources, its important to understand the scope of your concept, how much money you need and how that compares to other projects that have been successful in that particular platform.
1st Rule of Crowdfunding: There is still no free lunch.
When I first started working on Kitchen Inc I had friends and family suggest that I seek investors to “give” me money. Give? Granting something in exchange for an ownership stake in my company sounds like more of a trade than a gift to me. Now that sites like Kickstarter are becoming increasingly popular, the misconception that there are people out there willing to “give” you money to help launch your business is growing. Unfortunately, it doesn’t exist.
Platforms like Kickstarter are based on trade. You have something this person wants, but they can’t get it because your company doesn’t exist yet, so they purchase a guarantee for a future reward through Kickstarter so that when you do launch, they get the product they wanted to buy. As a result, the most successful campaigns are ones that offer rewards people will want to buy. The more geographically localized the reward, the smaller your audience. Since food concepts tend to be inherently localized, your audience is likely to be smaller, making these platforms more challenging to you. Universally appealing product areas such as music and video raise by far the most money. It is a bit harder to sell how great it will be to have your coffee shop in the neighborhood to millions of people that will never step inside it.
That being said, the level of involvement in crowdfunding and social media within your region will play a key role in your project structure and success. A larger population may not always be a factor. For example, there are hundreds more active projects in Austin then there are in Houston. That is a reflection of different population demographics.
2nd Rule of Crowdfunding: You are not selling a product, but telling a story.
So why then, would they want to fund you and what could you possibly offer them? This is where your story comes in. To appeal to people outside your geographic region, your business will have to symbolize something broader – a movement, a philosophy, setting an example for future concepts that could be built in THEIR neighborhood. A great example of this is the Forage Kitchen in the San Francisco Bay area, a Kitchen Incubator-like concept with a broad vision. Chances are, you will never benefit from using the Forage Kitchen. Yet the success of a project like this can inspire or help fund, by proving feasible, a similar development in your city. It is more than a single project, but a movement that people want to be take part in. This also builds a brand and can turn something as simple as a t-shirt into a compelling reward.
Part of your story is who you are. That translates most easily into the campaign via your video. Don’t have a convincing camera presence? Maybe you can better present yourself through product testimonials from past customers or interviews of your future customers and why they look forward to your opening? Even a slideshow or cartoon can work. Just don’t force yourself to go in front of a camera if it is not something you feel comfortable doing. One of the most painful things about Kickstarter is seeing thousands of videos of one person talking at a camera who is clearly reading badly scripted lines off a note card that clearly hasn’t attempted to address a crowd since they ran off the stage in High School drama crying. Don’t let that be you!
3rd Rule of Crowdfunding: A campaign does not run itself.
A “campaign” is defined as “a systematic course of aggressive activities for some specific purpose.” Sites such as Kickstarter provide a host platform for your campaign. They do not seek or claim to do anything beyond that to campaign for you. No, inviting all of your Facebook friends to “like” the video you posted doesn’t count either. Expect to devote a significant amount of time to actively campaigning for your funds. This is especially true during the “trough,” the inevitable significant slow in activity around the middle of your campaign. As with anything in your business, it’s important to start with a plan.
Your campaign plan should clearly describe how you plan to launch, raise awareness, battle the “trough” and finish with a bang. Participating in festivals and other community events, hosting fundraisers and even online sales are all creative and effective ways to campaign. The most important thing to remember is to continuously measure the success of your efforts. Monitoring tools such as Indiegogo’s “gogofactor” algorithm help track your social media effectiveness. Of course, the actual money being raised is your number one measuring tool.
In summary, new financing tools can be incredibly effective so long as you approach them with the right mindset. Over 50% of Kickstarter projects are successful and those that fail likely set unrealistic funding goals or failed to offer compelling incentives. Kickstarter makes incredible amounts of data available via their website so that new projects that do their research are poised for success. Of course they want you to succeed! If you don’t get funded, they don’t make any money either. Take advantage of them. Research projects similar to yours. Learn from them. Don’t be afraid to reach out to the founders and ask questions. The beauty of small food businesses is that we tend to be part of a community rather than competitiors. If you want to make popsicles in Houston, do you view a successful popsicle stand in Portland as a competitor? Probably not. So if they reached out to and asked for quick tips or advice, would you respond? Most likely yes. Collaboration is the backbone of small business!
So Research. Reach out. Make connections. Learn!
More in depth articles on crowdfunding at
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