How Does Crowdfunding a Restaurant Work?

Getting restaurant funding can often be a difficult and exhausting process — with all the different lending options in the marketplace, how do you decide what’s best for your restaurant? While our Complete Guide to Restaurant Financing and Loans is a great place to start, we’re going to dive into a more unconventional financing option in this article: crowdfunding.

Crowdfunding has become more popular over the years for everything from charitable causes to out-of-the-box inventions. And restaurants have been turning to crowdfunding at an increasing rate as well — the number of restaurant crowdfunding projects on Kickstarter alone grew from 3,400 in mid-2019 to over 3,800 in April 2021. Not only does crowdfunding provide an alternative route to securing restaurant financing, but it also enables restaurants to form deeper connections with customers by allowing them to become investors in your business.

In this article, we’ll break down the basics of restaurant crowdfunding, provide tips to build strong bonds with would-be investors, and leave you with some best practices to keep in mind.

What is crowdfunding?

Restaurant crowdfunding, like any other form of crowdfunding, involves sourcing small amounts of funding from a large cohort of investors — often referred to as backers or donors — through one of the many crowdfunding platforms in the market, which we’ll get into a little later. These small individual contributions can be as small as just $1 as a show of support, but data from Fundly shows that the average funding provided is $99 per person. 

While this amount sounds generous, Fundly also shows that the average amount raised for successful crowdfunding activities is just $568, which is significantly below the amount most restaurants are seeking for restaurant capital. This average figure may be weighed down by smaller projects and charitable fundraisers, but it goes to show how important your business plan, value proposition, and overall strategy are when it comes to securing sufficient investment when deciding to embark on restaurant crowdfunding.

For example, to get the ball rolling, many people seeking crowdfunding will ask their friends and family to donate directly through their crowdfunding campaign. This helps to drive up the “amount raised” early on, helping to entice would-be investors to follow suit with their own contributions. 

The main drawback of this method is that crowdfunding platforms generally charge fees that are a percentage of the amount raised for successful campaigns, whereas traditional “friends and family” funding would eliminate those fees without using the platform.

Why are so many restaurants funded through crowdfunding?

People are generally well aware of the difficulties that face the restaurant industry, like how profit margins hover around 3-5%, and that’s why it can be difficult to get sufficient funding at a reasonable rate from traditional brick-and-mortar lenders, who may be accustomed to seeing restaurants as a high-risk lending target. 

Without a strong track record or brand recognition, getting a loan becomes even harder. That’s where crowdfunding a restaurant can come into play.

With minimal barriers to entry, crowdfunding a restaurant can help be the catalyst a restaurant needs to get off the ground or even to go back to lenders with a showing of crowdfunding support. Beyond this, restaurant crowdfunding is a great way to generate buzz, build a community, gauge guest interest, and more.

For example, three entrepreneurs were looking for a place to start when reviving Brooklyn-based Gage & Tollner, which shuttered way back in 2004. “There was no precedence for a project this size in our lives,” co-founder St. John Frizell admitted to Forbes; the trio turned to crowdfunding to jumpstart their fundraising efforts, raising a whopping $477,000 before parlaying that success into a subsequent $1.5 million in investments and loans from individual investors and the SBA.

$477k is an eye-popping amount for a restaurant to raise through crowdfunding, which goes to show the value of a thoughtfully prepared campaign for crowdfunding a restaurant. Crowdfunding for restaurant remodeling or smaller-scale expansions is a great avenue for smaller capital requirements as well — just ask BitBar, a Salem-based hybrid arcade and restaurant. BitBar is close to raising its full $40,000 goal, thanks to its ability to build a sense of community through its restaurant crowdfunding campaign.

One note of caution — crowdfunding requires strong backers and major momentum to become successful. According to Statista, nearly 62% of Kickstarter projects were unsuccessful as of November 2020 — meaning they were unable to reach their funding goals.

Pros of crowdfunding restaurants

1. No payback, repayment, or interest rate: crowdfunding restaurant needs differ significantly from most other forms of funding because there aren’t interest-related fees attached to the funding. While many platforms do take a cut of the amount raised alongside a payment processing fee, the rest of the funding can go straight into your restaurant’s project — as long as you use the funds the way you promised to your investors.

2. Great way to engage with customers and build brand awareness: as we saw with BitBar above, crowdfunding restaurant ideas can help draw interest from local customers. This is a level of grassroots marketing that can build through word of mouth as excited individual investors spread your campaign through their networks. You can even bulk order some restaurant-branded swag to give to investors that reach certain investment thresholds and have them represent your brand outside of the crowdfunding platform.

3. Broader use case: some brick-and-mortar lenders may not be able to stomach certain types of capital usage; however, your customers and local investors might be more inclined to invest in your dreams. Whether it’s an out-of-the-box idea or a pivot to a new concept, you can use your funding for any project — as long as you get your crowdfunders to buy in.

Cons of crowdfunding restaurants

1. Platform fee and time cost: as mentioned earlier, crowdfunding restaurant projects comes with a success fee that hovers around 5% of the amount raised, though some platforms like GoFundMe have removed this fee entirely. In addition, there is a payment processing or transaction fee that ranges around 2.9%-3.0% of the amount raised plus $0.20-$0.30 per donation. Finally, there is the time cost — restaurant crowdfunding campaigns can take a significant amount of time to complete and must be well thought-out.

2. All-or-nothing funding: the opportunity cost of time above carries a strong level of uncertainty along with it. Some restaurant crowdfunding platforms and campaigns have an “all-or-nothing” policy, where you only get funding if you reach your funding goal. Even with the best laid plans, your efforts could go down the drain if you aren’t able to reach your funding threshold.

3. Disgruntled investors: this is a risk that comes with most funding routes where individual investors are involved rather than traditional brick-and-mortar lenders. Investors will feel a personal tie to their hard-earned capital that they hand over to your restaurant; if you don’t achieve the results you’ve laid out, hit roadblocks in your project, or fail to get your concept off the ground, you’ll likely get an earful from your investors.

How to crowdfund a restaurant

Get your project plan ready: just as you would for any restaurant project, you need to make sure you’ve got a sound business plan ready to pursue restaurant financing through crowdfunding. It’s especially important to think about your plan through the eyes of your typical crowdfunding investor, who likely doesn’t have the business acumen that a traditional investor would. You might even want to share some designs if you’re crowdfunding for restaurant remodeling, mock up your concept if you’re crowdfunding to open a restaurant, or whip up new dishes if you’re changing or adding a new restaurant concept.

Make your campaign clear and easy to follow: provide enough detail for your backers to get comfortable with and excited about contributing — include things like what you’ll use the funds for, how long your project will take to complete, what they can expect in return (their rewards or perks), and really make sure they “speak” to your target audience. It might even help to pre-market your campaign to give your efforts a boost.

Choosing a platform: there are many trustworthy platforms you can select from when crowdfunding a restaurant and they all carry similar features and costs. However, some platforms like Kickstarter and Indiegogo may be better suited for traditional capital raises, while others like GoFundMe may be better for charitable fundraisers. Take a look at what kinds of comparable projects are on each of these platforms to help you gauge the likelihood of a popular, successful campaign. Keep in mind that some platforms are all-or-nothing platforms, meaning you won’t get any funding unless your goal is met; for those platforms try to undershoot your desired amount if possible to increase your odds of success.

Setting up an account: getting started on a crowdfunding platform is pretty simple overall — when signing up for an account, you’ll typically need to have your bank account information, government-issued ID, tax information, address, and other personal information. 

Sharing on social: now it’s time to spread the word and build up awareness through word-of-mouth support. Put together personalized emails to friends and family, ask them to help share your restaurant crowdfunding campaign, and create posts to share on Facebook, Instagram, Twitter, and other social media platforms. Most restaurant crowdfunding platforms enable you to track how your social media efforts are performing by arming you with referral links to your campaign. Don’t forget many platforms have embedded video tools as well, so you can tell your story while showcasing your restaurant or project’s vision.

Getting money: once your fundraising criteria are met — whether it’s a successful all-or-nothing campaign or a time-bound one — that platform will automatically deduct your backers’ donations from their bank accounts, subtract any platform fees and payment processing fees, and automatically deposit the remainder into your bank account that you signed up with.

Spending the money: this is what you’ve been waiting for — it’s time to put your money to use! Go back to your business plan and start laying out the steps you need to take to realize your dream project. During this process, don’t forget to give your backers some updates about how things are going to help nurture the communal bond you formed during your crowdfunding campaign. However, don’t go spending all that money just yet — remember the promises you made to your backers!

Giving out incentives: if you’re like most crowdfunding campaign creators, you probably created pledge or donation tiers for your backers, each with their own specific incentives or rewards. If your rewards were promises of t-shirts, coffee mugs, or anything else that doesn’t come out of your kitchen or bar, make sure you take care of those gifts before you employ all your capital elsewhere, tempting as it may be. Remember — this project wouldn’t have gotten off the ground without their support.

What crowdfunding platform can I use to raise money for a restaurant?

As we touched on earlier, there are so many crowdfunding platforms in the marketplace — how can you decide which one makes the most sense for your restaurant? Below, we’ll briefly outline some of the most popular and trusted platforms that help crowdfund restaurants, but it’s important to check out each platform’s rules to make sure they align with what you’re looking for. As a reminder, fees are not collected unless a campaign is deemed successful, and fees below are for U.S. projects.

Kickstarter ($5.4 billion+ in total funded projects)

• Platform fee: 5% of total funds raised

• Payment processing fee: 3.0% + $0.20 per pledge (5.0% + $0.05 per pledge under $10)

• 3,800+ restaurant projects active

• All-or-nothing funding only

GoFundMe ($9.0 billion+ in total funded projects)

• Platform fee: 0% of total funds raised

• Payment processing fee: 2.9% + $0.30 per donation

• Greater focus on charitable causes compared to other platforms

• Flexible funding or all-or-nothing funding

IndieGoGo ($1.5 billion+ in total funded projects)

• Platform fee: 5% of total funds raised

• Payment processing fee: 2.9% + $0.30 per donation

• Flexible funding or all-or-nothing funding

How much should I ask for when crowdfunding a restaurant?

To a certain extent, the amount you’re seeking shouldn’t differ significantly based on which funding avenue you pursue — at the end of the day, you’ve got a specific plan that requires a specific amount of capital. That being said, it’s important to set some expectations for yourself and your project. 

Try your best to triangulate between the amount you need to complete your project, the amount other restaurant crowdfunding campaigns on your chosen platform are seeking, and the funding you believe you can get from backers — especially if you decide to go with an all-or-nothing funding option. Regardless of the outcome, crowdfunding restaurant projects is an exciting process that will help you learn more about your restaurant, your community’s interest, and your own marketing prowess.

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