23rd October 2017

Over the last 10 or so years, the restaurant scene in London has undergone nothing short of a revolution. Central London is bursting with new openings covering the full spectrum of cuisines and the latest fashionable dining experiences, drawing on its position as a world cultural, tourism and financial centre. A recent article in the Evening Standard reported that a record of 44 new restaurants were set to open last month alone.

One of the drivers for this has been the emergence of food trucks and pop-ups, in particular at food festivals and markets such as Street Feast and Pop Brixton or in conjunction with the burgeoning music festival scene. What better way to test out your concept and drum up that all-important social media following without the crippling overheads of a fitted-out restaurant, staff and rent. Wahaca, Patty and Bun, Pizza Pilgrims and more recently Monty’s Deli are just a few examples of businesses that have made the leap from pop-up to restaurant. But there are of course also many chefs who, having cut their teeth in restaurants, decide to venture out on their own, such as Josh Katz of my client Berber & Q. Either way, a new restaurant venture will not succeed without adequate funding.

It may be that the founders of the venture have enough personal savings and are able to grow the business organically using only the revenues generated, but commonly they will look to external funders. This funding will usually take the form of loan, equity (ie issuing shares in the company) or a mixture of the two. Each route has its pros and cons, and each case is different.

Broadly speaking, the advantage of an equity investment is that the company does not have to repay the money. Also, the venture may be able to offer tax incentives for an equity investor through the Government’s Enterprise Investment Scheme (EIS) and/or Seed Enterprise Investment Scheme (SEIS). The main disadvantage is that the founders’ control and share of the profits in, and of any future proceeds of a sale of, the business will be diluted. Founders should bear in mind also that as the business grows, additional rounds of funding may well be required which would further dilute them.

The advantage of a loan is that there is no such dilution but it will need to be repaid and the lender may require security from the founders such as personal guarantees and mortgages in addition to a high interest rate.

So how can a venture secure the external funding that it needs?

Founders may be able to call on friends and family for the initial investment needed to get the venture off the ground.

Bank funding might also be possible, and increasingly founders are looking to borrow money through internet-based peer-to-peer lending and crowdfunding platforms which can offer unsecured loans at competitive rates. The Government’s Start Up Loans scheme may also be an option.

Crowdfunding could also take the form of equity or (where the funder gets something else, such as a meal, in return) reward funding, and can create a ready-made following for the venture when it begins to trade. However in the case of equity crowdfunding, having a large number of shareholders is more of an administrative burden and allows less flexibility in the future.

There are also networks of angel investors who invest in start-ups and early stage businesses. An angel investor may contribute business opportunities, personal insight and commercial discipline to the venture but will typically require tighter controls on the founders and the running of the business. Similarly venture capital funds might be willing to invest but usually only to roll out an existing brand with a proven trading history.

In a fiercely competitive sector that is sensitive to economic downturns, certain key factors will determine whether a restaurant will succeed – its location, its PR and marketing and of course the quality and cost-effectiveness of its staff, operations and food and drinks – and the business will need to be creative and prepared to evolve quickly as realities change. The approach and business model will be different depending on what the founders are looking to achieve, whether it be a one or two-site restaurant business or the next Pizza Express or Corbin and King, or somewhere in between. In any event, in order to achieve external funding the founders will need to have vision and direction from the start and a detailed, prudent and realistic business plan and budget which shows projected profit. They will also need to persuade the funders that they have the talent, ambition and energy to succeed.