It was a surprise to many in the restaurant industry when the single-unit Somerville, Massachusetts-based concept known as Spyce (which had only been in business a few months) obtained $21 million in Series A funding. If that number rings a bell, it could be because just last year Sliderz, a one-location gourmet burger chain want-to-be obtained $21 million from venture capitalists. It has since opened another location and has 10 “coming soon” units in the works.
So, just what do these big investment numbers mean to the restaurant industry?
Two years ago, 2016, to be exact, saw a record 19 major investments in small chains with 20 or fewer units, according to the Nation’s Restaurant News—the largest amount since the recession. In 2017, that number rose to 36.
What’s prompting this investment craze in what used to be considered high risk? One reason is the fast-casual explosion and the desire to get in on the ground floor of what could be another Fatburger or Chick-fil-A. Proven concepts, these days, are demanding top dollar. Another reason is low interest rates, and yet one more is the demise of retail. These three factors have led to an increase in competition among investors—even venture capitalists are now entering the fray.
Here are just a few of the restaurants that investors took a chance on:
- Zoe’s Kitchen Inc. found investors in 2007 when it had 20 units. Seven years later it was valued at $276 million. Just last month, the now 261 locations were acquired by CAVA Group, Inc. in a deal valued at about $300 million.
- Pacific Catch, a San Francisco-based fresh fish grill, found investors in 2016 when its restaurant locations amounted to seven. This makes at least six restaurant concepts that Brentwood Associates has invested in in the last 10 years which includes the aforementioned Zoe’s Kitchen, Veggie Grill, Lazy Dog Restaurant & Bar, and K-Mac Holdings. One of their more recent investments is with Upward Projects—a Phoenix-based group that includes Postino, Joyride Taco House, Churn, and Federal Pizza.
- Last year, the eight-unit Mediterranean chain, The Kebab Shop, received an undisclosed amount from the private-equity investment firm AP Franchised Concepts. They expect to open at least seven additional restaurants in the next few years.
- In 2018, Maria Empanada, a restaurant that started on a shoestring budget of $4,000, obtained $3.5 million in Series A funding from a venture capital firm. At the time, it had grown to a mere three units.
What are these big investors looking for?
What was once available for only those that made it to 10 or more units, is now a possibility for restauranteurs in the early stages. Investors are supporting entrepreneurs that at one time had only friends, family, and their own pocketbooks to count on. Apparently, if your next concept is tech-infused (think Spyce’s robotic kitchen and self-order kiosks) or unique (think sushi kiosks, pets allowed, or sophisticated food halls), you may have a number of investors knocking on your door. The scalable concepts getting investors attentions are often healthy fast-casual, possibly organic, around-the-world flavors, with a dash of sustainability.
The National Restaurant Associated reported annual restaurant sales of almost $799 billion in 2017. That’s up over $200 billion from 2010 and is almost half of the total amount that Americans spend on food.
So why, one wonders, are restaurants still finding themselves at the bankruptcy court? For many, innovation was not in their lexicon. In a land of highly-regarded new and unusual concepts, remaining with the status quo could be one’s death nail.
Keep in mind, obtaining funding does not guarantee success. Investors often want expansion…now. Fueled by the initial excitement, restaurateurs can jump on the investment bandwagon only to find themselves closing several units down the road due to lack of infrastructure within the business, a model that was not clearly defined, or locations that were not engineered.
Because of this, some owners are turning away potential investors. QSR Magazine reported on Mike Lassiter, CEO of Rising Roll Gourmet Café, who opted to self-fund its expansion despite numerous funding offers.
For some, however, the decision to accept an investor’s offer has led to great rewards. By Chloe—a fast casual vegan concept—recently raised $31 million. Twenty more units are to be added to their existing twelve. In addition to their unique plant-based offerings such as avocado pesto pasta and quinoa tacos, they are also social media whizzes (or at least have one on staff). CB Insights reported that the “#bychloe” Instagram hashtag has been used 30,000 times.