Need Angel Investor Advice

[NYCCHEF]

I am the Chef at a highly rated restaurant in Manhattan. I would like to open my own place. It will cost 2.5 million and I am offering each share at one hundred thousand. Where do I find funding? What are the different ways that you can finance a restaurant? Where do I find individuals who might be interested in this type of investment? I have a completed business plan, an established track

record, a four star management team and one angel investor on board.

Ive tried online angel match services. I've also tried "cold soliciting". Ive been told, "Talk to the people you know" but had minimal success. It would be easy to talk to the regular customers at the restaurant, but I dont feel thats right to do.

Where should I look?

[Pan]

Interesting you should ask, since we're having a discussion about starting a restaurant in NYC right now.

Click here.

[NYCCHEF]

This is true, and Bond Girls post was the reason that I decided to ask for advice here. But my situation is more specific to finding investment, rather than how to go about opening a restaurant.

[Pan]

I don't have the slightest idea, but do wish you the best of luck.

[herbacidal]

i hafta agree with those who have given you advice thus far.

Angels are a good start.

Check out financial planners, especially those who work with high net worth clients.

Also check with all your friends' inevitably some will think you're nuts, but they're the ones closest to you. Then ask them to ask their friends. It's the six degrees of separation thing. Lawyers, accountants, other "professionals" are especially appropriate.

[Franky2Times]

God bless and good luck. I just lost about 3 months of work because I thought I had a "done deal" with respect to a much smaller investment. Even if you do find investors, which is a hard thing to do in the restaurant business, you've gotta know who you're dealing with. My only advice: DO NOT spend that kind of money on a first restaurant, whatever your name is.

[jackal10]

I am an angel, although in the UK and mostly for high tech business, but I've lost money and at best broken even on restaurants.

1. 100K is way too big a parcel. Most angels either take it all, or invest maybe a quarter of that.

2. Talk to people who already handle money - your accountant or your banker.

3. Avoid Angel introduction services and NEVER pay up-front, only success fees

4. Its basically a real-estate deal, with a restaurant keeping it warm. Talk to your real-estate person

5. Who benefits from having a restaurant there? Who really needs one, enough to pay for it? Talk to the local community leaders.

6. You will need to put in enough yourself, maybe half, for it to really hurt if you have to walk away - as they say you need some skin in the game.

7. The other source is people who love your cooking. Maybe start doing private cheffing, and then ask some of your clients. Catering as a side line helps keep the restaurant alive in bad times.

8. Your suppliers might help or know of people. In the UK brewers often fund outlets.

9. There may be small business grants available, for example to provide disabled access.

Traditionally funding goes in rounds. In high tech you give roughly 1/3rd of the company away each round. The rounds (and the company) increase in value as the company matures and the risks get less:

a. Family friends and fools - maybe a few 100K

b. Angels - maybe 1-2M

c. Venture capital and other coporate 3-10M

d. Stock Market offering. Not at the moment.

[Fat Guy]

A chef with the stature of Gray Kunz or Christian Delouvrier can often pull in that kind of investment with no or little money down (more than that amount, actually), but it's far less common for a chef at any other level to be able to assemble a deal of that size without significant personal resources. Most chefs below the veteran-superstar level either open with a smaller budget or partner with an operator/restaurateur who has a track record. Were I a chef at a 1-3 star restaurant wanting to do a new place, I'd be talking to the Glazier Group, Myriad, Union Square, BR Guest, Suarez, Chodorow, et al. And if I couldn't generate interest at that level, I'd start looking at a smaller opening in an emerging neighborhood. Then again, anything can happen -- restaurant investments are made for a million reasons, and sometimes a clever or lucky chef with good timing can be the exception to the rule. Best of luck.

[jackal10]

They can do it because they have a track record of making money for their investors before, so the perception is that the risk is lower.

If you don't have the track record, since this is your first venture, you have to lessen the perceived risk some other way, by, for example, putting up most of the cash yourself, or dressing it as a real-estate deal.

[Fat Guy]

Or at least there's a perception that they've run financially successful restaurants, even if the reality is that they mostly presided over money-losing hotel-financed operations. Still, if you have a certain level of celebrity-chef status and four stars under your belt you can create a perception of lower investment risk.

The good news is that, even though restaurant investments are risky, there are a lot of people who like to invest in restaurants for a variety of non-balance-sheet-oriented reasons -- primarily, I think some folks just like the idea of owning a piece of a restaurant; it's a fantasy that many people have. It's not so easy to find 25 such dreamers in the same place at the same time, though.

[project]

Would like to underline Jackal10's outline of investing.

In particular, mostly 'investing' is for high technology. The broad reason is that the examples of Intel, Microsoft, and Cisco suggest that the big returns are in high tech. That Wal-Mart, McDonalds, and FedEx did so well seems to be passed over.

If you get the usual lists of venture capital firms, e.g., on Sand Hill Road in Palo Alto or on Winter Street in Waltham, their interests are essentially only in computing, software, digital communications, and biotechnology.

For someone with a background in high technology, seeing exactly how restaurants do get funded would be interesting. Fat Guy gave some comments, but more details would be interesting.

You might want to be careful about that $2.5 million: Even for high technology, that is a non-trivial amount of 'first round' 'equity funding'. Even if adding up all the remodeling, equipment, furnishings, etc. takes $2.5 million, maybe you don't need equity funding for all of that. E.g., you may be able to get commercial bank loans for some of the total, maybe vendor financing for some of it, your landlord for some of it, etc. You clearly know more about your business than I do and likely already thought of these things.

On your side is, the US is awash in new restaurants, likely many more new restaurants each year than new companies funded by venture capital people. So, these restaurants get funded somehow!

Apparently one major point in such things is publicity: So, it might help for you to get your name known where you are, on TV, in a book, etc. Your name can be your valuable 'brand', help bring in customers, and maybe help bring in investors.

[Rachel Perlow]

Excuse my ignorance, but what is an "angel investor"?

[tsquare]

Celebrities, sports stars and doctors seem to be good about investing in risky ideas - any connections?

[slkinsey]

Welcome to eGullet, chef. I hope we can help you come up with a few good ideas re investors, and I hope you continue to check back with us to let us know how the restaurant project is going.

[docsconz]

Excuse my ignorance, but what is an "angel investor"?

An "angel" investor is basically someone who puts up cash for an equity stake as a private investment without demanding a say in how the business is run. Typically a venture capital firm will put up money for a significant equity stake as well as a say in how the operation is managed. Often this is done via the board of directors. At least that is my understanding of it.

Welcome to eGullet NYCchef and good luck!

[jackal10]

Excuse my ignorance, but what is an "angel investor"?

An angel investor is an individual who will invest in your project. Originally a theatrical term.

A good angel will bring more than just cash to the table but also bring their experience, advice and contacts as well as cash. They must (under current financial regulations in most jurisdictions, as well as good sense) be "sophisticated investors" and "high net worth". Both are specific technical terms, the first meaning that they can make their own judgements, and the second meaning they can afford to lose the money. They are thus exempt (or on their own) from many of the financial protection regulations designed to protect people from scams. Indeed, unless they are so certified it is illegal to ask them to invest or show them your business plan. Typically an angel will have already made money in the industry and is looking to do it again, but as an investment rather than working day to day.

Different from the FFF round (family, friends and fools), in that the FFF people, like your rich aunt, know and love you and are backing you personally. An angel is backing the business you propose, not you. An angel will need convincing that what you propose is viable, and especially can compete in the market and attract profitable custom. That is the biggest hurdle and gamble: everything else is mechanics and process.

I'm not offering to invest, but if I did, as standard as an Angel I would look for a 40%- 60% IRR (annual internal return), to compensate for the risk and pay for the ones that don't succede. That means the business should be able to pay me back entirely from its profits in the third or fourth year of trading. Tough to do, especially in catering (will you be making profit in excess of 2.5M/year in your third year?), but possible.

I'd expect to take about a third of the business, and that my money is as good as your money. That is if I put in $1M, the business had better have $2M of your or other people's money in it before I invest, but you (and your staff) can put in some of your money as sweat equity (taking lower or no wages) or some valuation on the intellectual or other property you bring to the party. A third because it gives some control but not overall contral and allows some headroom when you come back for more money, as you will. More that a third and I end up owning the business, which is not what I want.

Its tough out there. Others may have a more romantic approach and offer better deals, but get in your way more, Bourdain decribes it well.

Edited January 12, 2004 by jackal10 (log)

[docsconz]

What jackal said.

[reggie_212]

I'm not offering to invest, but if I did, as standard as an Angel I would look for a 40%- 60% IRR (annual internal return), to compensate for the risk and pay for the ones that don't succede.

For all other startups in most any industry, I would agree this would be the range of return your're looking for. However, a restaurant is a peculiar enterprise and I'm going to say that most people that look into getting into a restaurant partnership aren't really driven by the value of the investment. I would think most people who get involved in restaurants are doing it as a favor to a friend or have so much disposable cash that a few bucks mean little. Let's put it this way, no one's going to invest their retirement account in your restaurant.

From my understanding of people who have previously invested in restaurants, the motivation was not financial gain but rather all the little perks that are involved with being a partner. As one friend said to me: "I never need to call for a reservation again!" It's these indivuduals who think of owning a restaurant as status who might be your best bet. Think about Larry David in Curb Your Enthusiasm.

But that runs into another problem in that with so many partners, even if you were to get this thing up and running, the partners would be expecting comp meals, free wine, and banquets for ten of their friends. How do you manage investor relations??

I'm not sure if this will help, but a great place to network and meet potential investors is alumni gettogethers. Depending on your school and your age, they're going to be some fabulously wealty people you might be able to meet.

Edited January 12, 2004 by reggie_212 (log)

[bcnchef]

I am the Chef at a highly rated restaurant in Manhattan. I would like to open my own place. It will cost 2.5 million and I am offering each share at one hundred thousand. Where do I find funding? What are the different ways that you can finance a restaurant? Where do I find individuals who might be interested in this type of investment? I have a completed business plan, an established track

record, a four star management team and one angel investor on board.

Ive tried online angel match services. I've also tried "cold soliciting". Ive been told, "Talk to the people you know" but had minimal success. It would be easy to talk to the regular customers at the restaurant, but I dont feel thats right to do.

Where should I look?

I'm in the middle of this process myself. I closed an initial round of funding a few months ago and am about to close a second (and final) round next week.

Our capital needs are a fraction of what you need though, the cost to open a restaurant in Barcelona being more "reasonable" than NYC.

The suggestion to work your existing network of contacts is really the best advice. Not only do these people already know you, there is an inherent amount of trust, which you will definitely need if you want someone to give you 100k of their hard-earnedmoney.

I found that the first few meetings and discussions inevitably lead to "and they told two friends, and so on" and before long we were over-subscribed. Our second round is almost entirely populated by friends and business contacts of our first-round investors.

Restaurant investors are not your typical angels either, in my experience. Like another poster mentioned, they are invariably caught up in the "romantic" notion of owning a restaurant. Focus on this in your meetings and also in your business plan, which should also act as a marketing brochure aimed at these investors. Presentation is very important, so hopefully you are handing out plans in full colour, with lots of photographs of highly stylized and well shot food as well as descriptive text that gets the idea of your restaurant concept across.

I also highly recommend scheduling test dinners, either at your current place of business if the environment and food style is similar to what you are planning, or at your own place. Both of our first investors signed up the day after a test meal.

Have you considered talking to the management team at your current restaurant? It depends on your working relationship and you might not want to signal to them so soon that you are about to leave. HOWEVER, you mentioned that you were pretty hot, so they are unlikely to fire you. Additionally, restaurant investors are ALWAYS looking for hot chefs. In many cases a restaurant is built around a chef, so if you indicate that you want to start your own business, they may rather invest in a new place with you as opposed to just losing you outright.

Lastly, I would encourage you to find a less-expensive way of launching the restaurant. You are trying to raise a lot of money and you improve your chances of success significantly by lowering the bar for the first time out.

Good luck!

Jordi.

[JosephB]

Welcome to the NY Forum bcnchef! Your insights are really appreciated. Have you ever worked in NY?

[Bond Girl]

For a chef at a top rated restaurant $2.5MM is not a lot of money according to some investors I know, neither is 100K a piece. I'm not certain but I do think Craft costs more than $5MM to build.

By the way, Welcome to eGullet!

[Fat Guy]

All the amounts are higher in New York than most anywhere else, but still a $2.5 million project is pretty serious. A chef like Colicchio, who has a mega commercial success under his belt, can raise $5 million, but most chefs, even ones with two and three stars, are going to be hard pressed to raise $2.5 million with no money down. In most instances -- not all, but most -- where an opening at that level is desired, one needs to find a restaurateur/operator partner with a track record and financial resources.

[Mayhaw Man]

The suggestion to work your existing network of contacts is really the best advice. Not only do these people already know you, there is an inherent amount of trust, which you will definitely need if you want someone to give you 100k of their hard-earnedmoney.

.

I have been on both the recieving and the investing end of this discussion and I can tell you, without hesitating, that 90% of the time the first (and most important) money is going to come from someone you already know. Maybe family, maybe some guy who sits in your dining room alot and just decides that he has enough money and you are good enough and smart enough to back in a deal. The majority of the money after that initial bump will come from this guy's friends and contacts and even more will come from an ever expanding circle around that guy or group of guys.

IF you can raise the money, and IF you can get open in a timely and responsible manner and IF you can return money in 3-4 years, you will find that your next project will be much easier to put together. You might even find some bank money out there if you have a real solid track record.

Jackal has written some very clear and honest words about this process and he is correct in pretty much every respect. I have never read a better description of a qualified or sophisticated investor (and I tried just yesterday in Bond Girl's thread to explain it ) than the one he has written above.

I suggest you start looking around in your dining room, asking everyone you have ever known, calling up your old college buddies, whatever. If you think running a place is hard now, just wait 'til you are running one with somebody else's money.

[jackal10]

Thanks.

I-am-not-a-lawyer, so treat anything I say with circumspection.

Asking people to invest in your project "making investment advertisments" in the legal terminology has very specific rules and regulations, with severe punishments for transgression. You can, in principle, go to jail. The rules go back to financial scandals like the south sea bubble, or in more modern times Ponzi and pyramid get-rich-quick schemes and are designed to protect the weak and vulnerable. You need professional advice. Distributing your plan to more than a few tens of people, or putting it on a web site count as investment advertisements. Investment advertisemens must be authorised by "members of self-regulating organisations" such as brokers, bankers or lawyers or accountants, who can check for accuracy of your statements, and have professional indemnity insurance so that they can be sued if incorrect. Expensive.

The get out is that you can solicit an few people who have certified that they are high net worth and sophisticated. Different jurisdictions define these terms slightly differently.

In the UK (I believe but I am not a professional) "sophisticated investor" is not really a legal category, unlike the US, but in both jurisdictions are self-certified. "High net worth" is currently defined in the UK as income in excess of £100K per annum and disposable net worth (excluding dwelling house and pension) of more then £500K, which must be certified by an accountant or employer. Other exempted categories are members of SRO's (see above), and some organisations.

[Fat Guy]

A couple of additional thoughts:

- It's important to distinguish between the role of chef and the role of restaurateur. A person can be both, of course, but savvy investors will recognize that the two skills are different. As a result, to many investors it doesn't matter how well you cook -- they're not going to invest in a chef's project; they're only going to invest in a restaurateur's project. In most cases, with multimillion-dollar openings, there is a Phil Suarez or a Jeffrey Chodorow paired with a Jean-Georges Vongerichten or Alain Ducasse. As I mentioned above, were I a talented chef looking to do a big opening, I'd be looking for someone like that to partner with -- getting investors would be no trouble after that. Otherwise, I'd look at a smaller opening -- a 71 Clinton Fresh Food as a prelude to a WD-50 as a prelude to something even bigger.

- Current employment, and the relationship with the employer, should be kept in mind. Word travels fast; if you're out there promoting your investment online and to dozens of people in the flesh, it's not going to be a secret for long. Thus it's important to be up front with one's employers -- they shouldn't find out through word-of-mouth that their employee is looking to strike out on his own. I don't know this particular situation well enough to comment on it -- maybe this has all been done -- but it's always worth keeping in mind. The same goes for follow-up and updates.