A Mexican food chain in the U.K. called Chilango turned to an unlikely source to fund expansion recently: its customers. The chain promised returns of 8 percent a year and free food for life, according to a report by the Financial Times.
The company expanded rapidly, but then it hit a snag and had to file for a company voluntary agreement, which means it had to restructure to be able to drive down its debts. This happened because auditors would not sign off on the company’s accounts.
The result for investors is that they could either lose 90 percent of their investment or settle for equity in a business that isn’t making money.
Since the year 2016 in London when restaurant openings peaked, many of the eateries looked to equity crowdfunding site Seedrs to raise capital. Seedrs’ chief investment officer, Kirsty Grant, said at the time that the crowdfunding was reaching a “point of mass adoption.”
However, since then there have been a series of high profile closings, including a chain of restaurants from Jamie Oliver, a famous TV chef.
“The headwinds that the sector is facing are only increasing over time, so some of the opportunities we might have looked at a couple of years ago and got excited about we probably wouldn’t now,” said Tom Makey, an associate director at Gresham House.
Robin Rowland, a partner at private equity firm Trispan and former CEO of Yo! Sushi, said times have changed, and casual dining doesn’t bring returns in the way it used to.
“In the good old days you could make 20-25 percent ebitda conversion,” Rowland said. “The new reality is somewhere between 15-20 because upward cost pressures have not been met by price increases.”
One former Nando’s executive, Eve Bugler, said crowdfunding did have some benefits besides just the capital.
“As well as getting the investment we need, we also have a range of brand ambassadors, which is really valuable,” Bugler said.