Leaders of growing restaurant concepts have faced a number of hurdles on their growth journeys ever since the Covid 19 pandemic, perhaps none as high as the fact that investment dollars have been largely parked on the sidelines as investors wait for inflation and interest rates to come down.
“Raising money right now is extremely hard,” said Andrew K. Smith, cofounder and managing partner of the Utah-based private equity firm Savory Fund, which counts 10 restaurant brands among its portfolio. “And when I say it's extremely hard, the investors that have money are going to be more picky.”
So what are those emerging brand leaders to do as they wait for dollars to become more available? For one, they can learn more about the financing options available to them and meet investors who may someday be a financial partner in their business.
Savory Fund is a gold sponsor for NRN’s Investment Summit, an annual gathering of investors and emerging brand leaders that is co-located with CREATE: The Event for Emerging Restaurateurs. At this year’s Investment Summit (Oct. 8-9), Smith will moderate a panel called “Are you ready for private equity?” to help restaurateurs learn more about that financing option.
Ahead of the Investment Summit, Smith shared his five tips for businesses looking to raise capital for growth.
1. It’s better to be a speed boat in tumultuous waters than a cruise ship
Savory Fund reviews roughly 400 emerging chains each year to determine which brands it will bring into its portfolio. And Smith said it’s noticeable which brands and leaders are better at navigating today’s difficult operating environment.
Those leaders that get his attention are the ones that “galvanize as a team” and “punch through what the rest of the industry is dealing with.”
“What we're seeing with a lot of these brands is, man, there are some really, really passionate, smart, and gritty founders out there that are finding a way to navigate these tumultuous waters that we're in,” Smith said.
The best restaurateurs, he added, are the ones who evolve in difficult times to “become something unique” — a process that’s much easier for emerging brands than legacy chains.
“I think a brand that's big, kind of dilapidated, older — the Titanic — they can't shift as fast as these guys that are in speed boats trying to figure it out,” he said.
2. When raising money, you have to date around
There are many financing options available to entrepreneurs who are building a business like a restaurant. They can fund the business with debt, taking out loans from family and friends or a bank, for example. Or they can pursue a dilutive financing option — receiving funds from a firm like venture capital, family office, or private equity — which does not include debt but does exchange equity in the business.
Smith’s pitch for private equity is that it provides business leaders with peace of mind through crises like inflation or a pandemic.
“I woke up every single day during the pandemic and I was calm about it. I knew it was going to pass. I knew we were going to work through it somehow,” he said. “And one of the things that kept me really comfortable is that I didn't have a bunch of debt service.”
He added that business leaders need to play the field as they look for the ideal financial partner. Most people don’t settle with the first person they meet for a spouse, and neither should restaurant leaders settle with the first investor that offers to write them a check.
“Get to know many, court several, and figure out which one matches what your psyche is on growth and on developing your brand across the country,” Smith said.
3. You shouldn’t try to time the market when you’re raising money
There’s no perfect time to raise money. But Smith calls it a “fool’s errand” to try to time a raise with the market.
“Nobody knows what’s going to happen in the world or the market,” he said. “All you can do is your best work to make sure that you grow as fast as you should, but not too fast. … At the end of the day, you have to be a business that has profits, because you're not going to ever survive this unless you actually have profit.”
If your business is profitable, then even a tough economy like today’s can be a good time to grow. Smith compares today’s market to that of the Great Recession and its after-effects, from 2008 through 2012, which he said were some of the best years for growth.
“The water kind of comes down on costs across the board — that's the time you want to be armed up for growth,” he said. “So I would say to those that have a good business, now is the time to raise, because the next three to four years feel to me like [2009, 2010, and 2011].”
4. Make sure your foundation is strong before you raise money
The best way to secure financing with an investor is to demonstrate strong business fundamentals. That’s especially true in tough times when investors are more selective.
“If you're picky as an investor, you're not going to look for the projects that you have to buy and turn around or the fix-it jobs or the ones that have too much debt that you have to go restructure with the bank,” Smith said. “They're going to look at the ones that are a little bit easier and there's a path of least resistance for them to get involved and then for you guys to work together. If you're in that scenario right now, it is time to buckle down and fix and smooth out those rough edges of your business.”
Smith said brand owners should get their house in order before a raise, which includes ensuring a stable foundation, strong unit-level economics, and efficient team, among other things.
5. Cut loose any anchors on your speedboat before you hit the throttle
Getting your house in order is likely to require some difficult decisions. That may include laying off an employee or even closing an underperforming restaurant.
“Before you hammer down on that throttle, you’ve got to make sure you have no anchors slowing you down,” Smith said. “If you have people that are just boat anchors, get rid of your boat anchors. You can't ride your speedboat really fast, right?”
