Tom Wellings brushes rectangles of pizza dough with olive oil. On the other side of the counter, his wife, Camila Arango, pipes cream between layers of pastry for the classic French dessert Paris-Brest. The air is rich with butter, yeast and just-baked croissants. Trays of pistachio and gianduja macarons and glistening kouign-amann the color of maple syrup fill racks, ready to be shuttled downstairs.
At a pop-up space called Prequel, the pastry chefs are doing a test run of Bluebird Bakery, a boulangerie-patisserie they hope to open late this summer or in early fall. Almost everything is in order. They’ve put down a letter of intent for a first-floor space in the Holm apartment building in Logan Circle, on the corner of 11th Street and Rhode Island Avenue NW, which is still under construction. During more than a decade, they’ve honed their techniques while working for high-profile establishments in the city — she for Alain Ducasse’s now-shuttered Adour and the Mandarin Oriental Hotel, he for Restaurant Eve, Fabio Trabocchi’s various enterprises and Equinox. The recipes have been developed.
Only one thing is missing: the money.
That’s where Wellings and Arango are hoping the bakery’s future customers will help out. The couple have partnered with fundraising firm EquityEats in an attempt to become the District’s first equity crowdfunded eatery. Unlike with other crowdfunding platforms, such as Kickstarter and Indiegogo, investors can potentially earn money back from the business, as well as perks. Using EquityEats’ Web site, any D.C. resident or business can pledge from $100 to $10,000 to help Bluebird Bakery reach its goal of $300,000 to $488,000 within the next 30 days, starting today. (The amount of money the bakers raise will determine whether they can afford the space in the Holm building or will have to set up shop in a second-generation restaurant or bakery space.)
More than a dozen other states (including Virginia and Maryland) now allow this novel funding model, which is still in its infancy. Last October, the District’s Department of Insurance, Securities and Banking passed crowdfunding rules allowing entrepreneurs to raise up to $2 million from up to 500 non-accredited investors, otherwise known as anyone with the money to spare.
“This is the first time this type of funding tool has been available to companies trying to raise capital, and it’s a new opportunity for investors,” says Mike McManus, assistant director of the city’s Corporation Finance Division, which reviews and approves applications for crowdfunded raises. “So this is historic.”
Wellings and Arango could run the campaign themselves, but they decided to partner with EquityEats, which focuses on food and beverage businesses. “We thought it was a good, interesting way to get the community involved and raise awareness of what we’re doing,” says Arango, 33. “Tom and I have the skills and the hands to prepare these baked goods, but we don’t have all that business knowledge.”
The couple and EquityEats tried to raise money last year through accredited investors, who by definition must have a net worth of at least $1 million or have earned $200,000 or more over the previous two years. That didn’t work. “We were trying to fundraise from a traditional group of people,” says Steve Lucas, EquityEats’ vice president of strategy and acquisitions and co-founder. “If they have that money and interest in restaurants, they can find a chef they want to believe in and can make that happen. So we had to come up with a new way of approaching restaurant investing.”
Then the changes to the equity crowdfunding law went into effect last October. To test the new process, EquityEats tried raising money for its own project, Prequel, where businesses like Bluebird can showcase their food to potential investors. The experiment paid off. The company raised $220,100 from 339 investors and opened Prequel in early April. According to Lucas, approximately 80 percent of those investments were $1,000 or less.
Seeing that success, Wellings and Arango decided to move ahead with their own funding project (called a “raise” in equity-funding parlance). At Prequel, before the raise was announced, they couldn’t talk about it with customers or directly engage investors but were simply stoking general interest in the idea of Bluebird. Now, they’re able to pass out information on the raise, engage investors — Lucas likes calling those who convert from shoppers to funders “investomers” — and point them to a Web site where they can invest online. (Because there are no overarching federal guidelines, businesses in places where laws permit it have to restrict their raise to those state’s residents.) Once Bluebird opens, they’ll serve much more than what they’re now offering at Prequel: a slew of classic French pastries and breads, plus panini, morning toasts, granola, soft-serve gelato and coffee from La Colombe.
If Bluebird doesn’t meet its goal, none of the pledges kick in. But if all goes according to plan, its investors could earn back their money in the first two years. If the operation is very successful, investors will receive further payments, potentially more than doubling their money in the long run. On top of the financial rewards, investors might receive free food or coffee, baking classes with the couple and specialty baked goods during the holidays, depending on the amount of their investment. Of course, there’s always the risk that the business will fail: In that case, investors could lose all their money.
By contrast, with Kickstarter and similar reward-based crowdsourced fundraising mechanisms, investors are given items or experiences, but not equity, in exchange for their money. That method has been used by several D.C. food businesses, including Rose’s Luxury, Pleasant Pops and the forthcoming Crumbs & Whiskers, a cafe where customers will hang out with adoptable shelter cats. Maketto, the cafe-marketplace-restaurant on H Street NE from Toki Underground chef-owner Erik Bruner-Yang and Will Sharp of the Durkl clothing store, leases its space from investment crowdsourcing platform Fundrise. That firm raised $325,000 from 175 investors, who pledged amounts from $100 to $10,000 to help buy the building. In turn, Fundrise serves as the landlord of the property but has no day-to-day role in the business.
So far, little research has been devoted to crowdsourced funding, so it’s hard to tell whether it’s a successful, or even generally healthy, investment strategy. However, Ethan Mollick, an assistant professor at the University of Pennsylvania’s Wharton School and author of two books on crowdfunding, studied Kickstarter campaigns focused on technology, video games and product design. He found that 86 percent of campaigns were fulfilled as promised, though about 85 percent of those were delayed. “The other 14 percent are either still promising to deliver, have disappeared or have refunded the money,” he says. Fewer than one-half of 1 percent were found to be fraudulent.
Such projects attract an array of investors with varying motivations. “On one end, you have people putting money into projects like they would any other investment,” says Mollick. “At its best, crowdfunding allows communities to work together to help them fill a need that the community has.”
No matter what inspired their participation, Wellings, 36, says he prefers dealing with this wider pool of smaller investors. “This is better than cooking private breakfasts and lunches for multimillionaires, trying to get them to invest $200,000,” he says.
Initially, though, he had reservations about working with EquityEats. “I wondered, ‘Are they going to get their hands into what we’re doing?’ ” he says. “But the more we’ve worked with them, the more we’ve realized that they’re not. They’re there as a guide and a helping hand. They help you with the framework and structure, but they don’t want to create your business for you. They want you to stay true to your idea.”
EquityEats isn’t focused only on getting projects up and running; it also hopes to keep businesses going through early transitional humps. “Restaurants go cold for a little bit after they open, because they don’t have a regular customer base and they’re not the hot restaurant anymore,” says Lucas. “So they often fail in that period. We help smooth out that curve with this model, because on Day One they will have 300 to 500 people who are literally invested in their bottom line and want to see them succeed. If they have great successes, they can share that with them. If they have challenges, they can engage them and they can help.”
Equity crowdfunding for food-related businesses is beginning to happen across the country as laws change to allow it. “There’s a lot of investor capital available for tech concepts, but before now there was really no access to that capital for start-up food concepts,” says Alex Lowe, co-founder and chief executive of Artís Coffee, a San Francisco coffee shop, roaster and retail shop that’s expanding with three new locations, the newest of which just opened in the city’s Hayes Valley neighborhood.
Artís originally raised $1 million from angel investors before turning to equity crowdfunding Web site CircleUp — which also caters to food businesses but is open only to accredited investors — at the end of January. Including the initial funds, the company has raised $1.7 million of a proposed goal of $2.5 million. That money will cover the cost of opening all three shops, operating expenditures and marketing. “CircleUp opens us to a huge network of people and allows us to put our entire deal book on display for investors, rather than try to get them that information piecemeal,” he says. “The most powerful thing it does is offer social proof. If investors see other smart investors join the round, they’re a lot more likely to invest themselves.”
Though Artís has not hit its crowdfunding goal, Lowe says he expects to do so this month. Bluebird Bakery just started its raise, with a month to go, but Wellings says he already is cautiously confident that the partnership with EquityEats will help him and his wife achieve their longtime dream of owning a bakery.
“It’s like buying a house,” he says. “There’s always something. Even working in this business for 13 years and having opened five restaurants, there are always surprises. So you try to build a team around you that makes the process goes easier.”