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cityscape

Why Isn’t Crowdfunding Working for Toronto’s Food Industry?

Crowdfunding campaigns have bankrolled movies, books, and other products, but Toronto restaurateurs are having a hard time tapping in.

Glory Hole Doughnuts opened with the help of a crowdfunding campaign  Photo by W     , from the Torontoist Flickr Pool

Glory Hole Doughnuts opened with the help of a crowdfunding campaign. Photo by W….., from the Torontoist Flickr Pool.

Ashley Jacot De Boinod did everything right when she was trying to get her doughnut business off the ground. She kept costs low by renting a shared commercial kitchen space. She gained an almost rabid following for her handmade gourmet pastries, cheekily called Glory Hole Doughnuts. She sold her doughnuts wholesale in coffee shops and local businesses across the city, and met customers in the early morning to drop off custom orders. Once she could see that her business would be viable, she embarked on the expensive and onerous process of setting up a store. That’s when things started to go wrong.

“Our budget collapsed when we were so close to finishing up, so I had to figure out something to keep going,” she says.

It wasn’t until the store was near completion that contractor issues arouse. As Jacot De Boinod describes it, she got “screwed over.” At a point when it was too late to back out, she needed a plan to secure some extra funding in order to get the store ready for opening. She settled on an untraditional course of action: a campaign on the popular crowdfunding site Indiegogo.

“I didn’t want to [turn to crowdfunding] at all,” Jacot De Boinod says. “You think you have everything planned, and everything budgeted, so it feels like, ‘Where did you go wrong?’”

While today Jacot De Boinod’s business is up and running—booming, actually, with lineups out the door each weekend for her unique creations (think meat and alcohol ingredients, along with more traditional options) that sell for up to $4 a pop—she was unable to meet her Indiegogo campaign goal of $15,000 when trying to set up shop. Having raised less than half, she ended up borrowing from family to finish the job.

“It’s difficult for many Toronto businesses to meet their goals,” she concedes.

Crowdfunding is an emerging way for startups to raise funds through small contributions from the general public. This is mostly done online, using sites such as Kickstarter and Indiegogo (recently made famous in Toronto thanks to Gawker‘s Rob Ford Crackstarter). Entrepreneurs can use social media to boost interest in their campaigns. Contributers are usually rewarded with different “perks,” which can range from mere shows of gratitude to actual, physical products.

Overall, it seems to be working. Globally, crowdfunding platforms raised $2.7 billion and successfully funded more than 1 million campaigns in 2012, according to an industry report released in April of this year.

But is crowdfunding right for Toronto’s food and beverage industry? Let’s review a few examples:

Company: Market 707
Goal: $14,500 to build an outdoor patio and portable stage for outdoor events.
Funds raised: $6,500

Company: The Real Jerk
Goal: $2,450 to create a photographic mural at its new location, 625 Queen Street East.
Funds raised: $876

Company: The Gravy Train
Goal: $20,000 towards building a restaurant from scratch, buying equipment, and covering rental costs.
Funds raised: $3,525

Judging by those results, the answer seems to be “no.” But why?

According to Brock Murray, a board member of the National Crowdfunding Association of Canada, the problem may be with the structure of the system. Currently, “equity-based” crowdfunding is not legally allowed in Canada. This means that while projects can raise money in exchange for an ownership stake from accredited investors, anyone who isn’t accredited (meaning, most crowdfunding contributors) can’t invest in return for equity. Someone who solicits funds can only offer products or services in return.

“Projects on Kickstarter.com, for example, had early success because a lot of projects were creative projects,” Murray says. He explains that reward-based crowdfunding allowed artists to fund their projects in return for a finished copy of the product. A director could ask contributers to chip in $25 and in return provide a DVD of the movie after it was finished.

“Because the art community was an early adopter of crowdfunding, they had excellent marketing pitches in the form of videos,” says Brock. “Some would give a trailer to the movie they wanted to make, [and] you and I both know video can be very compelling when done well.”

According to Murray—who is also the CEO of JOI Media, the creator of some crowdfunding software called Katipult—the projects that tend to do best are passion projects, such as documentaries or independent films, or projects that have been initiated by groups or individuals with solid project plans. It doesn’t seem to work as well for food and beverage companies.

Taking Glory Hole as an example, Murray says it would make a lot of sense for equity-based crowdfunding, but on a rewards-based platform, the incentives of food and beverage don’t work quite as well. People can get doughnuts already; there’s no reason for them to give money to an operator who can’t immediately provide them with a pastry in return.

“I’d rather go to Groupon or another similar site and get instant gratification,” he says.

“The problem is, from a crowdfunding perspective, [Jacot De Boinod] doesn’t have an option to give equity because she can’t,” he says. “Right now these are the types of projects that are awesome for the economy, but won’t happen because banks won’t give them small-business loans. I think that the issue is the need for equity or debt crowdfunding to be passed into legislation.”

So, given the lack of success to date, and the structural obstacles that make success difficult, why do food and beverage companies continue to rely on crowdfunding? It seems that for some companies, bringing in the big bucks isn’t the main idea.

Kensington Brewing Company, set to open a brewery in Kensington Market by the end of the year, has been raising funds for the new facility through what the company has dubbed “Community Supported Beer.” However, while the company is asking for funding, owner Brock Shepherd explains that the program is not a make-or-break proposition for him. Rather, it’s about building a sense of community around the brewery.

“This helps get people involved, gives them a kind of ownership in the company,” he says.

Because ownership through crowdfunding can only legally be figurative, Shepherd is offering gift cards in exchange for donations. By doing so, he hopes to build brand ambassadors, who will carry their cards in their wallets, talk to their friends about the company, and likely share the beers they receive once the brewery is up and running.

While time will tell if this method works for Shepherd, for now, crowdfunding seems to be picking up steam. As things stand, though, it may not be worthwhile for everyone.

“I’m happy I did it in the sense that I wouldn’t have been able to open,” says Jacot De Boinod. “But I wouldn’t do it again.”

Comments

  • Torontopoly

    1) Localized product limits the appeal to funders that cannot benefit (Outside of Toronto)
    2) No value exchange – same as point 1 really. If a funder donates to say, the Occulus Rift team, in exchange for the donation they are given something tangible is received in return (the product). In the case of restaurants, all you’re giving is more value to the restaurant so they can get even more from your patronage.

    • tyrannosaurus_rek

      #2 contradicts what the article says: “Someone who solicits funds can only offer products or services in return.” If I were to donate to – oh, say, El Gastronomo Vagabundo’s campaign to replace their generator – I can get products (in the form of tacos, t-shirts, etc) in exchange. (#1 still applies for anything that can’t be mailed.)

      • Torontopoly

        Right you are

  • Ray Kao

    As noted in the article Crowdfunding is ultimately driven by consumer behaviour, either the perceived value or novelty of the service/product that needs funding isn’t enough. Similarly the value of the ‘rewards’ being offered aren’t enticing enough to draw consumers to be passionate and invest financially or arguably more importantly, emotionally.

    The notion that it’s a failure because contributors are not allowed to have equity/ownership in a business is possibly the wrong perception on this topic.

    Perhaps it is an issue with crowdfunding being the wrong tactic – the opportunity may be in micro-loans rather than ‘simply’ crowdfunding – where the behaviour is (again) consumer based vs. micro-loans being investor based?

    I do concede the fact that micro-loans could face the same regulatory/legal issues as equity-based crowdfunding.

    • tyrannosaurus_rek

      “The notion that it’s a failure because contributors are not allowed to
      have equity/ownership in a business is possibly the wrong perception on
      this topic.”

      It also flies in the face of a number of very successful Kickstarter campaigns, which simply reciprocate donations for the end product(s) and related collateral.

  • Shawshank

    I think its pretty obvious why this and many other restaurant crowd funding projects have failed. Other projects succeed through hype of how awesome this usually unique product is, typically filling some kind of void or being unique. People pass it along, it gets featured on blogs, gets buzzy, goes viral etc. With restaurants it’s like – oh, you’re making gourmet donuts like everyone else is? There’s not much traction in terms of buzz for that, especially being local.

    And perhaps the most shameful reason is how utterly lame the “rewards” are for Glory Hole’s campaign… You’re helping the business get off the ground – your money is being asked for to put it in to existence – but the very product you’re helping them create, that you’re being rewarded with, is being marked up higher than the final retail value? Give me a break.

    Even with many physical consumer tech products being created on sites like Kickstarter, by being GENEROUS enough to help fund a business, you get the product for an exclusive early deep discount rate. For Glory Hole, you get a $25 donut while everyone else pays $4 for them when the store is open. Thanks so much, let me gouge you for over 500% to show my appreciation! It doesn’t take a genius to figure out how that campaign failed.

  • Invest Wisely

    It all comes to down to the fact that there needs to be value to the investors. You aren’t getting equity in the ongoing success. You aren’t getting your money back no mater how fast the restaurant makes money. So what are you getting a one time gift. In that case it needs to be unique.

    Look at the Cheesewerks and the “board member” program. That is how this should work. Give something unique.

    http://www.cheesewerks.com/board-member-privileges/

    If Glory Hole for example offered a special flavour that was available for life, but only to early “investors”, then the investor would have pride in their “perk” and Glory Hole could use it to generate future buzz.
    Or for a no reservation place such as grand electric the ability to make reservations once a month but only for investors.

    Or an invite to the “friends and family” meals before opening where you get a meal of perceived value greater to the investment.
    All of those perks could be enough to entice investment and could build hype.
    But all that is offered is the same product that the rest of the public will get. With no discount. What incentive is there not to wait for someone else to finance it?
    Crowdsourcing is not charity. It is a business opportunity.

  • XXX

    Even if equity funding was legal restaurants would be a tough raise, statistics show that new restaurants fail at an alarming rate. The return that most investors would require for accepting that kind of risk would turn the owners into employees, not an ideal outcome for either side.

    Too bad more people aren’t more aware of the crowdfunding debate it is an opportunity for Ontario to take the lead in a new finance development but the paternalistic forces in government and the OSC would likely relegate us to the sidelines…

  • Astin44

    Glad I didn’t comment originally. Most have covered my points – uncreative and low-value rewards, local interest only, high-risk industry.

    I’ll add that poor penetration is also a factor. I’m aware of Glory Hole Donuts, and try to keep on top of food news in Toronto, but this was the first I’d heard of their campaign. If I’m not hearing about it, then the chances of those even less in touch with what’s happening with restaurants and the like hearing of it are slim to none. Taking advantage of social networking means getting the information to spread beyond 1 degree of separation. Your Twitter and Facebook followers are already fans. Your customers already know about you. You need to get them to spread the word, otherwise you may as well just put a sign up in your window and include a pamphlet with your deliveries asking for help.

    Which I suppose goes back to making your campaign interesting.

  • Eli Regalado

    Really depends on leveraging the crowd effectively. You need to get the first 20-30% in the door from friends and family. That give the campaign legs. You need to get people to buy into WHY you are crowdfuding. And, last but not least you have to price the rewards accordingly. Oh! And I almost forgot, you need to reach out to mainstream PR and bloggers to get your coverage. Here’s a little hack using Google Images that is the easiest way to do such.

    https://www.youtube.com/watch?v=qjzlY24HDAg&list=PLNA6TGqNLNSsBrnkrdzwyFy2QOSh9dhaN&index=1