Nowadays, it seems like everyone wants to open a restaurant. It’s fun to daydream about what you’d put on your menu, how you’d decorate the space, what kind of boss you’d be, and how you’d assemble your dream team.
One big question that people love to ignore when daydreaming is, “How will I fund my restaurant?”
When it comes to funding a restaurant, there are many, many different ways to go about procuring capital. In a recent episode of The Garnish, we spoke with Joanne Chang — whose bakery, Flour, has expanded to eight locations across Boston – and Charles Bililies — CEO of Souvla, a four-location Greek-American restaurant in San Francisco — about how they gained funding for their now very successful restaurants.
We also spoke with Emiliana Puyana, a Program Manager at La Cocina, a culinary business incubator that helps women and immigrants start businesses through mentorship, training, connections to funding, and subsidized use of a commercial kitchen. She told us about alternative paths to funding that are available to just about anyone.
Below are the highlights from those conversations. Quotes are edited for clarity.
Funding the First Location
Joanne Chang funded the first Flour bakery with help from her family and her savings. “I was eager to open my own bakery. I was starting to look at bank loans and trying to find investment, and I'd written a business plan. My parents said, ‘Why don't you take your business plan and share it with your uncles and see if they are interested in investing?’”
They wanted to help her achieve her goal, so they contributed some money, as did her parents. Chang was also able to bring some money to the table. “I'd worked as a management consultant directly out of college, and so I liquidated all of the mutual funds that I bought when I first graduated and invested money as well. So we really scraped together a little bit of money here and there from some relatives and my parents and myself, and opened up on a shoestring budget.”
Charles Bililies over in San Francisco took the investor route. He spent ten years working in fine dining before opening the first Souvla location. Through his work experience, he was well-connected and had access to a network of affluent people and restaurant investors, but he faced a lot of “No's" early on.
It took Bililies two and a half years to raise $450,000 from investors, family and friends, and his network in order to open the first Souvla location. Bililies said he got a lot of responses like this at the start: “Well it's a great idea. We really like you, but I'm not going to give you any money." Bililies added, “We didn't close the round until about the week after we opened the doors, which is decidedly not what you're supposed to do."
He explored the SBA route but decided it was too risky. “I was pretty young, and I really had no assets. So it would have involved my parents putting up the house, and I didn't want to put them through that. And just the amount of paperwork and sort of rigamarole was just too much.”
Lucky for Bililies and his investors, Souvla was a hit. “We structured the investment on the preferred return model. So investors got 90% of available profit until they were paid back [to] 120% of their investment, which is both putting investors first — which they obviously love to see, especially in a more risky investment. But it also incentivizes me, as the owner-operator, to run as lean of a business as possible because I don't get to effectively realize any of this profit until everyone is paid back, so I was really proud to be able to repay our investors to 100% of their investment in the first year.”
Expansion and Funding Location #2
While Bililies went into the game wanting to scale Souvla to many locations, Chang had no interest in growth when she opened the first Flour bakery.
Chang felt the push to expand when she realized her staff didn’t have much room to grow professionally. She wanted to keep them in the company and offer more management roles for existing staff to grow into — including a pastry chef role — so she started looking into opening the second location. “We just had so many people that wanted to stay, and I wanted to keep them within the company. So opening a second location seemed to be the best way. We were really lucky.”
After six years of running a very successful bakery, Chang had the cash flow and credibility to take out a loan. “We ended up taking out a bank loan, and then also investing some funds from cash flow from the first location,” said Chang. “At that point it was six and a half years in. So we had decent cash flow and we just decided to divert that cash into helping pay for the second one. And then we paid for about half with the bank loan as well.”
Bililies also had an easier time coming up with the money for the second Souvla location because the first had been a hit, he explained. “It took me two and a half years to raise $450,000 to open the first Souvla. It took eight days to raise $1 million to open the second,” he said.
Now, Souvla has four locations. “A huge milestone for us is that we opened up our fourth restaurant in January of this year, and we did it ourselves. We didn't have any investors in it, which is something that I had always kind of hoped for but didn't think it would happen so soon. But we did it basically through cashflow and debt, and we've already repaid half of that loan in the first six months.”
What Should New Restaurateurs Know About Money and Expansion
Both Chang and Bililies have learned a few key lessons over the years, especially about finances and expansion.
Chang says financial and business learning is crucial for anyone embarking on a new venture in the restaurant industry. “I think anybody who's opening a restaurant should take an accounting course. I really do,” she said. She elaborated:
“We try to teach our managers the basics of the P & L, and the basics of COGS, and labor costs and cash flow, and I can tell that some sort of get it, and I can tell others are just kind of reading the numbers that we've told them to read. And I really think if you're going to operate a business, you need to understand, just as well as you understand what happens when you mix sugar, flour, water and butter together to make a pâte brisée, you need to understand what happens when you have expenses and bills and payroll and taxes and credit card payments and all of the different ways in which people get paid and have to pay out to vendors.”
She said while many people do successfully outsource the financial side of running a restaurant, you have more control if you understand how everything works. “I just think for the health of your business, to know and understand fully what's happening to every dollar coming in and every dollar going out, it's really invaluable,” she said.
Bililies met with a prolific Bay Area restaurateur to ask for advice about how to scale Souvla when the first location was about six months old. “He's this kind of old-school Italian guy, and he basically cut me off. He just said, ‘Hey, stop. Stop talking. Don't even think about scaling until you are 100% happy with what's going on within those four walls. You need to make sure that everything is truly perfect in terms of the team, in terms of the systems, in terms of just the daily operation before you even use one percentage of your brain to think about growing it.’ And he was right… So much of it really comes down to having a great team. I was really fortunate,” said Bililies.
Chang also knows that her team is her greatest asset. “The amount of work that it takes to both find great staff and then keep great staff, the amount of work that it takes to train everybody so they're ready to put forth the vision you've created — it’s an extremely HR-dependent business. I think a lot of people that go into opening restaurants are all about the food, which I am as well, but you learn very quickly that it's all about the people.”
How La Cocina Helps Prospective Restaurateurs Make Their Dreams Reality
In San Francisco, food business incubator La Cocina connects women and immigrants to resources that might be out of reach otherwise, including hands-on mentorship, subsidized access to a commercial kitchen, technical assistance and training, and connection to micro-lenders and other forms of funding.
Emiliana Puyana is a Program Manager there, and she helps food entrepreneurs who don’t have access to substantial money from their personal or professional network navigate the intricacies of starting their own business. Most of the businesses that come up through La Cocina start as small businesses, like farmers market stands or catering companies, and some eventually turn into restaurants.
Puyana explained to The Garnish how this process usually goes.
First, La Cocina supports the entrepreneurs in growing their concept and creating several revenue streams. “Once we've achieved that, then we begin to search for those exit opportunities, that ultimate restaurant location.That process, we hope, will take no more than three years, but often it can take between three and five. And during that time frame, our entrepreneurs have really built a robust catering business or maybe they’re regular participants at farmer's markets around the city. And so they basically build these diversified revenue streams that allow for them to present to a micro-lender as a more sure thing. Even though in the restaurant business, that's an incredibly hard thing – I mean, it's just a risky business.”
Puyana said that the people who come to La Cocina for support typically have very little luck with bank loans. “Traditional lending institutions aren't going to take a second look at a small business owner who is entering into the restaurant industry and having a business that has $300,000 in sales a year. So what we're left with is a host of different alternatives to consider.” Puyana explained that La Cocina is able to connect entrepreneurs to these alternatives, such as:
Kiva, a crowdsourcing microlender: “The idea there is that as an entrepreneur, you don't need a credit history. You just need people from your own community to vouch for you... I get 20 of my closest friends or family members to lend me $20 or $25 each, which basically gives Kiva the reassurance that if people within my own circle are willing to lend to me, they basically speak to my credibility as a buyer. And then I get to go live on their site and I get to crowdsource the rest of the money that I'm trying to borrow, and then I get this money, whether it's $1,500 or $10,000, and it's interest free and I get a predetermined amount of time to pay that money back.
Adelante: "[A] fund in conjunction with The Mission Economic Development Agency... You can get up to $100,000 loans on them, interest rates are, depending on your credit history, between 2 to 5% — essentially higher than a traditional lending institution, but it gives you access to $100,000 that you otherwise wouldn't have access to. They're not predatory lenders. They don't require such an extensive credit history and so on and so forth.” Puyana also mentioned Opportunity Fund, a similar organization.
Puyana noted that for many reasons it can be easy for some people to access capital, but not for others. “It's so incredibly frustrating. When we look at most cities around the US and why they become tourist destinations and why people love them, it's more often than not because of the folks that make up the fabric of that city, the restaurants that adorn every street corner. And I think so often people have no idea how truly difficult it is, as an immigrant, as a person of color, to even make it, even into a little corner restaurant that appears to not be that pretty — that is a feat unto itself. It's a system that is rigged. It's a system in which it’s so incredibly difficult to compete because the playing field is, is never equal, never even, and every time that you think you see the goalposts, then it gets shifted further away from them.”
The process of cobbling together money from many different sources is exhausting — but it’s worth it for these entrepreneurs. Puyana also noted that she’s constantly impressed with the money-savviness and business smarts of the entrepreneurs at La Cocina.
“I mean, I don't even know why I'm surprised anymore — the entrepreneurs that I have the pleasure of working with at La Cocina are some of the best folks with money that I've ever been around,” said Puyana. “You have people like Isabel Pazos, who's a single breadwinner for her family, has really minimal English skills, but has been operating a business in San Francisco now for nine years. After being in business for seven years as a caterer and at farmer's market stands, it comes time to open her restaurant. And she's like, ‘Well, I've saved $70,000. I just have $70,000 sitting in the bank from running this business wisely.'”
For more on how Flour and Souvla started out and scaled, and about the support that La Cocina gives to aspiring restaurateurs, listen to the full episode of The Garnish, and don’t forget to sign up for our listener newsletter so you never miss an episode.