Suppose you have have a lifelong dream to start your own restaurant. How do you raise the money?

Time was, you had to go to a bank.  These days you start a crowd funding campaign.

The chef behind one of London’s most popular celeb hangouts is looking to crowdfund a new restaurant with a £1.75 MILLION price tag.  But a small local eateries might only need a tiny fraction of that to get started – say £20,000.

And your investors might become your most loyal customers – a double whammy.

Michelin-star boasting Nuno Mendes, who has cooked for the likes of Yoko Ono and Kate Moss at the Chiltern Firehouse, is hoping to raise £1.75million through the equity crowdfunding platform Seedrs.

He will use the money to open ‘destination restaurant’ Viajante – which means traveller in his native Portuguese – in Wapping’s Metropolitan Wharf. It will be the second reincarnation of the restaurant, after the original he opened in 2010 in Bethnal Green Town Hall and won a Michelin star for in 2012, closed in 2014.

Mendes says: ‘Viajante was a very special project for myself and the team, a project that we were all incredibly proud of and extremely sad to have to end. We all believed that the restaurant was going from strength to strength at the time of closing and ever since I have been committed to launching it one day.

‘Our challenge has been to find the right location with a better offering and in a space where the project could really realise its full potential.’

 If he raises his target, investors will collectively own a 33.3 per cent equity stake in the business, which is currently valued (pre-investment) at £3.5million.

Risk and reward 

There’s no guaranteed return for equity crowdfunders but depending on how much they invest, they will enjoy certain perks at the restaurant. For example, invest £2,000 and you’ll get priority booking for the first three months after opening – scheduled for autumn 2016 – and an invite to a shareholder event with Mendes before the opening. Invest £100,000 and you’ll also get a dinner for up to 12 people hosted by the chef himself.

The minimum investment is £10 ‘so that all foodies can take part’ and UK taxpayers may also be able to claim 30 per cent of their investment back if they qualify for Enterprise Investment Scheme income tax relief.

The crowdfunding opportunity will close for investment on Monday 11 January.

By 11.30 on 10 November – day one of funding – some £34,140 had been invested, with the biggest individual sum invested £20,000. For that amount, the investor would get a lunch or dinner for up to four people, including wine pairing, as well as priority booking and an invite to the shareholder meet and greet mentioned above.

What is equity crowdfunding?

People invest in an opportunity in exchange for equity. Money is exchanged for a share in the business, project or venture. As with other types of shares if it is successful the value goes up. If not, the value goes down and you could lose your money completely.

While you may receive a share of a business or project, dividends are rare and your investment could be diluted if more shares are issued.

You must also take a long-term view to any returns – it can take a while before start-ups begin making the big bucks and investors should not expect instant returns on equity investments. Your stake will only become worth something when the business floats on the stock market, in which case it will have enjoyed many years of success, or if management buy back stakes from investors.

However, most crowdfunds are illiquid, meaning it can be difficult, or even impossible, to claim back money invested or have it converted back into cash – an issue to bear in mind if you are thinking of taking the equity route.

Investing in the restaurant business

Ayan Mitra, chief executive of crowdfunding platform CrowdBnk, says: ‘Restaurants as a business are challenging. They’re capital intensive (compared to software and tech), hugely competitive, have lower EBITDA margins, lower exit multiples (compared to other sectors) and that means it is really difficult to make good returns on an investment.’

If at all possible, he suggests investing in an entrepreneur, chef or team, with ‘a demonstrable track record of building and exiting restaurant businesses’.

He explains: ‘You need to know whether they have skin in the game – that is, have they invested in the same terms as the investor? – and how much time they will spend on the projects.

Other factors to consider before you invest include whether you’re diversifying your portfolio appropriately and making sure your investment reflects the amount of disposable cash you have to part with.

‘The restaurant business can be hugely rewarding’, says Mitra, pointing to discounts available, EIS tax breaks and handsome returns if the investment is ‘priced and structured correctly’.

That said, he warns: ‘Be prepared for a seven to ten-year wait for liquidity.’