I teach at several universities and enjoy performing university service mentoring business students. Recently I received an email from a student doing a project about venture capital involvement in the fast food industry for his entrepreneurial finance course.
Crowdfuning for Consumer Businesses
Interestingly, I read an article in VentureBeat, 3 reasons crowdfunders will hit consumer products first . The article was spot on since I see little interest in funding consumer based businesses below a certain threshold from angel investors and venture capitalists.
No doubt that many readers here are thinking of franchising their business model and of course this requires some capital. So I though the Q&A with a student would be helpful for those considering this route.
Before you begin dreaming of success as a franchised restaurant concept, insure that you have a business that has the following attributes:
- Your business is following a growing trend. The Pizza Consumer Trends - Upscale QSR and Fast Casual Driving Innovation is an example of small operators in market ripe for franchising.
- It can be systemized and packaged
- The business can be easily replicated by a franchisee looking at your business
- You have a business model that is scalable, meaning it does not rely exclusively on you
Questions for Franchise Financing in Consumer Foods
What is the best source of financing for a franchise looking to grow aggressively?
I think the VentureBeat article opens up a non-VC alternative.
Aside from scaling the business, what are some of the other scenario's that franchise businesses can capitalize on by incorporating a venture capitalist?
Since scaling encompasses the organization, finance, marketing… I am not sure what other worth a VC brings.
In your opinion what are the major selling points for VC's looking to invest in franchise business models?
Franchises, or at least many, have proven business models so articulating the feasibility of a business model is very quantitative. Shopping center developers seem to feel more comfortable leasing space to a franchisee vs. a one-up startup. For the most part, real estate developers are not pioneers and simply looking at the cash flow a space generates.
What are the indicators that would signal a franchise should seek VC involvement?
The competitive context. I recently wrote an article from an interview with Technomic , Technomic Pizza Trends Upscale QSR and Fast Casual Driving Innovation . Some are franchises and remainder are corporate for now. I point you to the article since it points to an early trend to upscale QSR and Fast Casual Pizza… an early but potentially significant trend. Location is key in any business in brick and mortar retail and capital is critical to acquiring great locations.
Check out MyPiada… they are borrowing heavily from the Chipotle "line" style service model and incorporating lots of "theatre". To me they just feel like a winner and a fast casual pizza force… however at 5 units, they need capital to move quickly.
Experience in scaling. I am not a franchise expert but it seems to me you can franchise 2 or 3 units without significant experience but after that… you have the need for more rigorous business processes such as financial projections. Although the franchisee is responsible for site selection, the franchisor needs some knowledge here since the wrong location will lead to a failed franchisee and no one wants many of these in their Franchise Disclosure Agreement
Why is their such little VC involvement in the fast food franchising business despite the huge profits some of these franchises are turning?
Again read the VentureBeat article for their insight.
Are you considering franchising your business model? How are you approaching the financing dilemma for growth.