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.

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.”