In 2013, when we decided we wanted to open another business in the Bay Area, the first step was to figure out what it would be. We had learned so much about this industry and this business model, that it made sense to leverage that learning and those connections, and carry forward the same general concept. However, we also knew that we didn’t just want to open another Mission Cheese. We talked about the idea of franchising to a few more locations, but it just didn’t feel like a soulful way to grow, and soul is at the core of why we’re in business. So we developed the concept for Maker’s Common, taking the Mission Cheese foundation and expanding in ways that we currently feel constrained — by expanding the kitchen so we can add breadth to the menu and tacking on a market where we could effectively retail items. Both of these expansions will act to further our original mission of showcasing the best of what America has to offer, and telling the stories of the valiant producers of handmade, delicious, domestic goods.
The next step was to figure out how to finance it, which as any small business owner knows, can surely be half the battle. Given the expanded concept, we knew that Maker’s Common would take more capital than Mission Cheese, and when we crunched the numbers we landed on the figure of $600,000 for startup and buildout costs…in other words, well beyond chump change. We had funded Mission Cheese with a veritable hodgepodge of sources, including personal savings, loans from friends and family, a microloan from an SF City affiliated organization, credit card debt, and a small IndieGoGo campaign. Mission Cheese required about $200,000 in total, and our experience suggested that raising $600,000 through a similar mixed bag of funding would be somewhere between very difficult and impossible. So…what to do?
Searching the internet for “small business financing” is one of the more unexciting web searches I’ve done in recent history, so I’ll save you the agony. In a nutshell, here are the primary options for small businesses:
• Friends and relatives
• Venture capital / Angel investors
• Private equity (with accredited investors)
• Commercial bank loan
Parsing through these in detail could be, and has been, the subject of many a non-fiction non-thriller, so I’ll just briefly explain our thought process and get right to the point.
In this industry, where 10-100X scalability isn’t likely, Angels and VCs don’t even register a business like us as having a pulse, and tapping our friends and family for $600,000 would not only be difficult, but would also hold the potential to put us in the nuthouse for fear of angering everyone in the world that we know. So we decided that VC/Angels and friends and family were not options for Maker’s Common.
Donation crowdfunding deserves a pretty solid nod, as it has become a pretty big player on the small business financing scene, and has changed the fluidity of capital in big and mind-expanding ways. It helped Mission Cheese finish its buildout ($12,500), it is helping our neighbors Dandelion Chocolate build a parklet ($17,000), and in general has partially funded thousands of small businesses. But unless you’re making a new video game, feature film, trendy electronic gadget, or some other globally scalable product, it would take a few medium-sized miracles to raise $600,000.
Raising funds through private equity is an option that certainly has its positives, but we held back from this for several reasons. First, we weren’t sure we had access to a community with that type of capital. Second, when you work your a** off to start a small business and make it go, you certainly feel like you’ve earned the right to not have to consult a board of directors to make decisions about the future of your company. Third, if the business flourishes as a result of your blood, sweat, and tears, you want to be able to take full advantage of the upside of success. Fourth, in my few interactions with potential equity partners, the amount of the company they wanted for their investment seemed a bit asymmetric. In other words, why would you want to put the necessary amount of blood, sweat, and tears into a business when the upside potential is so limited?
Of course, we could double mortgage our house (if we owned one), take on $600,000 in credit card debt or shady high interest loans (barf), or win a contest (yay!), but those fall in the categories of dangerous, stupid, and improbable, respectively. So, we were down to a regular ‘ol bank loan, just like most businesses like us. Because at the end of the day, banks are still the big shop in town.
We can get a bank loan. That is totally doable. But like the idea of building a franchise, it doesn’t suit us. Banks are very useful societal entities, don’t get me wrong, but why does a small business need to pay 6-7% interest on a bank loan, when the bank is paying out a maximum of 1% interest (most are far less than 0.5% annually)? Where does that 6+% interest spread go? It goes to overhead in the form of downtown offices, big salaries, bonuses, and complex IT system infrastructure. If they were taking on a portion of the risk, that spread might be justifiable, but they aren’t. When a small business owner takes a loan, they are required to sign a personal guaranty, which basically takes all of the risk out of it for a bank. Banks are expensive middlemen that are unwilling to assume any level of risk. Outside of being an expensive (but very safe) mattress, it’s hard to see what utility banks actually provide for that big interest rate.
After reviewing all these standard options, there wasn’t a clear path — until we discovered the Direct Public Offering (DPO). The good food industry is founded on the principles of being local, wholesome, organic, good for the environment, good for the community, so it stands to reason that we’d want to use a financing mechanism that shares this set of DNA. A DPO does. It is offered within a single state (relatively local), good for the community (interest paid to a community instead of a bank strengthens that local economy), you can advertise the investment openly (like crowdfunding), the opportunity is open to accredited and unaccredited investors and the minimum investment can be low (equitable access to a community investment opportunity), and the offering company can structure the terms so that they work for them (lower cost of capital increases chance of business success). Further, by taking many small investments rather than one big one, by the time we are done fundraising Maker’s Common will have 150-250 Founders that care very much that the business succeeds, building a strong revenue base.
We are doing a DPO because it fits the good food industry. We are doing a DPO because we think it’s the only true way to invest in Main Street. We are doing a DPO because, if we’re eating locally and buying locally, doesn’t it make sense that we should be investing locally too?
As of 2011, Americans had $26 trillion in stocks, bonds, pensions, and retirement accounts. If just 1/1000th of this was invested in small businesses, you could open 43,000 businesses like Maker’s Common. Imagine that…the country would be a different place.