Foodie entrepreneurs Eric Partaker and Dan Houghton spill the beans on raising £2.16m through crowdfunding for their Mexican restaurant chain Chilango via a ‘burrito bond’.
Balancing a huge chicken-and-steak-filled burrito in one hand and a pen and notepad in the other – while still maintaining a modicum of decorum – is no easy task, but as co-founder of Mexican restaurant chain Chilango, Eric Partaker, points out as we have lunch in his eatery in London’s Chancery Lane: “It might seem overwhelming but the key is to embrace it.” It’s good advice from the entrepreneur who, with co-founder Dan Houghton, enjoyed success earlier this year after raising £2.16m through crowdfunding platform Crowdcube.
The duo’s ‘burrito bond’ – a four-year mini-bond offering an eight per cent interest rate – was launched in the wake of new regulation on crowdfunding. It saw 749 people investing, on average, almost £2,900 into the business.
The pair, who met while working at Skype in London in the early 2000s, now have seven restaurants – they opened their first in 2007 – but the lightbulb moment came, says Partaker, while visiting his native Norway on a business trip. “I was out for dinner at a Mexican restaurant in Oslo and my colleagues were saying how much they loved the food, but I didn’t think it was that great. I realised it was a lack of competition breeding a poor product.”
Partaker shared his idea with Houghton – a Cambridge graduate who had spent his first few professional years working for tech start-ups – in 2005. “Eric and I were paired up at Skype,” recalls Houghton. “I thought his idea was great and was actually the one who quit my job first because I was so keen to get the business up and running.”
They tell us why their burrito bond was such a success and how they plan to put the investment to use…
How did the idea for the burrito bond come about?
Eric Partaker: We knew the guys at Crowdcube, who told us about a new mini-bond product they were launching. It was perfect timing; we’d been trying to transition from equity finance to debt finance for about six months but had only managed to sell £80,000 of Chilango debt – partly because we hadn’t been able to reach out to a big enough audience. Crowdcube gave us an official platform: we suddenly had access to a registered database of 75,000 users, as well as the 20,000 people who were coming through our restaurants every week. The name burrito bond, which we trademarked, came about because we offered incentives in burritos to our investors.
What did your investor base look like and why do you think the burrito bond attracted so many people?
Dan Houghton: The distribution of the investment was quite interesting. Over 100 people invested £10,000 or more but there were also people who invested smaller sums of £500 or £600. Around 80 per cent of investors came from London and the south of England and we think the majority had heard about or been to Chilango. There are a number of reasons we think the bond was attractive, above and beyond the fact that we were offering an interest rate of eight per cent. We were doing something different: we were offering, for the first time, I believe, an incentive in burritos rather than simply offering cash. And the individuals who invested £10,000 or more received a Chilango Black Card, which entitled them to a free meal per week for the duration of the bond.
What were the risks and challenges of launching this type of bond?
Partaker: Crowdcube were an awesome partner and they helped us every step of the way. They took all the complexity out of doing something like this. The beauty of partnering up with them was that they had Financial Conduct Authority (FCA) approval – and they are the ones who regulated everything, not us.
Houghton: There are steps you have to take as part of doing a financial promotion. Anything that was in the invitation document, had to be verified by lawyers. Crowdcube helped us with that, but they also looked at our accounts and we worked with them to show that we could service the debt. We shared everything as part of the due diligence. It was more time-consuming than challenging.
How do you plan to use the money raised from the bond?
Partaker: It should free up lots of time, going forward, to focus on the internal side of the business. With the funds we will be able to get our next four units open and that will take the group to 11. From there we believe we have a very solid foundation to grow throughout London. If you look at some of the people who have got behind us, such as the chief executive of Carluccio’s, Simon Kossoff, most of them have come from large, multinational backgrounds with hundreds of units. That is very aligned with our long-term aspirations for Chilango and for the brand.
What advice would you give to other SMEs who are thinking about trying to raise finance in this way?
Houghton: The key is to think about the incentives; there’s more to it than just an interest rate. Being engaged in the direct sale is very important. Consider how you can make the incentive fun – it’s a great way of attracting people. Also, really think about creative ways to get PR, such as being in touch directly with people on Twitter.
Partaker: You have to have patience. We experienced a big burst of investment in the beginning, it plateaued in the middle, and then there was another burst at the end. There were times we didn’t think the bond would break £2m. But then we weren’t factoring in those times when we would raise £150,000 in a single day. There were other days when we might not raise any money or even lose a bit. It’s about having some patience and belief that it will work.
Will alternative finance become the main route of funding for SMEs in the future?
Houghton: It is clear that crowdfunding is definitely here to stay. The government changed the regulation to allow mini-bonds to be included and I’m certain it’s going to continue growing. These changes in regulation are helping small businesses to raise money more easily even in a tough market, but this type of funding is not incompatible with bank debt. With a bank you might get a slightly better rate but you would also get covenants and no engagement with your customers. There is room for both but they are different.
Where would you like to see Chilango in the next five years?
Partaker: The whole company exists to brighten up people’s days. Our key brand word is ‘vibrancy’ and our goal is for customers to leave our restaurants happier than when they came in – it’s something we think people the world over can buy into. That, and the fact that Mexican food, it seems, is completely untapped outside of Mexico and the US, means the potential feels massive. We believe we have a global brand in the making, but for now it’s getting the next few restaurants open, with our immediate focus on central London.
What is your perfect burrito?
Houghton: Prawns with basil crema, pico de gallo, salsa verde, fajita peppers and onions and rice!
Partaker: For me, it’s got to be a surf and turf burrito, which is a full portion of steak with prawns, rice, black beans, sour cream, cheese, guacamole, lettuce and all three salsas – it’s just bliss.