Though restaurant IPOs have remained elusive in recent years, investment into both restaurant chains and restaurant technology remains on the rise. Funding to the restaurant delivery space, for instance, reveals that there remains plenty of opportunity on the horizon.
Restaurants and restaurant technology companies often turn to Private Equity and Venture Capital in their quest for expansion. The biggest restaurant chains (specifically in the franchise market) still rely heavily on commercial lending. And, of course, mergers and acquisitions remain a significant part of the foodservice industry.
Here is a rundown of restaurant investment definitions:
Equity Financing: The process of raising capital through the sale of shares in an enterprise (i.e. the sale of an ownership interest in a company in order to raise funds for the business’ expansion).
Private Equity: Individuals and firms that invest into private firms, or perform buyouts of public firms with plans to take those firms private. The underlying motivation is to achieve a positive return on investment. A private equity investment will generally be made by a private equity firm, a venture capital firm or an angel investor.
Venture Capital: A form of financing provided to small, early-stage firms that are deemed to have high growth potential. Venture Capitalists (VCs) invest in early-stage ventures in exchange for equity or an ownership stake in the company. VCs are typically looking for large (5-10x+) returns, and therefore often seek to bring the business to its initial public offering (IPO) stage so that they can sell their shareholdings at a high profit. They often demand 50% or more ownership over the investee’s firm in order to offset their high risk.
Angel Investor: Affluent individuals who invest in startups or entrepreneurs, providing capital through either a one-time investment or an ongoing injection of fund to support a company in its early stages. Angel Investors are essentially the opposite of Venture Capitalists and often include an entrepreneur’s family and friends.
Seed Capital: The initial capital used when starting a restaurant or other business, often coming from the founders’ personal assets or friends and family and used to cover initial operating expenses and to attract venture capitalists. The first round of institutional venture capital to fund growth is called the Series A round (followed by Series B, C, and so forth).
Down Round Funding: Funding that occurs when investors purchase stock or bonds from a company at a lower valuation than the preceding round.
Adventure Capitalist: An investor who takes stake early on in a restaurant or businesses with an uncertain chance of success (i.e. those that are riskier), and often actively participates in their management. These specific types of venture capitalist are often more accessible, but typically without as much funding, as a traditional venture capitalist.
Debt Financing: Financing that occurs when a firm raises money for working capital or capital expenditures by selling bonds, bills or notes to individuals and/or institutional investors.
Institutional Investor: A large organization (i.e. bank, pension fund, mutual fund, labor union, or insurance company) that makes substantial investments on the stock exchange. They invest in private equity and venture capital because of its consistent ability to deliver superior long-term returns and outperform other asset classes. Because they’re considered to be more knowledgeable than the average investor, institutional investors are subject to fewer of the Securities and Exchange Commission’s protective regulations.
Pension Funds: A fund (accumulated from contributions from employers, employees, or both) from which pensions are paid. While historically these funds were limited to investment primarily in government securities, investment-grade bonds, and blue-chip stocks, changing market conditions have resulted in pension plan rules that allow investments in most asset classes.
REIT (Real Estate Investment Trust): A company that owns or finances income-producing real estate. REITs are modeled after mutual funds, and provide investors with regular income streams, diversification, and long-term capital appreciation.
Hedge Fund: An alternative investment vehicle available only to sophisticated investors, such as institutions or individuals with significant assets. Like mutual funds, hedge funds are pools of underlying securities. Hedge funds face less regulation than mutual funds and other investment vehicles.
Mezzanine Capital: A hybrid of debt and equity financing that has elements of both private equity and investment banking. Mezzanine financing can be structured either as debt (typically an unsecured and subordinated note) or preferred stock.
Non-Institutional Investor: The opposite of institutional investors (i.e. anyone who buys and sells debt, equity or other investments through a broker, bank, real estate agent, etc.). Non-institutional investors manage their own money, usually to plan for retirement or to save for large purchases.
Commercial Bank: An institution that manages deposits, such as checking and savings accounts, for both businesses and individuals. Use of commercial loan proceeds for restaurants include: refinancing, construction, expansion, the improvement of owner-user commercial real estate, business acquisition, and the purchase or refinancing of machinery and equipment.
Crowdfunding: A form of crowdsourcing and alternative finance; the practice of funding a project or venture by raising monetary contributions from a large number of people. Popular crowdfunding sites include Kickstarter, gofundme, and indiegogo.
Investment Bank: An institution that facilitates the buying and selling of stocks, bonds and other investments. Investment banks also assist companies in going public with initial public offerings (IPO), as well as provide advisory services.
Public Equity: The stocks that comprise mutual funds, 401(k)s, and IRAs. The mechanism for garnering public equity is via an initial public offering.
Initial Public Offering: Whereby a company begins selling its stock on an exchange; also known as an IPO.
Merger: The process by which two organizations join forces to become a new business, usually with a new name.
Acquisition: The process by which one business buys a second (generally smaller) company which is then absorbed into the parent organization or run as a subsidiary. The company acquired is often referred to as the ‘target’.
Leveraged Buy-Out: The acquisition of a company using a significant amount of borrowed money. The assets of the company being acquired are often used as collateral for the loan, along with the assets of the acquiring company.
Nano-cap Company: A company with a market capitalization of less than $50 million.
Micro-cap Company: A company with a market capitalization of roughly $50 million – $300 million.
Small-cap Company: Companies with a relatively small market capitalization. Though the definition can vary, small-cap generally refers to a company with a market capitalization of between $300 million and $2 billion.
Mid-cap Company: A company with a market capitalization between $2 billion and $10 billion.
Large Cap company: A company with a market capitalization value of more than $10 billion.
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Aaron Allen & Associates is a leading global restaurant industry consultancy specializing in growth strategy, marketing, branding, and commercial due diligence for emerging restaurant chains and prestigious private equity firms. We work alongside senior executives of some of the world’s most successful foodservice and hospitality companies to visualize, plan and implement innovative ideas for leapfrogging the competition. Collectively, our clients post more than $100 billion, span all 6 inhabited continents and 100+ countries, with locations totaling tens of thousands.