Dating for Investors
A serial entrepreneur finds an innovative way to cover the check
Daniel Shifrin was living a tough life in 2008. He took time off and spent much of that year hanging out at his family’s Colorado ranch. Well, it was tough for a self-described “serial entrepreneur” who is more accustomed to starting and running companies than taking it easy. “I was definitely bored,” Shifrin said. “I was thinking about my own unique stuff. But ideas don’t come around every day that are good ideas.”
He thought about buying into a franchise, and while he had the funds to invest, he was worried about the economy and wasn’t sure he wanted to take that full risk himself. So he decided to look for other investors with similar ideas. The trouble was, he had no way to find them. “I couldn’t find anybody,” Shifrin said. So created a platform where he could meet people interested in helping fund concepts. Last fall, he launched GroupedUp.com, a website where people can create investment groups to buy a franchise. His company also helps franchisors use their website to create investment groups. Shifrin is experienced at turning the road-less traveled into turnpikes. After noticing buses wrapped in large advertisements, he came up with Autowraps in 1998—an adhesive with an ad printed on it that is placed on cars like a second paint job. The advertiser pays the car owner a monthly fee for driving around their ad during their daily routine. He sold the company when the price was right, and then went to work for Zipcars, a membership-based car rental company.
So many businesses, so little money
The fact that GroupedUp is even needed is indicative of the state of franchise financing right now. Loans are difficult to come by, especially for people just getting into the game. “It’s a wreck out there,” Shifrin said, noting that it’s “almost impossible to get a loan for a franchise if you don’t have a minimum of 40-percent equity.”
Perhaps because of the challenges with the financing markets, GroupedUp appears to be attracting investors—Shifrin said he’s getting 10 to 20 registrations a day, although the company is doing no marketing or advertising.
A user on the company’s public website registers and can then either create a group looking for other investors or join an existing group. The groups on the site are based around a specific franchise, investment size, location and whether the group founder is looking for operational investors or passive investors. The groups are typically small, most commonly two to five members. For instance, an investor with $100,000 looking at a $400,000 burger franchise may post a group seeking three additional members, each with $100,000. Once three additional people join the group, the process advances to the next stage, where the company helps them negotiate details with an attorney and develop a shareholder agreement and an employment agreement.
GroupedUp receives a commission once a group signs on with a franchise, but the real moneymaker for the company may be in its “white label” product—a service that enables franchisors themselves to create investment groups on their own websites. Shifrin has 20 franchisors signed up thus far, while only five have agreed to participate in the public site. The Flip Flop Shops, a retail concept, is one company interested in the private label product.
Shifrin found out quickly that franchisors aren’t eager to share leads with other franchised companies. In addition, they already have lists of potential franchisees lacking capital but potentially interested in forming investment groups. “Some clients have told me that they have groups ready to go,” Shifrin said. “The white label product is going to be more successful going forward.” He added that it also requires less marketing, other than direct sales.Still, much like dating, many business relationships ultimately don’t work out. Shifrin said some potential problems are avoided in the planning stages—people who start groups indicate what kind of investors they’re looking for, while shareholder and employment agreements dictate roles and relationships, as well as buyout provisions and other issues.
Shifrin believes his company could be expanded beyond franchises to other industries like real estate. He could see investors forming real estate investment trusts, or REITs.
For now, the franchising product appears to be attracting interest from franchisors. Brian Curin, president and co-founder of Flip Flop Shops, said his company has “eight or nine” potential franchisees who might be good candidates for GroupedUp.
Roughly half of Flip Flop Shops’ franchisees are self-funded—highly unusual, but the company only began franchising in 2008, just as the credit crunch took hold. Its $200,000 initial investment is small enough for some to self-fund, but those without that much cash may have trouble getting loans from lenders that often prefer larger loans. “We’ve had some potential franchisees who were super candidates, they fit the vibe of the concept, but maybe had only $50,000 to $100,000 they had access to,” Curin said. The company thought about ways to pair some of those franchisees. “It was a strange scenario,” he said. GroupedUp can now do that work for them.
Even before GroupedUp came along, the Canadian-based casual dining chain Boston’s had been trying at least informally to put interested investors together when they didn’t have enough capital. Darren Bothe, director of franchise development, said its Canadian franchisees had long formed investor groups because stringent banking regulations there made 30-percent-down requirements common. When equity requirements increased in the U.S., the company thought it’d be a good idea to bring the idea of investor groups south. “Then we got a call from (Shifrin) for his service, and thought this would be a great way to continue what we started,” Bothe said.