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Crowdfunding Offers Alternative Means of Financing

Crowdfunding Offers Alternative Means of Financing

What goes up must come down. Many experts are saying that the hotel industry has reached the peak of the current cycle. While most industry benchmarks—occupancy, ADR, and RevPAR—are still on the higher end of recent memory, others are starting to show signs of impending downturn. In particular, lenders are starting to become more stringent with funds, making it more difficult for hoteliers, especially ones new to the industry, to get development projects off the ground. Add this caution to lending restrictions that went into place from the Dodd–Frank Wall Street Reform and Consumer Protection Act in December, and the idea of breaking into hotel development can seem daunting.

But for intrepid hoteliers, lack of major lender support doesn’t have to be the end of their development aspirations. The past few years have seen a sharp increase in the use of crowdfunding to finance big projects that otherwise wouldn’t move forward. LODGING has already covered a few crowdfunded properties, including the Purpose Hotel, which will be a socially conscious property that gives back to the community and world at large with every aspect of its rooms and services. The Purpose Hotel’s Kickstarter (an online crowdfunding service) raised $679,587 from 4,236 backers—almost double its original goal of $347,000. It is expected that the industry will continue to see more and more projects funded in this manner as time goes on.

Even though crowdfunding can be a reliable source for raising capital now, the very idea of soliciting investments via the internet seemed untenable 20 years ago. The primitive web wasn’t set up to send money, and oftentimes exchange of currency could even be illegal. However, that doesn’t mean the concept of crowdfunding wasn’t sound. After all, that’s how Bob Rauch, CEO of San Diego, Calif.-based hotel management and consulting company RAR Hospitality, got his start in the hotel business.

In 1996, Rauch had a very successful hotel consulting company. The income was good, but the hours were grueling. “My wife said to me one day, ‘How are you going to work this hard forever? You help someone make millions of dollars, and then the contract’s over and all you have is your fee.’ I said the only way to fix that would be to buy a hotel, but we didn’t have enough money. She said she’d get some cash advances on her credit cards, and I decided I would raise the rest,” Rauch describes.

So Rauch’s wife took out $50,000 in advances from credit cards, and Rauch approached family and friends, asking if they would be interested in investing in his hotel. He raised $350,000. That money, along with what his wife was able to secure, gave him the leverage he needed to purchase a struggling property in a phenomenal long-term location. The owner of the hotel wanted $2 million for it, but Rauch was able to convince him to take the $400,000 and he’d pay off the rest at 10 percent interest.
It took two years, but Rauch paid off that loan in full. Three years after that, he sold that first hotel for profit, bought some land, and built two hotels on it. Once he had the experience of the first property under his belt, lenders were willing to work with him. Now, RAR Hospitality owns seven properties and manages a further 14.

Rauch learned a lot when he was trying to get financing for his first hotel, and he believes these lessons are more relevant in today’s world of web-based crowdfunding than ever before. “Honestly, I think today’s crowdfunding is just a higher-tech version of what I did 20 years ago,” he says.
One of the most important takeaways from the experience was that relationships are the foundation of everything when looking for investors. “It wasn’t like my family had a lot of money,” he explains. “So I had to go to friends. And they weren’t personal friends, they were people who developed faith in me over the years as a hotel consultant. And when I paid back those investments, it solidified our working relationship.”

While raising money over the internet isn’t quite the same thing as asking people you know for an investment, the necessity of building a relationship stands. Look at today’s crowdfunding sites—almost all of them send investors updates on the project. It’s a virtual relationship that’s based on trust. If a project gets funding and stops communicating with investors, those investors will lose trust and not want to work with the person behind that project again.

Rauch also says that anyone looking to crowdfund should be extremely comfortable with their pitching abilities. “One has to develop the confidence to be able to stand up and talk to someone who has the wherewithal to make life a lot easier. I always encourage people to have a fantastic elevator pitch—just have those 15 seconds ready. If you run into somebody unexpectedly, you have to be prepared,” he adds. “If you can sell yourself as someone who understands how to build the market, how to run the business, and how to make a return on the equity invested, it’s that simple. Everything else will fall into place.”

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