Post Kickstarter- When Capital Fuels Growth of New Business

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After the euphoria of a successful Kickstarter campaign for new entrepreneurs, the real lessons begin.

Their idea to create gourmet donuts with mouth-watering toppings such as tres leches or Vietnamese iced coffee was received so enthusiastically that entrepreneurs Jason Hill and Matt Opaleski managed to raise $58,000 in just 30 short days on Kickstarter in 2014 for their new gourmet donut shop, Hugs & Donuts.

The new owners were thrilled that their customers, especially ones they had garnered from their loyal followers across the social media spectrum of Facebook and Twitter, would embrace their new business.

"We were happy we were able to raise all of that money from our customers over the past few years," Hill said.

As they soon discovered, the real challenges of starting a business begin rapidly after the excitement from the Kickstarter campaign ends.

Before they ever sold a single donut or poured fresh milk from their taps, the owners of Hugs & Donuts said they were beset by myriad issues, ranging from waiting for permits to get approved to constant construction delays. The 10-month delay meant that the Houston business was forced to spend $39,000 of the capital that was raised just for rent alone. Remodeling the 962-square-foot dine-in shop meant the owners had to shell out another $170,000.

Entrepreneurs Jason Hill and Matt Opaleski working at their new donut shop

"Once you run your own business, you comprehend how little you know."

Product Creativity vs. Business Insight

Being a chef for 20 years at fine dining restaurants meant that Hill could create inventive recipes that kept his customers coming back. He has ranked consistently on the Top 100 lists of entrees in Houston, but being a chef gave him little insight into running his first brick-and-mortar company.         

"Once you run your own business, you comprehend how little you know," he said. "You can only do so much as the chef and owner and try to manage both the front and back of the house."       

Ensuring the Law Is On Your Side

When he first started serving grilled cheese sandwiches, Korean pork belly tacos, short-rib mac-and-cheese sandwiches and boudin balls from his food truck, H-Town StrEATs in 2010, the company hired a lawyer to take care of its legal issues. When the lawyer did not make the company a priority, Hill decided to expedite the process by using LegalZoom.com Inc. so the company could incorporate as an LLC and, in the process, learned that he could take care of most of the legal paperwork himself.

Hugs & Donuts hit another snafu when, three months after it opened, the water was shut off one afternoon. The shopping center where the donut shop is housed was sharing one water line with six other stores, including a homemade ice cream store, a hair salon and a real estate agency. Hill said he was not aware that the water bill needed to be divided among the businesses and each one had to apply for a permit to obtain service individually. After sending in the right permit, the water was turned on the next morning, just in time for the morning bustle of customers.

Incentivize Workers

Although the 1.5-year-old donut shop has had no trouble garnering repeat customers, one issue the owners have run into consistently is finding employees who demonstrate good customer service skills, especially during the rush hours before the morning commute starts. They introduced incentives to all 17 of their employees, from the cashiers to the bakers, and that has boosted morale and productivity.

"Employees need incentives, so we have a tip pool which extends to [the] bakers," Hill said. "We also try to promote people from within and give them further training, especially those in culinary school."

Planning Ahead to Avoid Expensive Missteps

Small-business owners undergo many trials and errors and many of them learn lessons the hard way – a failure or misstep can either lead to better service or more headaches.

Running out of cash is a common problem for small-business owners and it can prove to be "fatal," said Jerry White, director of the Caruth Institute for Entrepreneurship at Southern Methodist University's Cox School of Business in Dallas.

Most business owners understand the concept that if you lose money "long enough, eventually you run out of cash," he said.

The antidote is a strategy of increasing revenues while lowering expenses, said White, who teaches entrepreneurs who are working to become business owners and helps them prepare for the challenges.

Between the money generated from the sale of the food truck and the help of two silent partners, Hugs & Donuts survived and flourished after coping with the interruptions.

"It's just the way Houston is," Hill said of the construction delays. "There are so many businesses opening that they get behind. Everything was behind schedule, but there were also a ton of legal hoops to jump through, including some that we weren't aware of, that kept slowing us down."

Another problem that many small-business owners run into is ensuring the right paperwork is filed, said Alon Rotem, general counsel for Rocket Lawyer Inc., the San Francisco-based online legal services company whose investors include Google Ventures. Since 2008, the company has helped 900,000 businesses incorporate and create 3 million legal documents.

"It's important that small businesses stay on top of legal issues, such as incorporating their businesses, documenting contractual arrangements and maintaining appropriate insurance coverage," he said. Taking these basic actions can avert possible pitfalls so that entrepreneurs can focus on growing their business."

Incorporating provides owners with liability protection, reinforces their business name, establishes greater legitimacy and helps with tax planning, Rotem said.

Developing legally binding contracts for employees, contract workers and vendors will help ensure "clear responsibilities and that the rights and obligations are agreed upon by all parties," he said.

Ways to remain compliant include knowing what documents need to be filed and keeping accurate records.

"A good practice for owners is to keep records for at least seven years," Rotem said. "If the IRS or [a] disgruntled employee, shareholder or business partner has a dispute [with the owner], proper documentation is paramount [for] a successful resolution for your business."

Hitting the Sweet Spot

Now the largest issue the owners of Hugs & Donuts must face is when or if they open a second gourmet donut shop. Their customers are eager for another location. Investors are not far behind and are making requests several times a month, Hill said. But he remains steadfastly mum on this topic, another skill he has learned after surviving the first year after opening a business.

Original article: www.eastwestbank.com

Written by: Ellen Chang

Shana Grossman