Fundraising for your Escape Room Business in 2020

Fundraising for your Escape Room Business in 2020

From dipping into your own savings to equity financing, the fundraising options to start your own escape room are many.

While you may recognize some of these escape room fundraising options as the stuff you already know, fundraising for escape rooms, in particular, comes with its own set of challenges, just like fundraising to start any other kind of business.

You can escape High Finance for escape rooms – Victor Blake left a promising career in finance to set up Escape The Room – but you cannot escape the financing puzzle when you want to set up an escape room.

An escape room can pay for itself, once it’s gained some bookings momentum. However, fundraising at the outset – when you’re setting up an escape room – can be challenging.

Even after your escape room gains some momentum and you’ve got players coming in, you’re the talk of the escape room circles on social media, you may want to expand…and once again, you may need some financing to expand your escape room business.

What are the options you have to get the financing you need to set up or expand your escape room business?

Formal and informal financing

At its very basic, fundraising can be formal or informal.

Informal fundraising

Informal fundraising is self-funding or someone giving you funds on a personal basis. Informal fundraising sources include

  • Self-financing
  • Family and friends
  • Crowdfunding

Pros

  • The funding generally comes with no legal conditions attached.
  • You may not face constant queries about financial targets.
  • You can engage with your investors on a personal level.

Cons

  • The amount of money you can raise from informal sources is not very high.

Formal fundraising

Formal fundraising involves someone giving you funds on a professional basis (in exchange for part ownership/equity or as a loan). Formal fundraising sources include

  • Angel investors
  • Venture capital firms
  • Business incubators and accelerators
  • Banks
  • Public institutions (like a government entity)

Pros

  • You can raise higher amounts from formal sources.
  • Your investor(s) may be able to help you with some aspects of your escape room business.

Cons

  • You may need to follow some legal conditions to avail of formal funding.
  • You may not agree with the kind of advice or directions your investor(s) is/are giving you.

Let’s now go into the individual types of fundraising in a little more detail.

Self-financing your escape room business

Nate Martin set up Puzzle Break with $7000 of his own money.

In many ways, self-financing is the best financing of all. It’s your money you’re using and you owe nobody anything, legally or otherwise.

On the other hand, it’s important to be judicious in self-financing.

An escape room business, just like any other business, has no guaranteed returns or capital protection.

It may be very tempting to cash out your nest egg because you’re investing in your love for escape rooms but prudence demands you refrain from taking risks with crucial funds like your retirement money.

We’ve also come a long way from when Nate Martin set up Puzzle Break with $7000 of his own money. Nowadays, $7000 will very likely not suffice to set up an escape room.

The biggest advantage of self-financing may be symbolic. It will show other prospective investors that you’re willing to put your money where your escape room plan is.

Pros

  • The funds come with no strings attached.
  • You don’t need to negotiate with anybody to avail of the funding.
  • You can build your escape room business entirely as you want to.
  • It shows other investors you have skin in the game.

Cons

  • The excitement of investing in your passion – escape rooms – may lead to financial decisions that you regret later.
  • Self-financing will typically not suffice to get your entire escape room up and running.

Family and friends

Asking your near and dear ones for some help to get your escape room business off the ground is the next option.

Depending on your relationship with them, this might be similar to self-financing.

There is one pain point, though.

Relationships may turn sour

Not everybody may be willing or able to provide you with funds. And, if your escape room business runs into rough weather, some of those who did provide you with funds may feel angry or let down.

In either case, there’s a chance of personal connections being disrupted.

If you do try to raise money from family and friends, make sure you do your bit to explain to them the risks involved. And, be prepared for some disappointment since not everybody may be able to provide you with funds.

Pros

  • Generally, the funding comes with no legal strings attached.
  • You won’t be under constant pressure to meet performance targets.
  • You will have a personal connection with your investors.

Cons

  • Some relationships may be affected.
  • How much money you can raise depends is completely unknown.

Crowdfunding your escape room

Crowdfunding – asking people at large, generally online, to fund your business idea – has attracted a lot of attention in recent times.

Some escape room crowdfunding pitches have been very successful.

For escape rooms, there are many pitch themes that may resonate well with crowdfunding donors, like

  • A fantasy world right in the middle of {wherever your location is}.
  • A chance for people to disconnect from their virtual worlds and bond with each other in the real world.
  • A little guy looking to fulfil their entrepreneurial aspirations and become a job-provider to others.

All that being said, you need to keep your expectations realistic. For every success story there can be ten failures.

In fact, Room Escape Artist founds that escape room crowdfunding campaigns have a 25% success rate (which means only 1 in 4 campaigns raised their target amount or more).

That study is a couple of years old; things may have changed in the meanwhile.

However, you should always remain realistic over the success of your escape room crowdfunding campaign.

Pros

  • The funding comes with few strings attached.
  • It’s indirect marketing of your escape room.
  • You can get a feel of whether people at large are interested in your escape room business.

Cons

  • A lot of crowdfunding campaigns fail.
  • You may not be able to raise a lot of money.
  • You’ll be competing with a lot of campaigns so you’ll have to put in time and effort to promote your campaign.
  • Some crowdfunding platforms don’t allow you to access the amount raised if the campaign fails (that is, donations miss your target). In that case, whatever effort you spent promoting your crowdfunding campaign would have been wasted.

Angel investors funding your escape room business

An angel investor is an individual who looks for opportunities to invest their own money.

Generally, an angel investor would be able to provide you with enough money to set up your escape room or even to expand.

However, you can expect to face scrutiny of your business plans by the investor. You may also need to give them a stake in the company.

Angel investors come in all shapes and sizes

Your friend, a successful lawyer with cash he wants to invest, could be your angel investor. Jamie Dimon, if he so decides, could invest his personal money in escape rooms and become an angel investor.

Pros

  • Generally angel investors can provide you enough funding for you to set up or expand your escape room business.
  • A lot of people would be willing to invest in an entrepreneurial venture.
  • They may be able to help you with your business and expansion plans.
  • They may be willing to fund riskier businesses – maybe an escape room in an offbeat location or following an unconventional theme.

Cons

  • You may need to give angel investors a stake in your business.
  • You may not agree with the kind of guidance they provide.
  • You may find it difficult to keep up with their expectations of business performance.

Venture capital firms funding an escape room business?

A private investor invests their own money; a venture capital firm pools money from its clients and invests their clients’ money (like a mutual fund house).

In this case, your pitch would be judged by professional wealth managers who would ask for a lot of documentation and closely scrutinize your business proposal.

Generally speaking, an escape room startup would not be considered by a venture capital firm. If you already have a successful operation with a location, staff and bookings and revenue history, your funding needs for opening new branches may be taken up by a VC firm.

Pros

  • You can raise a lot of capital.
  • VC firms may be willing to fund risky projects, like expanding into other countries.

Cons

  • You may be forced to give them equity in your company.
  • They can sell their stake whenever they want; you may not agree with their plans.
  • You will be under pressure to supply them with data and keep up with performance targets.
  • Startups may not be considered for funding by VC firms.

Business incubators and accelerators

What’s the difference between an incubator and an accelerator?

A business incubator helps a completely new company find its footing.

An accelerator helps a relatively new firm scale up.

Typically, incubators and accelerators provide mentoring, workspaces, training and networking. But some of them do directly provide or arrange for financing; with legwork and luck, you may find one that does.

Pros

  • You will be part of an energetic entrepreneurial community (incubators and accelerators work simultaneously with a lot of different companies).
  • You can get a lot of help in the form of mentoring and networking.
  • The brand value of the incubator/accelerator may power your own brand.

Cons

  • A lot of incubators and accelerators concentrate on non-financial assistance.
  • Typically these programs run for one to two years which may not suffice for you.
  • Funds may be provided for equity, which means sharing ownership and control.

Banks to finance your escape room business

Banks provide debt funding which means you don’t need to share ownership with them. You will, however, have to pay interest on your loan, which is money you could have reinvested in your escape room.

With a bank loan comes a repayment schedule; if you fail to stick to it, the bank may be able to seize your escape room.

While bank loans do prove useful, whether you get them depends entirely on how the bank views your escape room business proposal.

Pro tip: Make sure you understand the exact terms of your credit/loan agreement with the bank. For example, if you’re availing of a variable rate loan, ensure that the rate reset gels with your business plans.

Pros

  • Banks provide loans of various sizes, which means both escape room startups and existing rooms looking to expand are eligible.
  • You don’t need to share ownership or control with the bank.
  • As long as you stick to the repayment schedule, the bank can’t turn over the loan to anybody else.

Cons

  • You will need to pay interest on the loan which will eat up capital you could have reinvested into your business.
  • Banks may be reluctant to invest in startups.
  • The bank can seize your escape room if you fail to meet your repayment obligations.

Government or public institutions

When you encounter zoning laws, revenue regulations and building inspectors during the setting up and running of your escape room, you may start thinking government is indeed the problem.

However, when it comes to getting funding for your escape room business, the government or public institutions can be helpful.

For example, if your escape room qualifies as a small business, you could avail of help from the Small Business Administration to get a business loan and you may be able to avail of assistance from the SBIR/STTR program of the federal government.

NOTE: You can even consider VR Escape Rooms as they require less formalities than traditional escape rooms that come with their own baggage of Security, Insurance, Fire and Safety concerns. There are options like UBISOFT, Virtual Rooms, Bane Escape and some more promising additions like Entermission that offer environmental haptics and leap-motion for more immersive gameplay. 

Pros

  • You don’t need to share ownership or control of your escape room.
  • You should be able to get the capital you need.

Cons

  • You will have to face a bureaucratic process to get your loan cleared.
  • As an entertainment business, you may be lower in the list of priorities than a company in sectors like medicine or agriculture.

How do you decide which kind of funding to go for?

First, you need to create a business plan.

Then, you need to create a draft budget.

Third, you need to set up a revenue plan, to see what your expected cash flow is like.

Based on your needs and your expectation of revenue, choose whichever funding gels best with them.


About the author

Piyush is the founder of SEO ORB, a digital marketing company that specializes in working with escape rooms to scale up their business by digital marketing.

His digital marketing portfolio includes stints at Extreme-SEO, Internet Marketer’s Education and BuyQualityPLR.

When he’s not doing escape rooms with his mates, or handling digital marketing for his clients, Piyush may be found in his den, playing computer games.

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