Investment lawyer Youngro Lee was paying close attention when President Obama signed the Jumpstarting Our Businesses Act into law seven years ago, lessening securities regulations to make funding of small businesses easier. The graduate of Bard College at Simon’s Rock in Massachusetts had teased the idea of starting a business that aided local businesses, and with these laws, he could.
The opportunity seemed clearer after Texas adopted its own intrastate rules on online investing in 2014. Lee called his friends, Bob Dunton and Abe Chu, and decided to establish roots in Houston—Lee had connections to the investment industry here, and Chu had attended Rice University. The online investment company would be called NextSeed, and they would focus on helping to fund aspiring fitness studios, restaurants, and wellness brands, both in Houston and across the country.
That, among other things, meant Dunton and Lee packing up and moving here, where Chu was living. They had to establish themselves over other traditional investment companies and convince everyday Houstonians that their contribution to these local businesses meant something.
In 2015, NextSeed became the first online investment firm to receive a special license related to the JOBS Act.
“You can’t hide behind some name, so I think the response initially was skepticism, because we’re not necessarily from that community to start with,” says Lee. “But as [Houston] saw how serious we were and how respectful we were about what we were trying to do, they started to let us in. We [now] get more deals through referrals than any other channels.”
NextSeed’s first business campaign was Clear Lake hair salon Hair Revolution. The salon wanted to raise $25,000, which it did. Lee says that afterwards, applications poured in.
Now, they only accept under 5 percent of the businesses that apply. A business accepted by NextSeed is given a platform for people to invest in them; as the business grows, its investors see a return on investment (businesses can pay back investors through term notes, revenue sharing notes, or by selling preferred equity), plus they may also receive special perks for their support. Before online crowdfunding was legal, it was harder for small businesses to get funding without having significant networking or a considerable financial track record. Since NextSeed’s inception, though, local businesses have raised about $13 million.
Successfully funded campaigns in the local food-and-drink industry include B.B. Italia & B.B. Pizza ($276,000 raised by 321 investors), the new Buffalo Bayou Brewing Co. taproom at Sawyer Yards ($1 million raised by 583 investors), and food truck the Waffle Bus ($107,000 raised by 129 investors), which will soon open its first brick-and-mortar operation in the Heights.
A Devoted Space
This year, NextSeed partnered with the landlord of Greenway Plaza to designate a space in its food hall, The Hub. The concession, called the NextSeed Space, allows restaurants to test logistics of a brick-and-mortar business for one to six months. There’s no investment opportunity with this space, but the exposure a business gets here is a critical step forward.
Tlahuac (pronounced “kla-wok”), a restaurant inspired by Mexico City cuisine, just finished its three months at the space. For months, Tlahuac co-founders Stephanie Velasquez and her boyfriend, Nicolas Vera, formerly of Xochi, scouted pop-up locations, including local breweries and farmers markets. While working a pop-up event at Axelrad Beer Garden, they met Jeff Kaplan, a local entrepreneur and principal at NextSeed.
“When we met Jeff, we started talking with him more about our background and our concept, and he got really excited about what we were doing and offered us the NextSeed space,” says Velasquez.
During the three months at the NextSeed Space, Velasquez, Vera and their team of three learned the ins and outs of running their own business.
“The space allowed us to have more creativity in a sense that we didn’t have to worry about constantly moving from one place to another and having to transport a small kitchen to different locations,” says Velasquez.
Velasquez and Vera are back to hosting pop-ups for a few months before traveling back to Mexico City and Veracruz, Vera’s hometown, for more menu ideas and inspiration. They’re hoping that NextSeed will accept their application to receive online investing next year.
Food truck the DoughCone is the latest arrival at the NextSeed Space at Greenway Plaza; meanwhile, the investment company just announced a second pop-up location with Boston’s The Chicken and Rice Guys in the Heights later this month.
Lee, Chu, and Dunton’s decision to start this business so early in the game has helped define what it looks like for the rest of the industry—in February, Lee was named one of the members of the Small Business Capital Formation Advisory Committee for the SEC. And NextSeed is changing how restaurants get made, and who’s behind them. According to NextSeed, 80 percent of funds have gone to businesses opened by women and minority owners.
“I see us making a direct impact in other people’s businesses and their lives,” says Lee. “That’s what’s most rewarding to me, is that we can work on something that’s tangible and have a big direct impact in their daily lives."