Charity Case: Can a Restaurant That Gives All Its Profits Away Succeed in D.C.?
Not many restaurant opening parties kick off with a PowerPoint presentation.
But during last week’s debut of the U Street NW corridor “philanthropub” Cause, founders Nick Vilelle and Raj Ratwani stood before the crowd in suits with microphones in hand.
“I never thought I’d be using graphs in a bar,” Ratwani told about 50 people. He pulled up a slide showing that younger people eat out more than others, then another that showed they also donate less to charity. “Coming from a cognitive psychology background, what I want to do is integrate these two, and that’s exactly what we’re going to do with this bar concept.”
Cause will operate like any other bar: You come in, buy drinks, eat food. The restaurant pays its staff and its bills. And then it does something completely unheard of in the restaurant industry: It gives 100 percent of the profits to charity.
At the opening, Ratwani quickly acknowledged to the crowd of nonprofit reps, friends, and media that he and Vilelle have no restaurant experience. “Two psychologists trying to start a restaurant? I’m sure everybody knows the statistics about the failure rate of restaurants.”
That’s where The Light Horse owner and restaurant vet John Jarecki came in. Now the managing director of Cause, he told the audience that Ratwani, a friend of a friend, first approached him about opening a bar five years ago. “I said, ‘Well, what experience do you have?’ And he said, ‘None.’ So I said, ‘Do me a favor, take what money you had for opening this bar, and flush it down the toilet. You’ll thank me in five years.’”
Ratwani and Vilelle came back to Jarecki a year ago and pitched a more developed business plan. The idea struck a chord with Jarecki, whose family members are heavily involved in nonprofit causes. “I said, ‘This is amazing. We’ve got to do this. Let’s paint ourselves into a corner and make this happen, because it needs to happen.”
What happens next is an experiment. As far as the founders know, no one has ever done anything like it.
But the idea seems to be a product of our time: Social enterprises—revenue-generating businesses with social or environmental goals—are the hot new model in philanthropy. Toms Shoes, for example, has become the poster child for profit with a purpose, giving away a pair of shoes to a child in need with every purchase. The company has donated more than 2 million pairs of shoes, while remaining one of the most popular consumer footwear brands. Cause wants to accomplish something similar in giving back while giving people what they want. But whether the do-goody concept can work in the unrelenting, fickle restaurant industry has yet to be seen.
Vilelle and Ratwani believe D.C. is the perfect guinea pig. The city has one of the largest concentrations of nonprofits in the country, and a significant population of well-to-do young professionals. Cause’s founders may be the first to acknowledge the high failure rate of restaurants, but they still believe they can make their idea work.
The plan was hatched about five years ago over beers at Clarendon Ballroom. Vilelle had just come back from a Peace Corps stint in Togo, and Ratwani was working on his cognitive psychology Ph.D. at George Mason University.
Looking around, they saw all the cash that young professionals were spending on drinks. “This money!” Vilelle remembers thinking. “What it could do in my village is just mind-boggling.” Meanwhile, Ratwani was searching for a way to give back, but he didn’t have much money or time, especially working up to 80 hours a week on his dissertation.
“You always find time to grab a beer, is one thing I noticed,” Ratwani says. He and Vilelle thought a restaurant and bar would be a fun, easy way for people to give to charity by doing something they already do. They tossed the idea back and forth over a few years before getting Jarecki and his partner at The Light Horse, Dave Pressley, on board.
Cause will choose between three and six small local and international organizations to benefit each quarter. The groups go through an application process and are vetted by a five-person advisory board of volunteers with backgrounds in law, finance, and nonprofits. The chosen organizations are listed on the menu, and when guests receive their bill they’ll check a box for which group to support. Servers are also trained to give information about the groups in the same way they might tell you what’s in the African chicken groundnut stew. But Cause’s founders don’t want the charity angle to be in your face. “We don’t want a ‘Do you want to round up for breast cancer?’ situation. We don’t like those, because you feel like an asshole saying ‘No,’” Vilelle says.
Cause is not a nonprofit. Selling food and alcohol makes it difficult to qualify for tax-exempt status with the IRS; those sales would likely count as what the IRS calls “unrelated business income” and be taxed anyway. Also, Cause is not carrying out any charitable activities itself. Although it misses out on some of the tax benefits of a nonprofit, operating as an LLC gives Cause the flexibility to donate to causes (or other social enterprises) that might not be registered 501(c)(3)s, Vielle says.
Eventually, if it becomes possible, Cause may become a “B Corp” or for-benefit corporation, a new designation popping up in some states (though not yet D.C.) for businesses that have a mission for social good.
Cause still aims to have the level of transparency that’s legally required of nonprofits. Vilelle and Ratwani believe the only way to satisfy critics who think they’re taking big salaries or using charity as a gimmick is to be up-front about their financials. So Cause will post all its salaries and expenses on its website at the end of each quarter. Screens near the restrooms will also visually display the numbers.
Start-up costs have been minimal. Cause opened with $100,000 in debt, very little compared to most restaurants, which often spend at least half a million dollars to open. The restaurant raised $23,576 from the crowd-founding site Indiegogo to help with build-out of the space. Other costs were offset by pro bono legal, graphic design, and PR work. Chef Adam Stein will share his time between The Light Horse and Cause, so Cause won’t have to pay him a full-time salary.
Ratwani doesn’t plan to take a salary for now (he has a full-time job as a senior research scientist for MedStar Health), and Vielle says he will only pay himself for the hours he works in the restaurant and the jobs he does. So if he buses tables for a night, he’ll pay himself a busboy’s wage.
Cause plans to pay down its debt to private investors over about five years. That way, it will be able to give to charity from day one. Financial Foods co-founder Adam Williamowsky, who consults with D.C.-area restaurants on development and investment, says most full service restaurants take four years to pay off investors. First-time restaurateurs typically don’t pay back anything in their first year.
Cause is also protecting itself against a common source of financial trouble for restaurants: the lease. Rents can jump significantly when a lease ends, forcing restaurants out. But in this case, Cause is its own landlord. A group of Cause investors purchased the property at 1926 9th St. NW for $930,000. By owning the building, they’re able to subsidize the rent for the restaurant at about 20 percent below market value. Cause’s founders say the building’s investors will still make money from the rent, but less than they would otherwise.
Ultimately, Cause will still need to draw a crowd if it wants to stick around. Williamowsky says sustaining any business—nonprofit, restaurant, or otherwise—always boils down to providing a quality product. For Cause, that means not just supporting great organizations, but also quality food and service.
Just to break even, the restaurant will need to bring in about $1 million a year. According to the National Restaurant Association, the average profit margin for restaurants is 4 to 6 percent. Jarecki says he’s projecting a profit margin between 10 to 20 percent (revenues of $1.1 to $1.2 million). Williamowsky says the full-service restaurants he’s worked with in the area see profit margins between 8 to 14 percent, on average. Successful fast-casual spots can do better than 20 percent.
Cause’s goal is to give away $100,000 in its first year. “Some people say we’re crazy,” Vilelle says. “But I think we’ve done a lot to keep our overhead low.” If it’s successful, Vilelle and Ratwani want to open up other locations across the country, and possibly internationally.
The duo think the exposure they’re giving nonprofits may ultimately be more valuable than their donations. By simply going out, thousands of people will at least learn about the organizations, and Cause’s founders hope some will later donate or volunteer.
“Neither Raj or I are in this for money,” Vilelle says. “It’s more like a challenge. Can we pull this off? Can we create this impact?”
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Photo by Darrow Montgomery
CORRECTION: Due to a reporting error, a previous version of this story mistakenly referred to benefit corporations as a tax designation. A benefit corporation is a type of corporation designated under state statutes. A B Corp is a certification that any organization can obtain through the organization B Labs.