I was recently asked about crowdfunding by the founder of a startup business that makes a range of non-alcoholic wine. There was nothing confidential in my reply, so I thought I’d share it with you.
You’re absolutely right that crowdfunding can be a more time consuming way to raise money compared to perhaps a VC investment or an angel investor. Yet there are other benefits that go way beyond the money it raises.
For example, VCs were queueing up to invest in Chapel Down (the celebrated English sparkling wine maker) when in 2014 they launched their equity crowdfunding campaign. Beyond raising £3.9m in three weeks, their CEO Frazer Thompson told me that crowdfunding had generated 1,500 brand advocates who would spread positive word-of-mouth, buy Chapel Down products at every gift-giving opportunity, and create sampling opportunities by stocking their wines (now beers as well since they built a brewery with some of the money they raised, and gin too) both at home and in their company drinks cabinets. Priceless!
Crowdfunding creates a virtuous circle whereby customers can become shareholders and shareholders become customers. I’m caught up in it myself as an investor in a craft brewery and a gin maker. If “my brands” are available, why drink others? Shareholders catapult themselves right up the brand loyalty ladder.
Hop Stuff Brewery started five years ago when it raised £58,000 through offering 34% of equity. It’s now valued at over £25m, with products stocked in Wetherspoons (which encourages lower than regular cost product trial), Tesco and Majestic Wine; it has a growing chain of beer and pizza outlets; and international sales and franchise brewing agreements. Hundreds of their 1,000+ investors from three rounds of crowdfunding on Crowdcube attended an “Investor Fiesta” event at their new brewery back in August.
A network of investors can be used for research purposes and to ask for ad hoc assistance such as help recruit staff, recommend suppliers, volunteer their own services, and so on. At the Hop Stuff event I heard a fellow investor volunteer to use his contacts to help sort out supplies of CO2, which if you remember was in short supply in the summer.
Even if it’s not a main aim of the crowdfunding, it could find you an angel investor. This happened to some people I know who started a business making tissues from bamboo. To begin with, all they wanted was an initial £10,000 of orders through rewards crowdfunding to provide validation they weren’t wasting their time. A backer was impressed with what he saw and stepped forward to invest, which allowed the founders to greatly speed up product development and company growth. So do eveything as professionally as possible.
They were a top-seller on Amazon very quickly. Within three years the company founders raised £500,000 in October 2018 for 10% equity on the Seedrs crowdfunding platform – they had a business valued at £5m!
Their latest news is The Cheeky Panda tissues are now stocked in Tesco and Morrisons; in the summer they signed a £1m corporate investment deal that valued them at £20m; and right now they are running a second round of equity crowdfunding for existing investors in which they are offering 5% for £1m.
Good crowdfunding is also good marketing. I call it an ultimate direct marketing campaign. There’s a start date, an end date, lots to do, and if you fail to hit target you don’t raise any money. Naturally there are risks, though by breaking a crowdfunding campaign down in to component parts each potential risk can be addressed and minimised. I’ve created a Seven Stage Assessment to check if a business is ready to start crowdfunding, and identify areas that need to be addressed before going public.
My approach is more from a marketing angle, since that’s what I’ve always done. I am not a finance expert and not qualified to give financial advice. Though I can provide an experienced layman’s assessment on how appealing any offer may be to the public. I do have a post-grad diploma from the Institute of Direct and Digital Marketing and a Professional Diploma in Management from the Open University Business School.
One vital tip is that crowdfunding should not begin until you have done enough personal pre-selling for 30% of the financial target to fly in to your crowdfunding campaign within the very first few days. This applies whether you’re trying to generate product orders or offering equity. This gives immense confidence to other backers who don’t know and haven’t met you, and creates valuable momentum. So if you have a target of £200,000 your pre-selling should reach a guaranteed support level of £60,000 in the bag before you start crowdfunding in the public eye (ideally more to allow for dropouts).
Early success is newsworthy and hard-working PR will generate media coverage to add to your early momentum. On the other hand, crowdfunding without pre-selling is like shovelling quicksand – hard work and you get nowhere.
How much it costs and how long it will take depend on:
- how well your business rates against my Seven Stage Assessment
- how much work has to be done to become investment-ready
- of that, what can be done internally and how much has to be outsourced
- including how enthusiastic and good you are at using social media – and “it’s ok, my kids use Facebook, they can help” isn’t good enough
- success rate of using PR to secure media coverage
- how long it takes to drum up support to reach the first 30% of your target.
If you have no social media networks to drive people to your crowdfunding project it may first require months of work to build some. Or months to accumulate impressive media coverage you’ll be able to refer to, or both, ideally.
Outsourcing support and input can even begin with the pitch document. A 30-chart deck may be very thorough but it’s too much for a potential equity investor to wade through with enthusiasm. Most look for the first reason they can give themselves as to why not to invest so they can move on to the next opportunity. Simply having to spend too long to get a feel of an opportunity is a good enough reason to discard it right away.
Don’t forget the taxman. Many retail investors prefer businesses to be registered with HMRC under EIS and SEIS agreements. These Enterprise Investment Schemes allow tax-paying investors to claim valuable rebates of up to 50% of the cost of their investment, and shelter capital gains from CGT. Under SEIS a company founder can invest up to £100,000 in their own business and claim a refund. Make sure you understand and take advantage of these benefits for yourself and your backers.
To close, what you see online when people and organisations run crowfdfunding campaigns is like the tip of an iceberg visible above the waterline. Invisible under the water is a vast amount of planning and preparation, and a fair amount of stress. It’s not impossible to run a crowdfunding campaign alone if you’re tough and resiliant enough, though most people need some help and support, be it technical or emotional or anything else. This comes either from a team of willing supporters who between them provide all the necessary skills required to achieve your success, or you need a budget. Most times it’s a bit of both. If you want to talk about your ideas that could transform your life please get in touch, [email protected]m.