You may need some front to secure enough backers

By Kristian Dando, Monday 18 February 2019

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“It’s hands down the worst thing I’ve ever done. I don’t really get stressed out, but this was a great cause of anxiety. Don’t get me wrong it was exciting too...”

crowdfunding

You get the sense that Luke Hodson, co-founder and director of Yorkshire-based custom merchandise outfit Awesome Merchandise might only be half joking when he recalls the wildly successful crowdfunding campaign the company embarked upon in 2018, in order to raise finance for international expansion. It might have caused him a few sleepless nights, but the company far exceeded its initial target of £350,000 and raised in excess of £600,000 when the offer closed in September. 

It wasn’t part of the original plan. “We went to the bank (for funding) initially, they said it would be cool. In short they said they were going to fund it, but then they didn’t,” he explains, from the company’s new premises in Austin, Texas.

For Hodson, the inspiration to pursue the crowdfunding route didn’t come from contemporaries in the print trade, who haven’t been too quick to embrace the method on the whole. Rather, it was a very different sector which has played its part in bringing crowdfunding into the mainstream: craft beer.

“I’d had friends in the craft beer sector who’d done it [crowdfunding] – Northern Monk, Camden Town, Signature Brew – we’ve got quite a few brewery clients,” says Hodson, who was still sceptical of whether or not the plan would work.

From humble beginnings

Crowdfunding came to prominence in the years after the financial crash, out of necessity. As the days of free and easy capital came to a juddering halt, businesses and organisations had to come up with new ways to raise money for investment and expansion. (Although curiously, the first recognised form of crowdfunding came in 1997 when British prog rock bank Marillion raised £39,000 to tour the US.)

Several other factors have helped it boom. “The rapid evolution of digital marketing tools and social media has made it a lot easier to reach and engage your community,” says Sarah-Jane Freni, communications and marketing manager at Bristol-based crowdfunding agency Ideas Square, a company which provides support and project management services for crowdfunding campaigns.

“If you look at equity crowdfunding specifically, we believe that it was known consumer brands – Monzo, Revolut, Brewdog – opening up shares to the public that really brought equity crowdfunding to the fore. By allowing their consumers to invest alongside sophisticated investors, these brands have democratised equity investment for the many.”

Now, there are a multitude of platforms to take your pick from, with 80 in the UK alone, all with different emphases and offerings. There’s even a crowdfunding platform for printing and publishing books, Unbound. From something of a novelty, it’s now a very serious prospect. In fact, the Cambridge Centre for Alternative Finance found that peer-to-peer lending delivered more than 29% of all loans to small-to-medium-sized enterprises in 2018. “All businesses should consider options for finance beyond their bank if they want better service, faster decision making and possibly even more competitive cost of capital,” says Bruce Davis, founding director of the UK Crowdfunding Association, the sector’s industry body. 

Pressing engagement

Darren Mulvihill, senior equity fundraising manager at Crowdcube, worked with Awesome Merchandise for its campaign. For him, the reasons for its success are clear. “It wasn’t necessarily groundbreaking – but it’s a very cool story. Awesome Merchandise has interesting narrative, team and culture. They were relatable and inspirational,” he says.

The business model was also an easy one to sell to prospective investors. “Awesome Merchandise had a very scalable model – if the opportunity goes to plan, there’s a lot of room for scaling up and multiple returns,” he adds.

Having an enthused and engaged customer base goes a long way in a crowdfunding campaign, and this was something Awesome Merchandise was also able to capitalise upon. “They had an audience which understands the business,” says Mulvihill. “In the months leading up to the campaign, affluent and interested customers were seeing interesting content. They used the newsletter to engage the customer base before going live.”

Hodson adds: “One of the reasons we did so well is that we are established as a company – there’s always a question of company valuations but ours was rooted in hard facts. We’d built up equity with people over a period of up to 13 years or so. 

“A lot know and trust us, and we’ve got quite a few ‘power users’. 60% of our customers are repeat customers. A lot of those people gave us a lot of love and support. People were putting in anything from £10 to a couple of thousand.”

Rewards are great ways of incentivising investors into parting with their cash in return for a stake in the company, but they shouldn’t be the sole reason for investment. “We do encourage clients to offer reward and equity; it should never be the reason that people should invest because the reward is additional,” says Mulvihill. “But if you have a strong reward for a certain amount you can get people who might have invested £1,000 up to £3,000.”

What works for some…

The increased prevalence and viability of crowdfunding campaigns means that they’re also under more scrutiny from regulators. Last year, the Financial Conduct Authority published a set of recommendations to ensure that would-be investors aren’t led up the garden path. 

“The key thing to remember here is that you have to be truthful and transparent,” says Ideas Square’s Freni. 

“If you can’t back it up with evidence, you can’t say it. You also need to steer clear of making promises that you can’t keep so be very cautious when talking about returns for investors.”

There are also clear limits to the sorts of businesses that crowdfunding will be successful with. Awesome Merchandise, a business was born in the online age with a big social media following, was a perfect fit. However, other printers might find it a struggle to raise capital this way. “If you’re a more traditional printer in the UK that serves local customers, doesn’t do a great deal online then the opportunity to scale and deliver multiple returns and value isn’t there,” reckons Mulvihill, who also points to businesses with disruptive effects or providing a service which delivers at lower cost than incumbents as entities which tend to do well on the platform.

There is usually a a phenomenal amount of graft required – not to mention expenditure upfront if you want to do it properly. Awesome Merchandise spent around £20,000 on their campaign. “I had to answer about 3,000 emails in total – answering pitch requests, a ton of questions from potential investors. I was warned… and it’s the truth. It’s rewarding, but it’s stressful,” says Hodson. 

Crowdcube’s Mulvihill adds: “They [Awesome Merchandise] thought in great detail about the nuances of a successful pitch before – around eight to 10 months before, and asked questions in order to de-risk the campaign.” 

A clear plan will also help convince would-be investors to take a punt on you. 

Hodson recommends a few questions to ask of yourself before you dive into a campaign: “Why are you doing it? How are you doing to add value for your investors? Do you have a clear plan you can sell to people? Speak to people in your network and see if they’re excited. Get your shit together. Your deck, your video, and how you plan to use the money.”

The platform you use could also mean you have extra requirements. “The role of the crowdfunding platform varies hugely from platform to platform with some offering a full service – marketing, investor management and so forth – and others requiring the issuer company to do more of the work to make the investment round a success. You should shop around to see what offering suits your business capacity and financial need,” says Davis.

Reputational damage?

One of crowdfunding’s big draws is that it’s relatively low risk. But having a campaign fail to land can do a lot of reputational damage – which was one of the causes for Hodson’s worries around the campaign. “I hated every moment. When it got to 75%-80%, I thought we might be successful. I stopped worrying when it got to 100%. It was dangerous – if we failed, we’re an established brand and it would look bad.” 

If it’s something that you think would work for your business, it pays just to ask about. “Don’t be afraid to reach out to platforms,” says Mulvihill. “We’re pretty upfront about whether or not it might be right,” says Mulvihill.

So, as crowdfunding comes of age, it looks like prospective users are going to have to become even more creative with their ideas and rigorous with their offering. “It’s not just the market which has matured: the crowd has too,” says Freni. “Those that choose to invest in crowdfunding campaigns have become more savvy and selective. This has resulted in increased competition and a higher barrier to entry. Entrepreneurs wishing to crowdfund will need to keep up and make full use of modern technology and the digital tools at their disposal.” 

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