Despite the current economic climate, there is no shortage of retail entrepreneurs. However, getting a new operation off the ground and competing with brands takes capital, and that is hard to come by… or is it? Luke Lang, co-founder of crowdfunding website Crowdcube, takes a look at an alternative way to finance growth that has helped many retail start-ups give banks the boot
What is ‘crowdfunding’?
Crowdfunding is like Dragons’ Den online. Ordinary people can visit one of the many crowdfunding websites and contribute small (or larger) amounts of money in support of a venture, making it far easier to raise finance for young businesses.
There are two types of crowdfunding sites:
- Rewards-based sites (like Kickstarter and Crowdfunder) give people personalised rewards in return for their contributions. They tend to focus on technology or arts-based projects;
- Equity-based platforms (like Crowdcube) where investors get shares in the business. They cover all business sectors and are more relevant to retailers.
Entrepreneurs showcase their business and investment potential to thousands of ‘armchair investors’ by uploading a video pitch, images and supporting documents. People can support them by investing (as little as £10) in exchange for shares in the business. Most of the pitches are registered with the EIS (Enterprise Investment Scheme) and/or SEIS (Seed Enterprise Investment Scheme) that allow participants to off-set their investments against tax.
A significant proportion of the pitches on Crowdcube are in the retail industry.
For example Gem Misa, who had a successful career in Unilever as a global brand manager for one of its top products, left in 2009 to set up Righteous, the UK’s first ‘all natural’ salad dressing brand with its great-tasting dressing that is preservative-free, gluten-free and 100% vegan.
Gem turned to crowdfunding after researching bank loans and angel investment. She found the repayment rates with the banks were too high and was worried about the control that business angels might take over her company. In contrast, she found crowdfunding was pretty straightforward on Crowdcube; even the legal and administrative process after the full funding was reached. Crowdfunding also provided Righteous with an additional asset: a group of investors who are evangelists for the brand as well.
Righteous secured two rounds of crowdfunding: first in February 2012 raising £75,000 to create a TV advert; then a further £150,000 a year later to expand its overseas’ markets. In all Misa now has 165 investors who own stake in the business that sells its products in Harvey Nichols, Whole Foods Market, Tesco and Waitrose.
Another example is Kamm & Sons, the brand behind a unique ginseng-based alcoholic spirit, that is run by Alex Kammerling, an ex-bartending cocktail maestro and self-professed drinks geek. His drink contains 45 natural botanicals which include ginseng, fresh grapefruit peels and manuka honey. It offers an exciting new alternative to the more discerning and health-conscious drinker.
In 2011 he successfully raised £180,000. Eighteen months later the company, which is currently exporting to Sweden, France and Spain, secured a further £325,000 to finance overseas expansion to Europe, Asia and America as well as high-growth markets such as China.
Kammerling didn’t even consider asking the bank for a loan because the 17% APR interest rates were too high for his small business. Kamm & Sons wants to sell more than 15,000 units this year and this investment will help them to achieve that growth target.
If you are a small and growing retail venture or a start-up, then here are five tips for crowdfunding your business:
- Make sure you’re investment ready. It is crucial your business is investable and demonstrates to investors how they will realise a return on their investment. You need a good business plan and financial forecasts to give potential investors all of the information they need to make a judgement on whether or not to invest
- Create the right pitch. People are more likely to invest in a business that they are already passionate about, or has a story that is compelling. Your crowdfunding pitch should be one, or both, of these things
- Tell people. Crowdfunding needs to be driven by the entrepreneur. Once your project has launched, you and your team need to actively promote it and spread the word with marketing and PR
- Maintain pitch momentum. It is important you have a burst of activity for launch but you also plan ahead to try and maintain a drip feed of future activity. You need to manage your campaign so that you maximise every opportunity
- Build investor relationships. Once you have reached your funding target you need to build relationships with your investors. They are potential customers, brand advocates and suppliers of your business so you will need to do your best to keep them happy
As a retailer, finding capital to grow your business can be daunting and long-winded if you stick to traditional avenues like banks and angel investors, but there are easier, quicker alternatives and crowdfunding is an option well-worth exploring. Good luck.