What is crowdfunding - and how can it help your business?

A plethora of food and drink entrepreneurs have used crowdfunding as a way to raise funds while at the same time spreading the word about their brand, from The Uncommon English which looked to Indiegogo in July to successfully raise £25k for an urban winery to produce its sparkling wine in a can, to Active Root which raised over £6k on Kickstarter to bring its energy drink to market, and healthy ice cream brand Oppo, a three-time Seedrs campaigner which oversubscribed within minutes of going public with its first foray in 2015 and becoming the platform’s most overfunded campaign and the fastest ever food or drink brand to reach its target.

And with a report by Seedrs – which in 2012 was the first equity crowdfunding platform to receive regulatory approval from the Financial Services Authority – stating that food and beverage deals are joint top in terms of the number of its funded deals, at 11%, crowdfunding is proving an easily accessible means to raise capital for small businesses in this sector.

The idea behind crowdfunding is that small amounts of money are invested by large numbers of investors through online campaigns which are usually either donations-based, where investors don’t expect a return; rewards-based, where the investors receive some kind of benefit such as a discount or free products, but don’t receive any equity or ownership in the brand; or equity-based, where investors get a stake in the company, and therefore the opportunity for a future financial return. If a pitch fails to reach its funding target within the allotted time, either an extension is given or it’s cancelled and no payments are taken from investors.

Added extras
So apart from hard cash, what benefits does crowdfunding offer brands compared with more conventional investment strategies? Andrew Hunt, CEO and co-founder of Aduna, which in 2017 successfully crowdfunded on Seedrs, explains that as a social business supporting small-scale producers in Africa, it was important that investors were aligned with the brand’s long-term mission and impact. “Many conventional investors in consumer brands don’t fit into this category. They may also be investing on harsh terms and seeking a rapid exit. The great thing about the crowd is that only people who are excited about your business and believe in what you stand for will invest.”

Joe Hill, co-founder of One Planet Pizza, which crowdfunded on Seedrs on 2016 after initially rolling out its vegan pizzas to its local vegan and veggie community in Norwich, agrees that like-minded investors bring something extra to the table. “As a family run start-up, we realized that we needed more than just capital to turn this idea into a successful business. We also needed the right people to believe in us and buy into our venture. This is when we knew that crowdfunding was the right decision.”

“The campaign was a huge success for several reasons,” says Hill. “Firstly, we raised the money needed to invest in a refrigerated van, a production kitchen and everything in between, so we could increase production. And secondly, the local influencers, bloggers, family and friends who helped us launch the company were now physically invested in it. They don’t just want it to succeed, they want it to continue to succeed. Crowdfunding provided us with something that money couldn’t – it created 140 investors all motivated for the company to flourish. At an early stage of growth, this proved immeasurable in our success.”

“Raising on Seedrs enabled us to take on much-needed cash injections at a crucial stage of our business growth, so the importance can’t be underestimated,” says Hunt, adding that another plus point, particularly for a consumer brand, is that investors can also be brand ambassadors. “While this can be difficult to measure, it is definitely a positive factor,” he says.

Funding growth
Already a successful brand in 2017, listed in H&B and Ocado, Hunt explains what prompted the campaign: “Since launching in 2012, we’ve taken our African baobab and moringa from obscurity to being established superfoods within health food retail. This has been no mean feat – but if we want to achieve our vision of impacting the lives of millions of small-scale producers then we can’t stop there. We needed to develop new, more convenient product formats to appeal to a broader, more mainstream audience. And this requires investment.”

Last July Aduna did a follow-on campaign to help fund the launch of two new product ranges - African Super-Teas and Superfood Energy Bars – and scale up production and marketing. “In the first campaign our target was £350k and we smashed that in just 48 hours, going on to raise a total of £471k from 370 investors. In the last campaign we achieved a similar result – raising £428k against a target of £300k,” says Hunt.

When snack food brand Snact, which uses surplus fruit and veg to produce its range, launched a rewards-based Crowdfunder campaign in 2017 it was in order to get its trio of Banana Bars off the ground by raising £10k to make the first run of products.

“We did a crowdfunding campaign in 2014 to get SNACT started and to launch our fruit jerky, so it made sense to us that we’d go down the same route to launch another range,” says brand co-founder Michael Minch-Dixon. “It went well, it was fun to run and we overfunded, so it was a success. We’ve crowdfunded twice but have also raised investment through more conventional routes,” he adds.

“Crowdfunding can be extremely rewarding – it’s a great feeling to see that people buy into your project/idea and that they’re willing to part with their cash to support you personally – but you have to make sure you really plan your campaign carefully before it goes live and that you articulate really carefully why people should give you money (in exchange for equity or rewards),” he explains.

Campaign commitment
Indeed to stand any chance of success, a crowdfunding campaign needs effective forward planning and serious commitment, as Hunt explains: “I think the most important thing to recognize is that crowdfunding starts with your own network. You will need to be out there pitching your business in the ‘real world’ several months in advance of going live, and need to have generated real commitments and momentum. If you expect that you can just make a nice video, put it on the platform and the money will just roll in, you will be in for a nasty surprise!

“Firstly, you need a strong growth (and brand) story to go to market with, then you need to turn this into a brilliant three-minute film. After that you need to ensure you have at least one-third of your target committed from cornerstone investors before ‘going live’. If you have these three things in place and combine them with a well planned email and social media campaign, then you stand every chance of being successful.”

“The downside is that it’s public and it’s a lot more work than people probably imagine,” adds Minch-Dixon. “The main lessons came from our first campaign; it’s a full time job and you really have to commit your time to reaching out to people and to having those conversations. We probably wouldn’t crowdfund again in the context of SNACT as we’ve done it twice now, but who knows!”

First choice for start-ups?
“I think it’s definitely on its way to becoming the first-choice form of financing,” says Hunt. “For many small businesses it compares favourably to venture capital, particularly in terms of the key terms like valuation and preference shares, but also in keeping control of your business – it is often better to have lots of small investors than one big one who can flex their muscles. What I like about the concept of crowdfunding is that it has democratized the process of investing in start-ups - something that was previously only the domain of wealthy angel investors. This means that pretty much anyone can invest in businesses they believe in.”

“From my experience, crowdfunding is a great option for start-ups to explore,” agrees Hill. “I’d say one of the main benefits is exposure – if done the right way, a campaign can become a great marketing tool to help reach the right people and generate real excitement about the products/service. Having lots of smaller investors can also be advantageous simply by creating a situation wherein more people are spreading the word and talking about the start-up. It could lead to a domino effect that’ll get the name out there faster than any magazine or social media tool.”

The seed of an idea
Another way to gain support as a small business is via pitching initiatives which may offer cash investment, retail listings or mentoring. One such enterprise is The Seed Fund, which was established in 2013 by Jayne Noblet. “The Seed Fund is an entirely philanthropic project founded and supported by The Collaborators and Great Taste, essentially aiming to help ambitious start-ups in food and drink to grow and gain a foothold in an incredibly competitive industry,” she explains.

Each year, one winner – selected from 12 UK start-ups chosen to enrol into The Seed Fund Academy programme – receives business support, brand development and guidance from industry experts.

In 2016, Bristol-based Adam’s chocolate won The Seed Fund prize. “We launched Adam’s in 2016,” explains co-founder Mark Claydon. “Up until then we had bootstrapped our funding. We didn’t consider crowdfunding at the time as we were a very new business with only a small traction of sales and it would have been very difficult to put a value on what we were doing.”

“The connection has enabled us to take steps in retail with support around us to guide the process,” says Claydon, who believes the prize was far more valuable than the £100k it’s estimated to be worth. “It is amazing how quickly cash can disappear in an FMCG business. Whereas the advice stays with you and gives the foundations for better decision-making. We are in a much stronger position now.”