Crowdfunding is the fastest growing form of alternative finance for businesses in the UK today. Harnessing the power of the crowd to get products and projects of the ground is an attractive prospect for entrepreneurs with creative ideas that might not otherwise have found funding.
Crowdfunding has traditionally been the go-to funding solution for individuals, startups and entrepreneurs. But more recently, retailers and larger companies have been using crowdfunding as an investment route, market research tool or promotional technique.
Why consider crowdfunding?
The obvious attraction of crowdfunding is that it sidesteps the need to convince a bank or investor you can make their investment worthwhile. But the rewards of the crowdfunding model are not just financial. A crowdfunding campaign can raise awareness of a brand or product, deliver valuable information about demand for a product or service, and create an already established customer base once a campaign is complete.
The ethics of crowdfunding for retailers
Crowdfunding has always had a reputation for being an alternative investment source – a way for creative people to fund projects that traditional investment might ignore. Everyone who pledges a donation to the project gets some kind of reward in return, often the product that’s being developed.
This power-to-the-people image is something retailers are being forced to consider when they jump on the crowdfunding bandwagon. Some have tried crowdfunding, only to be met with a negative reaction from customers unwilling to donate to a profit-making business. Brooklyn café and cake shop the Chocolate Room started a crowdfunding campaign to fund a relocation after a rent increase. Although they made over $9,000 of their $40,000 goal, they also attracted a backlash from customers annoyed at being asked to fund the business’s move.
Will your customers react well to being asked to pay to help your business expand or increase profits? Is someone who pledges money to your campaign a customer, or an investor? The line between the two is often unclear in crowdfunding. As a customer, they are putting down money with no guarantee of ever seeing a finished product. As an investor, they may not in fact be getting any financial reward.
Crowdfunding as a pre-order system
Some retailers are successfully using the crowdfunding concept as a form of pre-ord system. Menswear retailer Gustin designs new products and asks customers to back the idea by pre-ordering items online. Once the target has been reached, the item is produced and shipped. Gustin uses the crowdfunding model as a pre-ordering system to match stock levels to demand. But it also gives customers the chance to feel they are part of the decision-making process at the brand.
Crowdfunding platforms can also be used to gauge interest for a new product – though retailers should be clear with customers how the pre-ordering system will work, and what exactly will happen to their money.
Celery is a crowdfunding platform specifically designed to cater to this model, describing itself as a ‘platform for pre-orders’.
Choosing a Platform
Making the link between crowdfunding platforms and retailers can be a challenge, and one that some of the major platforms are trying to address. In 2015 craft marketplace Etsy ran a pilot scheme called Fund on Etsy, a crowdfunding feature that allowed sellers to raise money from backers to grow their business and create new products. Amazon is also running a pilot scheme of ‘exclusive’ crowdfunded items for sale through its site. And US gift chain Brookstones works with Indigogo to mentor companies through the process of getting their products to market.
Equity and loan crowdfunding
Increasing numbers of retailers are using equity crowdfunding to finance expansion, a model that combines the crowdfunding principal with a genuine investment opportunity. In these cases backers stand to gain financially if the company succeeds.
Some retailers have used equity crowdfunding as a gateway to attracting venture capital investment. Knitting kit supplier and fashion brand Wool and the Gang run an online retail business and a bricks-and-mortar store in New York. They raised over £1 million in equity crowdfunding for their business by offering shares in their company from just £10. The retailer then went on to attract venture capital funding.
Crowdfunding as a form of business loan is also increasingly popular. Fashion jewellery brand Tatty Devine took out a £100,000 loan through crowdfunding platform Funding Circle, which allows individuals to lend to businesses at attractive rates of interest.
Value and Reward
The key question for any crowdfunding project is, why would anyone back your campaign? For a retailer, this question is even more pertinent. Why would customers, who can already buy your product or service, pledge or lend money to expand it? The answer may be in the rewards you offer, if they are something more than a ‘normal’ customer could buy.
The value of community
Where retailers succeed at crowdfunding, it is often because their campaign is built around an existing community who value growing that community. Wool and the Gang had the advantage of an existing community of fans interacting with the brand through social media. This gave them a powerful and enthusiastic audience to approach.
A key consideration for retailers considering crowdfunding is demand. Many crowdfunding campaigns reach their target but come unstuck when it comes to actually delivering on their promises. If you reach your target, will you be able to deliver on your pledges? You might even exceed your target, in which case scaling up to meet unexpected demand can lead to manufacturing or delivery problems which could eat into your profits.
From campaign to shelf
Once the campaign is won, some would say that the hard work really starts. How do you get that product to a customer base beyond those who backed your campaign?
One new retail concept that has a foot in the crowdfunding world is b8ta, a bricks-and-mortar store in Palo Alto, California that showcases new tech gadgets, many of them financed by crowdfunding. Companies pay a subscription to have product displays in store, and b8ta take a small cut of any sales. The concept allows customers to get hands-on with products that might otherwise only be available online, and gives emerging companies invaluable data on how people react to their product, and how it sells. This fusion could be one answer to the retail and crowdfunding equation in future.
“Gustin”: Gustin, https://www.weargustin.com/
“Tatty Devine”: Tatty Devine, https://www.instagram.com/
“Wool and the Gang”: Wool and the Gang, http://www.woolandthegang.com/
“b8ta”: b8ta, https://b8ta.com/