The UK’s innovation agency, NESTA, predicts the UK crowdfunding industry to raise £14bn in 2016. That’s a big number considering the global market was expected to reach $6bn in 2013, up from $2.7bn in 2012.
The growth is being driven by an increase in platforms, rapid adoption of crowdfunding as a finance source by businesses and growing consumer awareness.
Crowdfunding is providing the platforms to connect many parties, both individuals and businesses, with the goal of financing projects and ventures.
It’s not a new phenomenon; the plinth on which the Statue of Liberty stands was crowdfunded in 1884. Joseph Pulitzer placed an ad in the New York World and raised $100k in six months from 125k funders. However, crowdfunding is now evolving rapidly, driven by digital media.
Crowdfunding is also diversifying. Perhaps the best-known platforms are reward-based, including Kickstarter and Indiegogo, which have attracted lots of attention through high profile projects such as the Pebble watch and celebrities like Zach Braff (he of Scrubs fame who raised $2m in four days) raising money for their own projects.
However, a key growth area is loan-based and equity-based crowdfunding, used by businesses to raise the cash they need to operate or finance a specific project. An example of this is Lancashire County Council investing in a local business on the Seedrs platform.
With the recent announcement in September 2013 from the US that equity crowdfunding is now legal for accredited investors and the FSA consultation to write the rulebook for UK crowdfunding, the doors are opening.
In this blog, I’m taking a look at five key ways in which retail ecommerce can benefit from crowdfunding. As an ecommerce consultant, I’m excited by the unlocked potential for closer connections between consumers and brands, giving people more influence over the companies/products that they believe in.
I hope you find it interesting…
1) Essential funding for start-ups
If you don’t understand business financing and don’t have the ready cash to get started, it’s hard to fund a new business.
In the UK especially, small businesses struggle to secure bank loans and without connections, getting access to angel investors and VCs is challenging, not to mention potentially daunting.
Crowdfunding platforms enable people with bright ideas to take their proposition to the market and attract individuals and businesses to invest in them. They can raise money in exchange for equity in the business, known as equity-based crowdfunding.
The equity share given will depend on the amount needing to be raised and the current valuation of the business. This type of funding raises more per project than any other funding type.
An example is Trinkets, a niche retailer of feminine hygiene products. The owners target raising £165,000 for an 11.26% equity stake. Only 10% has been funded to date.
Seedrs is the main player in the UK for start-ups, now open for business in Europe. The ecommerce category is currently quite barren and the volume of investors isn’t as high as you would hope to encourage more businesses to take a leap of faith (only one project showing with >100% funding).
Crowdcube is the key player for SMEs and there is a lot more activity on the platform. A good example is the project by Dinein.co.uk to raise £300,000 for a 23.08% equity share. To date 91% has been funded, with the largest single investment £900,000.
Equity funding is still relatively new and I expect this to increase in 2014, as well as see other platforms enter the market backed by digital experience to drive deal flow and consumer interest. One such platform launching in 2014 is CrowdShed, which is bringing equity and loan-based crowdfunding together with rewards, giving entrepreneurs a variety of ways of raising capital and growing their businesses.
According to Henry Freeman, CEO of CrowdShed
Funding a business with the crowd not only raises cash but can also attract a loyal customer base and encourage funders to be company ambassadors due to their vested interest.
Deal flow will be a critical battleground for the platforms. Without the projects, you can’t attract investors. Without investors, no projects get funded and tumble weed sets in.
2) Launching new products (new and existing businesses)
This is well suited to the rewards-based platforms like Kickstarter and Indiegogo. A business can crowdfund investment to help fund production runs in return for rewards from backers. Rewards can be graded to enable multiple levels of investment, encouraging people to up their investment in return for a more exciting reward.
If you’re unsure how popular a product concept will be and don’t have the funds to fuel the manufacturing run, crowdfunding provides a vehicle for raising the finance. It can be used as a proof of concept channel, proving the business case for further investment and helping gauge market demand.
You can use the platforms to create a route to market without needing your own website in the early days. Of course it’s advisable to build your own site to position the brand but if you really don’t have the resource/skills, the crowdfunding platforms provide a ready market place.
A good example is the Pebble watch, the most successful Kickstarter project that raised more than $10m from 68,000 backers. The campaign is now closed but the watch is now sold via its own website getpebble.com.
3) Financing retail growth
This fits nicely with loan-based and equity-based crowdfunding. We’ve outlined the equity-based model above; in loan-based, backers provide money in return for a fixed income until the loan has been repaid. This segment of the global crowdfunding market grew by 78% in 2012.
Retailers are able to raise cash to finance growth, for example overseas expansion. Where cash flow is an issue, this can be a useful solution to avoid having to go through financial institutions. I’m not saying this should be the de facto option but it’s an alternative finance channel worth considering, provided the pros and cons and cost/benefit has been properly considered.
Funding Circle is a key platform. An example retail project is Tatty Devine, which raised £100,000 from 1,211 people in 7 days.
It must be noted that with these investments there is a risk. The risk to the investor is that of bad debt and the business being unable to fully repay the loan. Funding Circle claims its bad debt rate is only 1.3% of £199m lent to businesses since it launched in 2010.
There is an education responsibility for the platform owners to make it clear to people the risks they take when investing and how those risks are mitigated. This is clearly a barrier to adoption but a manageable one given the benefits that can be realised.
4) Letting consumers profit from retail growth
This relates back to loan-based crowdfunding. Typically the benefits of retail success have been restricted to high net worth individuals and institutional investors. Crowdfunding opens the doors to anybody to use their personal income to invest in businesses and make a return on that investment.
According to Funding Circle, the average net return is currently 5.7% after fees and bad debt. Contrast that to general savings where interest rates on cash ISAs are around the 1.5% – 2% mark and current accounts far less. Even for fixed rate bonds, it’s hard to get an interest rate much above 3%.
I think it’s a positive development that, as a private investor, I can profit from the success of a business I back with my money.
It also opens up the opportunity to invest in businesses that I believe in and have a personal interest in, so their success not only generates a profit but also provides a greater sense of satisfaction.
5) Increasing customer engagement with brands
This is closely linked with the previous point. Marketers salivate over engagement but true engagement is hard to deliver. However, if somebody actively invests in your business they have a stake in your success. Whether that investment is for a reward or an equity stake, they have committed financially to your business.
The audience that commits to you via crowdfunding becomes a valuable stakeholder and inevitably will include influencers whose voice can be used to help promote what you do.
If someone has invested in a retail business, they clearly want that business to thrive and maintain a positive brand image. They are more likely, surely, to promote the retailer to their friends and family and talk about the business. This could be a boon for digital marketers looking to increase the reach and impact of content marketing and social media by providing a ready-made network of brand ambassadors.
I’m sure a few social media marketers are already salivating at the thought…
Crowdfunding in retail is growing but consumer awareness is still quite low. The overall UX/UI design of crowdfunding platforms lags behind mainstream ecommerce. I wouldn’t be surprised to see more investment in digital skills, headhunting senior ecommerce people to drive the platform development and digital marketing. With this will come smarter marketing and increased awareness.
I’d welcome your thoughts on the role crowdfunding has to play in retail ecommerce growth. For me, it’s a nascent industry with huge potential.
The market growth is there, the platforms are emerging and consumer awareness is growing. Could this be a game changer for how retailers interact with consumers to drive business and product innovation?