July 20th 2021 / 10 min read
As Senior Venture Portfolio Manager at Founders Factory, and previously part of the commercial team at Crowdcube, Darren Mulvihill has experience in helping founders use equity crowdfunding to raise investment. He shares his recommendations on how to approach crowdfunding, and whether you should consider it as part of your fundraising strategy.
It’s fair to say that retail investment is having a new ‘moment’ in 2021. The ability for ordinary investors to participate in traditional asset classes as well as completely new ones (crypto, NFTs etc.) has meant that now, more than ever, founders and even VCs can harness the power of being owned by their biggest fans.
In March 2021, Passion Capital, a London based VC firm co-founded by Eileen Burbidge, offered a retail allocation of £2.5m in their third fund to ordinary investors via the Seedrs platform. This and other transactions like the Deliveroo IPO (where the app’s customers invested £50m of a £1.5bn debut on the public market) may prompt people to ask— as a founder, why bother?
The answer is how consumer behaviour is changing more broadly. Once upon a time, your level of wealth as well as your network greatly impacted your ability to invest in startups. This is changing, globally. In short: Community = Social Capital + Financial Capital.
Long before the advent of stock trading apps and the proliferation of crypto assets, the UK has been a world leader in giving retail investors access to the once elusive market for angel investing. I spent almost five years at the forefront of that trend, helping startups and growing private companies raise investment from their customers and the wider retail market at Crowdcube.
When I joined the company in 2015, the platform had just hit £100m in funds invested. Back then, equity crowdfunding was just beginning to establish itself as one of the major elements of the UK funding ecosystem. It had previously been dismissed as a quirky new means of fundraising, or a “last resort” for founders. But soon, crowdfunding became a popular strategy used by revered entrepreneurs to fund and market their businesses.
Not only that, we also saw the most successful companies starting to use crowdfunding as a community building strategy, fostering fanatical users, and increasing diversity of access. Crowdfunding goes far beyond simply raising funds: it's part of an overall philosophy.
In this piece, I’ll be sharing my experiences from the world of crowdfunding, my recommendations for how to approach it, and whether it’s even right for your startup in the first place.
Before you consider crowdfunding, you need to think about the strategic benefits you want to achieve. Above all else, you need to be doing it for a reason besides the need to access capital. That may sound counterintuitive, but the most successful crowdfunding rounds are from companies who buy into the idea of being funded by their community, and growing the company’s community of advocates in the process.
As a general rule, companies tend to optimise for two specific outcomes:
1. Converting existing customers into investors, deepening the existing relationship with your communityIf managed properly, having this new community of customers on your company’s cap table can become an even more powerful marketing amplifier for your brand. By leveraging the power of advocacy and word of mouth amongst their loyal investors, brands can open up a sustainable acquisition and awareness channel, while also mitigating any churn risk for these existing customers who also own a piece of the business.
2. Capturing the imagination of new investors (and customers) while building wider brand recognition:This strategy suits companies where there is some awareness of the wider market trend they’re exploiting: for example, a company like InFarm and the rise of indoor/vertical food production. Retail investors who recognise this market opportunity, and subsequently become customers, can benefit from the various rewards and perks of being an investor. This strategy should be employed alongside an existing communications strategy, where the company’s core messaging is amplified through effective PR, word of mouth, and direct channels. Asking people to invest quickly in a business they’ve never heard of, or have no sense of anticipation for, is very challenging. Most companies adopt some elements of both strategies, but it’s critical to define what success looks like in each case. Ideally, you want to build a large band of advocates who feel a sense of ownership and authorship in your company’s journey. For B2C companies, this should be a community that will use your product, benefit from investor-rewards (more on that below), and have a shareholders’ certificate that seals their allegiance to that same product. Or even better, they have something to show they are a member of your investor community.
Some companies have such fanatical user bases that they could fill a crowdfunding round with existing users alone. Companies like Monzo led this trend back in 2016 when they offered £1m of their £6m seed round to their customers, a tactic designed to get as many “Monzoite” advocates as possible vested in the success of their cool new challenger bank. In doing so, they managed to secure funds from more than 1200 individual investors alongside VCs like Passion Capital, who led the round. In 2018, Monzo raised £20m from 36,000 of its customers in just 2 days—nearly £18m of which were raised in just 2 hours and 45 minutes.
Strictly speaking, Monzo didn’t need to crowdfund. They pursued it as part of their overall strategy, espousing values of transparency and customer-centricity. In doing so, they aimed to make their first customers fanatical and passionate about their crusade. Besides receiving their investor debit cards, backers were invited to meetups to learn and feed-in to the product roadmap, as well as mingle with the Monzo team.
This, of course, is an extreme example. A more typical example, perhaps, is Mindful Chef: before crowdfunding, they had already established a following of 3,000 happy and dedicated customers. Mindful Chef had been sure to cultivate this relationship through personalised notes in their subscription boxes, regular events, and a strong email strategy. In a competitive market where other players were also raising to acquire new customers, they wanted to prevent those 3,000 customers from churning. They also hoped to make them even more indelible to the brand—so they launched a crowdfunding round that was accessible to their existing customers as well as lead investors, with the hope of raising £1m.
Their strategy was a huge success: backed by the likes of former athletes Victoria Pendleton and Will Greenwood, Mindful Chef reached the target within 24 hours. They went on to raise a total of £1.92m from 638 investors and closed at over 190% funded.
Giles Humphries, co-founder of Mindful Chef, told Crowdcube: “I’m so glad we crowdfunded. We got more than 600 investors, those investors became brand ambassadors and customers. You wouldn’t have got that going down an institutional route.”
It’s also worth considering that customers increasingly seek out ethical businesses. 61% of consumers are making more environmentally friendly, sustainable, or ethical purchases, with 89% likely to continue post-COVID.
People like David Baldwin and Simon Sinek have written at length about the belief economy, and how brands need to use their values (or “authentic belief systems”) to connect with their audiences. But it needs to be genuine and earnest in order to succeed.
It’s quite easy to spot which companies are genuine and which ones aren’t. Some startups might try to market themselves as ethically-driven and community-based, but in reality, they’re backed by huge VCs and/or their own families.
From a marketing point of view, crowdfunding is a great way to bridge that gap. Built on the values of transparency and inclusivity, it can be an effective way to build an engaged community, promote diversity of access to your business, and become more transparent with your customers.
Here are some Founders Factory companies who have successfully crowdfunded:
LuckyTrip (£1m raised with a £200k target)
Black Ballad (£338k raised with a £250k target)
envoPAP (£381k raised with a £150k target)
Entale (£300k raised)
Shine ($500k raised with $20k target)
Your crowdfunding campaign should be seen as an extension of your marketing strategy—one which allows you to create a powerful marketing force in the form of passionate customers.
I like to think about the crowdfunding process in distinct blocks: the initial pre-registration/campaign build phase; the phase when your crowdfunding campaign is live; then after you’ve crowdfunded.
1. Be very clear on why you’re crowdfunding
Why have you chosen this as part of your fundraise? What does success look like? Some companies have very numerical aims, e.g. getting to 1,000 investors, acquiring a certain number of new customers, or converting a certain proportion of their user-base to investors. Be crystal clear on your desired outcomes, and your strategy behind those goals.
2. Build your book of potential investorsA large proportion of your customers may be likely to invest in your crowdfunding round. To warm them up, I would suggest running a campaign up to two months before you go live, signposting that they have an opportunity to invest, and directing them to a pre-registration landing page.
Your pre-registration page needs to be engaging, inspirational and provide them with all the details they need, but it also needs to pull two key things from prospective investors: their email address, and a band/amount they would like to invest. This process is known as “bookbuilding”.
Then, you should hone in on this audience and make sure they convert. Once they’ve registered their interest, you can slot them into a separate email flow. Start by sending them interesting content: a profile of someone on the team, or an article on how your revenue has grown. Then you can progress to offering them calls, webinars, or in-person events: by offering them something more than the chance to invest, you might get some hard-commits and draw a lot of liquidity on your customer base before you even go live.
Building up a big enough book can really pay off. Depending on the size of your community, you might sign up 2000-to-3000 people, all of whom could invest. If 5% have said they could invest £25-to-50k, this group of larger investors alone could really move the bar in your overall fundraise.
3. Look at your campaign from an investor’s perspective
Follow businesses you like on social media, and see how they’re communicating with their investors. Get hold of material and copy from other companies who have successfully crowdfunded, such as landing page copy, emails, or press releases. From these examples, create a clear approach to which channels you’re going to use to communicate, what you’re going to send, and when you’re going to send it. You’re going to send out at least 100 different pieces across different channels and customer segments, so you need to build a very programmatic view.
4. Pre-raise before you launch
There’s immense value in pre-raising a solid chunk of your target amount ahead of launching your campaign. I’d recommend finding lead (or ‘pre-arranged’) investors who can raise at least 50% of your target, as a way of demonstrating momentum and popularity behind your campaign. These will inevitably be made up of friends, family, angel investors and VCs.
5. Understand the power of third-party validation
Having a respected investor leading the round, and getting as much committed as possible before you go public, will pay off. You also need to be sure to get the message out, so don’t be shy to create as much noise as possible. Maybe get a 5-to-10 second video from your investor to share on your socials, think about who you know that could endorse the campaign, and encourage your own community to share the campaign even before it goes live. In the case of professional angels and VCs, it’s often a huge advantage for your customers to know they’re investing alongside well-reputed angels or a well known VC firm, on the same economic terms.
Putting time and effort into the pre-registration phase will increase your chances of success when it comes to launching the campaign, and going live should come in different stages, which are outlined below.
1. Private launch: This is a period (usually up to 48hrs) where the campaign page is live as a private link, available only to your pre-arranged investor and pre-registered community. Ideally, by the end of this period, you should have at least 50% of the round already in place.
2. Public launch: This is where you go live on your chosen platform for all the world to see, ideally with most of the funding on the progress bar (at least 50%) as you go public-live.
With this three-tiered strategy (a pre-registrant campaign, a private launch followed by a public launch), you can really utilise “investor FOMO” [fear of missing out]. After all, people want to back something that they know is definitely going to close—on Kickstarter, most investments come in after 70%.
Dan Murray Serter, founder of Heights, explains how he had already closed £900k of their £1m raise privately before taking his crowdfund campaign public - a strategy set up so they could get to “over-funded” very quickly (in 20 minutes to be precise).
Dan has shared a detailed and very helpful campaign plan we recommend checking out here.
To build a community of people who are invested in your brand, you need to build a platform to communicate with them—especially after the campaign has ended.
It’s all too easy to launch a crowdfunding campaign, raise the money, and never speak to your investors again. Lots of companies don’t even send quarterly updates. But the ones who go above and beyond to engage their investors are also the ones who really reap the rewards of crowdfunding, over the medium and long term.
One successful example is BrewDog. The craft beer company launched their crowdfunding campaign, “Equity for Punks”, back in 2009. In 2018, they broke the world record for equity crowdfunding, closing their fifth round at over £126m; and this year, they are well on the way to hitting their £25m target.
Over the past 12 years, BrewDog have hosted roadshows for their investors, known as “Equity Punks”, across the UK, including their popular “rock ‘n’ roll AGM”. Some people might see this as an extreme strategy, but in order to get people to invest in your company—both financially and emotionally—they need something to hold onto. And that’s a much bigger endeavour than just running a campaign.
Asking someone to invest in a company for the medium/long term is very different to asking them to buy your product. The psychology is completely different, because the person who is investing is, by definition, delaying gratification by putting their money away.
For some businesses, as a result, there are benefits in letting those who invest in your campaign receive something in addition to their equity.
One successful example of this is Grind Coffee’s rewards programme: if you invested £5K, you get a free coffee every week; a higher tier unlocks two free cocktails a month for two years. This is a really smart model, because it’s likely that customers will buy other things in store when they redeem their reward.
Another example is Nothing.tech, who raised $1.5m in 54 seconds during their first community funding round (a Crowdcube record). In March 2021, Nothing.tech made $1.5 million worth of shares available to their community, sold at the same price as their wider Series A funding round led by GV (formerly known as Google Ventures).
Nothing.tech rewarded their investors in tiers: by purchasing £10k in equity, customers were rewarded with the first product off the product line. This approach not only secured Nothing.tech investors, but also their first customers and loyal advocates.
The reward you choose to offer doesn’t have to be costly, as long as it has relevance and helps the community feel connected to your campaign.
Valuation is obviously a key consideration for founders and investors when it comes to raising capital. It’s fair to say that over the last number of years, crowdfunding has earned somewhat of a reputation for companies raising at higher than ‘normal’ valuations. This is only partly true, however.
As with the above guide: the first money committed is often from VCs or professional angels, who effectively price the round. This helps hugely when it comes to ridding the room of argument when it comes to the investors discussing your valuation publicly on the forums of your chosen platform. If it’s seen as a fair price by VC or angels who are investing a real amount of money into the business, this is a generally a strong enough validating signal.
The main thing to avoid is relying on your crowd (your community & customers) to be the first investors in and to price the round. Over the years, we’ve seen some mid stage businesses which don’t have a cornerstone ‘lead’ investor, and because their customers love the brand so much, they’ll pile in with less scrutiny for what they’re investing in and at what valuation. Valuation needs to reflect the risk an investor is taking and, as such, having a sophisticated investor committed before you go live is the best scenario to be in when it comes to having your customers and community invest.
One often-cited disadvantage of crowdfunding is that you’re “airing your laundry in public”, so to speak. Personally, I don’t subscribe to that. In reality, you have full control of what you do and don’t disclose.
What I have seen first-hand, however, is startups following a less optimised strategic approach—namely crowdfunding because they had no access to capital elsewhere, with big investors and the general public in the same round. This puts you at a disadvantage, because it might trigger the perception that you need to crowdfund because you’re unable to raise the money elsewhere; especially if you don’t have lead angels in the crowdfunding round.
To clearly outline the pros and cons, we spoke to Wil Harris, who successfully crowdfunded his startup, Entale (born in Founders Factory's Venture Studio), via Seedrs. Below, he shares his experiences, the challenges he faced, and what he learned along the way.
Crowdfunding Case Study: Entale
Entale crowdfunded via Seedrs in early 2019, as part of a bridge round between seed-funding.
Their goal was to raise a total of £300K.
Aiming to go live with 50% already committed, the founders sought to secure £150K from private funds before launching on the Seedrs platform.
By the end of the crowdfund they had the full £300k committed
Wil Harris, CEO and founder of Entale, shares what he learned from crowdfunding:
Have a great deck and a strong vision.
Have your own strong community of investors before crowdfunding. Seedrs’ community is great, but you should see it as a platform to leverage your own community. For us, only a quarter of our crowdfund came from Seedrs investors. The rest I found to plug the gap.
Make the most of the platform. In terms of promotion, Seedrs and other platforms have packages you can buy to support your campaign. The only thing that moved the needle was targeted Seedrs’ emails. Being on Seedrs homepage also helps, but it’s algorithmically driven. If you have a boost of funding on a given day, you’re more likely to get boosted to the homepage.
Crowdfunding works far better for B2C brands than B2B. People on Seedrs are retail investors and consumers, and they typically like something they can use or consume themselves.
It’s a lot of day to day management. It is good, free marketing, a great public-facing story and the PR that comes with it can be brilliant. But you have to be on the pulse promoting it from your own brand and personal social accounts every single day pre, during and post the campaign.
Once the crowdfund community is on your cap table, it’s an administrative nightmare, even though they only make up a small percentage of your investors. Every time you do a round or draw a new contract, you need to follow Seedrs’ processes. For example, with most fundraising, you wouldn’t allow sales of private shares, and as a company, you have first refusal over secondary shares. However, Seedrs has its own secondary platform for people to sell their own private shares. So, every time you draw a contract or do a round of funding with new paperwork, you need to carve out Seedrs’ own secondary platform.
There’s still a sect of the VC market that see crowdfunding as “dumb money”, a means of raising capital when all other avenues have failed you. This is certainly a perception among some investors—possibly a hangover from the advent of crowdfunding and angel networks, which started to “take away’ equity from VCs.
But a lot of Tier 1 VCs now understand the value of crowdfunding. The savvy, customer-centric ones are not averse to crowdfunding—they’re actually champions of it.
I believe we’re seeing a revolution in how Tier 1 companies and VCs view crowdfunding. It’s no longer seen as a “last resort”, or a quirky new means of fundraising: crowdfunding is now used by many revered entrepreneurs.
Over the past few years, I have seen the trend move beyond startups. Deliveroo recently launched a campaign through PrimaryBid, allowing customers to invest alongside VCs. Like Monzo, they didn’t strictly need to crowdfund—but it’s an excellent strategy in engaging their customers.
In my experience, crowdfunding is best done as a part of a round that’s being funded by an established player, such as an angel network or VC firm. As an investor myself, I’ve found that I become more captivated and have more confidence when there’s an existing funder that has priced the round, passed due diligence, and validated the business.
The bottom-line is that—whether you’re crowdfunding or pursuing other avenues—you’re more likely to get backing if you’re crowdfunding for the right reasons, and not just the need for capital.
You can read more about strategies and approaches to general fundraising in our Fundraising Guide.
Darren is Senior Venture Portfolio Manager at Founders Factory, and previously part of the commercial team at Crowdcube, Darren Mulvihill has experience in helping founders use equity crowdfunding to raise investment.
👋 I’m on Twitter or LinkedIn if you want to say hi.
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