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Seeking support from the crowd

For many enterprising businesses, such as BrewDog and Diet Chef, the emergence of crowdfunding has proved the perfect antidote to bank lending and venture capital. Does it have potential for food and drink businesses looking to fund an expansion?

Brian Moore is a corporate partner and head of capital markets at Maclay Murray & Spens LLP.

What is crowdfunding and who is doing it?
Crowdfunding is where a business uses the internet to source small amounts of funding from many individuals, usually using one of the many crowdfunding platforms available. The most notable successes have been consumer products able to inspire strong loyalty, such as those in the food and drink, fashion or consumer tech sectors. Retailers can fall into that category too – especially if they consciously position themselves to their target audience – and even some convenience retailers have been getting in on the act.

What are the advantages of crowdfunding?
Apart from being a way to access funds for those who might not otherwise receive support from banks or other traditional funding sources, crowdfunding has the advantage of building a loyal support base with a vested interest in and strong connection to the brand. With successful products and entrepreneurs acting as poster-boys for the trend, crowdfunding has now become the first choice funding method for many businesses. Even when bank or venture capitalist funding is available, some businesses are choosing to raise money from their customers and communities because of the advantages it offers in terms of brand and buy-in. However, there are pitfalls.

What are the risks?
‘DIY’ crowdfunding without professional advice is high risk. Likewise companies need to take care even when using one of the FCA-approved platforms. A key concern when crowdfunding lies in the valuation of the business, and the potential disappointment for investors who could lose some or all of their money. Even when ventures succeed, there is often no obvious way for investors to cash in their shares, bar a liquidity event such as a takeover or IPO. Instead, some ventures have relied on offering perks – usually a discount or regular special offers – to those who help them get off the ground. With many small businesses rushing into crowdfunding without advice, some end up giving away far more than they should have: a 25% discount offered in perpetuity could become a millstone around a retailer’s neck as the chain matures and markets change, while handing over a large share of the company too early will have consequences when looking at a second or subsequent funding round. Even though the various FCA-approved crowdfunding platforms are easy for the layman to use, it is therefore still a good idea to seek expert advice on terms and conditions and valuations before launching a campaign.

Could grocery retailers benefit from crowdfunding?
Many of the most successful crowdfunded ventures have had an ethical twist, been social enterprises, or involved in quirky innovations that people have wanted to help get to market. Food and drink businesses may be able tap into this emotional angle by positioning themselves as community champions, ethical retailers or focusing on healthy, organic, or fair trade options, which are increasingly popularly with customers. For those who can harness brand loyalty or a strong sense of community, a well-managed crowdfunding campaign can be a great way to fund a start-up or expansion in a way which builds a strong connection to the customer base at the same time. But it is still worth looking at what the traditional funders can offer, and weigh up that route against a realistic look at the potential extra work and cost that crowdfunding can entail.

Do you have a business, property or legal question or issue that you would like to know more about? Contact Scottish Grocer and we’ll put it to an expert.
Contact John McNee 0141 567 6032 or john.mcnee@peeblesmedia.com

 

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