Today, many start-ups are looking to crowdfunding as a source of finance. Crowdfunding has helped entrepreneurs in the wearables space raise money and accelerate their businesses without having to agree to onerous terms with commercial banks. It has developed as not only a means to obtain finance, but also as a useful marketing tool to establish or grow a potential customer base.
The first question that many angel or institutional investors will ask often relates to proof of concept. A good way to gain recognition and credibility is being able to demonstrate that your venture has had a successful crowdfunding campaign.
Through investment-based crowdfunding, a company can gain not only investors, but also an army of brand ambassadors and potential customers. Encouraging those investors to take to social media to send out your message is potentially more powerful than a traditional marketing campaign.
As with wearables, crowdfunding comes in different forms. More particularly, is it right for your business? Here are some crowdfunding options for the wearable tech industry:
- Loan-based: people lend money to individuals or businesses in the hope of a financial return in the form of interest payments and a repayment of capital over time. An example is Funding Circle, who have experience in helping UK companies working in the fashion industry. This form of funding is akin to a bank loan, but may not be suitable for early-stage businesses, which may be limited to other forms of crowdfunding.
- Investment-based or “equity”-based: people invest directly or indirectly in new or established businesses by buying shares in that business. This is how Dog Tracker Nano, a wearable technology tracker for dogs, recently raised a total of £145,390 for 10% of the company on crowdfunding platform Seedrs (they sought £100,000 worth of investment and received nearly 50% more). Here, investors don’t receive a product, but rather a share of the company.
The risks of investment based crowdfunding for a company depend on the crowdfunding platform, and therefore the legal structure, used to raise finance. For example, Seedrs uses a nominee structure, which allows it to manage the investment for investors while still giving them an economic interest in your business. Whilst this arguably protects the investors (and means Seedrs is acting akin to a venture capital firm or angel investor), it does provide a potentially powerful voting block of investors in your business (particularly if they have a blocking minority of over 25% of your company).
On the flipside, equity crowdfunding site Crowdcube allows investors to hold shares in your business directly. Whilst this may provide you with more control over your business, you would have the administrative burden of a significant number of (potentially) geographically-dispersed shareholders, and in turn each of them would have the various obligations of legal shareholder status.
- Pre-payment or rewards-based: people give money to receive a reward, service or product, such as tickets for an event or an innovative product. This is the method of crowdfunding employed by Helix Cuff, who produce a fashion wearable with smart wireless headphones on your wrist. They raised over $264,205 on crowdfunding platform Kick-starter. The concept is simple: customers pre-order and pay for a pair of headphones and then Helix Cuff produces and ships them.
There is little downside for a fashion company in using pre-payment or rewards-based crowdfunding – it can create both a healthy order book and the cash necessary to produce those orders. It can also be done without giving up equity or accumulating debt. However, it is not suitable for raising money to expand your business, for which investment or loan based crowdfunding will be more effective.
- Donation-based: this is where people give money to enterprises or organisations whose activities or purchases they want to support. An example of this would be a campaign on the Justgiving website. This may be suitable for a company with a social objective.
If you are thinking of raising finance in a simple and innovative manner whilst marketing your product to a potential new customer base, crowdfunding may be your best way forward.
For more information please contact Jonathan Segal.