This week, Seedrs offered up some advice on how businesses (small and large) may benefit from using the equity crowdfunding method.
The UK-based portal revealed that unlike other forms of financing, the funding method has a number of additional advantages for businesses. Seedrs went on to reveal four of these benefits, which are listed below.
1. Validation
“The validation of any product early in its journey is a critical part of the development cycle for many early stage businesses. Crucially this prevents wasting any time on unnecessary development of something customers don’t need or want. Using crowdfunding to showcase a product to a community of inquisitive and critical investors is one of many ways to test whether there is any demand for it.
“Unlike rewards-based platforms such as Kickstarter or Indiegogo, investors in equity crowdfunding campaigns do not receive an early-stage product or prototype (although you may offer one as an additional perk to investing). However, as a by-product of being a prospective investor, many will test the product as part of their due diligence, and in doing so provide valuable feedback on viability. Remember, a potential investor is also a potential customer, and often investors are excited about businesses that are solving a problem they are familiar with.
“Because investors are considering more than just the current product when making decisions, the feedback from them will also likely be far broader than rewards-crowdfunding, and extend to analysis of business models, growth strategies and exit plans.”
2. Marketing
“Marketing and promotion is both one of the main challenges and rewards of a crowdfunding campaign. For early-stage companies with the beginnings of a product, it is an opportunity to present it in front of a new audience and benefit from the network effect of investors sharing and talking about their investments to raise brand awareness and grow customer numbers.
“Later-stage companies can also benefit from this opportunity, and use it as an engaging new way to connect with and market to their existing customers. Chapel Down and Tossed for instance both offered discounts to their customers who chose to become shareholders. During their campaign, Tossed even added stickers to their salad boxes, inviting their customers to become investors by telling them to “put their money where their mouth is”. They raised over £1.3 million, much of it from their existing customers.”
3. Ambassadors
“The conversion of customers into shareholders fundamentally changes the relationship between the customer and business. John Lewis recognised this for staff and was one of the pioneers of employee ownership, but when this relationship is extended to customers, the benefits are even more rewarding.
“A wider variety of product choice means that customers are increasingly likely to change their purchasing habits. Short of significant variance in quality or value, there is surely no better way to incentivise customers than for them to be engaged as shareholders.
“Not only are people more likely to buy products from companies that they have a vested interest in, but they are also more likely to promote and recommend them to others. Remember, existing customers are potential investors, and potential investors are potential customers.”
4. Advisors:
“One of the results of having a large number of shareholders is that you have people from a wide variety of backgrounds who want you to succeed and are often willing to offer their experience and networks to help get there.
“Existing customers who use the product regularly will be able to give valuable feedback into their experiences and how it could potentially be improved. Angel investors who have lots of knowledge of helping startups grow will be able to give their advice. Even investors who have no experience of the industry the business operates in will be able to give their opinion from a unique perspective. All of these sources of advice can help an early-stage business a lot.”