Over the past two decades, crowdfunding has witnessed a surge in popularity, with Indiegogo and Kickstarter widely recognised as pioneers of the online funding movement. In fact, Kickstarter – since its launch in 2009 – has enabled more than 16 million backers to pledge over $4 billion to help creative projects get off the ground. The platform boasts an overall success rate of 36% , with 168,372 successfully funded projects to date.
Next, in our series of articles for indie brands, we investigate if crowdfunding can help cosmetics and personal care start-ups launch and scale operations? How does this fundraising strategy compare to other options, and what you need to know before taking the leap.
FINANCING YOUR BUSINESS – CAN CROWDFUNDING WORK FOR INDIE BRANDS?
Perceived as ‘welcome disrupters’ and ‘challengers’ of the personal care industry, there is no denying the current power of the indie brand, with the likes of Melt Cosmetics, Nudestix, Knours Beauty, Joséphine and Côte all gaining popularity over legacy brands. The secret to success for many indie brands is through a carefully crafted and compelling story that builds trust and authenticity with the consumer. After successfully establishing the brand and its narrative, many indie brands are turning to crowdfunding platforms to build awareness, connect with consumers and secure that all-important funding to take their brand to the next level. But does it work?
The first step for any entrepreneur or business owner looking for funding is to understand the options available to them. There are three types of crowdfunding: donation-based, debt-based and finally, equity-based.
Donation-based crowdfunding – made popular by platforms such as Indiegogo and Kickstarter – offer brands a way to source donations from a large number of contributors who all individually donate an amount of their choosing. In return, the backers may receive a reward that increases in prestige based on the value of their donation. For many indie brands, donation-based crowdfunding presents an opportunity to get the buy-in from their fans or loyal customers who want to invest in the brand and its future. However, indie brands must consider the cost of delivering any promised rewards and balance investment with the required payout.
Debt-based crowdfunding or ‘crowdlending’ mirrors the traditional model of applying to a bank for a business loan. Also known as peer-to-peer lending, or loan-based lending, with this type of crowdfunding, a number of investors (the crowd) can lend money through a platform to a business or individual. The benefit of debt-based crowdfunding is that costs for businesses can be kept to a minimum, as the ‘middle-man’ such as a bank or loan company is removed, and they retain full ownership of the brand. This also presents the possibility of improved rates of return for the ‘crowd’.
Finally, there are equity crowdfunding platforms, such as SeedInvest or Angels Den, that enable indie brands to raise money through interested investors, who typically receive shares in the company. Historically only venture capitalists and business angels have had the opportunity to invest in start-ups. However, since the introduction of the JOBS Act in 2012, federal restrictions have been lifted, allowing for equity crowdfunding platforms, such as WeFunder, Localstake, AngelList and EquityNet to open up investment opportunities to a larger pool of potential shareholders – ‘the crowd’.
Leading the crowd
The most essential element in all of the crowdfunding options available is the ‘crowd’ itself. It is the consumers – the people that know and love your brand – who will create the initial momentum for your campaign to succeed.
Many indie brands, that are often self-funded, will want to seek investment straight away, under the pressure of succeeding and growing quickly to compete in the increasingly crowded market. However, it is more important to prove your value and test the market before considering crowdfunding as a viable funding option.
But for an indie brand that has an established loyal customer base, what do they need to consider before launching a crowdfunding campaign? The first step is to plan ahead and break down the process into key milestones. Being organized here is key – brand owners will need to practice their pitch, create a solid business plan and ensure all parties are fully aware of any relevant financial statements – keeping everything documented.
Brands must also have clearly defined their market and business need. What will the funding enable the business to achieve? What makes the business stand out from the competition? A great way to determine a business’ suitability for investment is sales as a proof of concept – demonstrating not only the market need but also the demand from consumers for your product.
While technology companies are leading the way in the crowdfunding space – a wealth of start-ups are using the platforms to garner significant investment and success – but can it really work for indie brands in the beauty and personal care sector?
A great example of how it can propel a business to new heights is that of start-up male grooming subscription service Dollar Shave Club. Four rounds of funding resulted in almost $100 million invested by venture capital firms including Kleiner Perkins, Andreessen Horowitz and Shasta Ventures. Unilever later acquired the brand for a reported $1 billion.
The business, which delivers razors and other personal grooming products to its customers by mail, successfully disrupted an established monopoly of mainstream brands. How? It responded to a market need – for quality, price and convenience – and quickly achieved brand awareness thanks to a viral marketing campaign and an army of loyal customers.
But Dollar Shave Club isn’t alone. Athleisure beauty brand, Sweat Cosmetics successfully closed its crowdfunding campaign at $255,000, enabling it to replenish its inventory and invest in a new marketing strategy. While, Volition Beauty – a brand that allows its customers to submit new product concepts and innovations to the company’s R&D teams and cosmetic chemists – was fully created through its crowdfunding efforts. It has since seen its formulations stocked in the multinational personal care and beauty chain, Sephora.
However, what works for one brand does not mean instant success for another. Indie brands must do their research before deciding which fundraising option is right for them. Take advice from brands that have experience with crowdfunding campaigns, learn from their successes and mistakes. Get advice on your business value and be prepared to work hard, and hustle. With the right approach and tenacious attitude for success, your brand could find its success through crowdfunding, harnessing the power of the crowd and fuelled by your most loyal supporters.