The complete guide to crowdfunding for eCommerce brands
As of 2021, crowdfunding efforts generated more than $1 billion. Predictions for 2022 estimate that those investments will double, which means your brand could miss out on big opportunities to grow if you ignore crowdfunding as a financing option.
Unfortunately, there’s no one-size-fits-all crowdfunding framework for eCommerce brands. But a good understanding of what crowdfunding is and how to maximize its benefits will allow you to create a successful crowdfunding campaign tailored to your company’s unique goals.
To get a complete understanding of crowdfunding for eCommerce, we spoke to three experts in the space. Throughout this guide, you’ll hear from:
- Andy Trewin Hutt, associate director at Morrama
- Jordan Stephanou, head of sales at Crowdcube
- Adam Woodhouse, COO of SPOKE
What is crowdfunding?
Crowdfunding is a financing method that businesses use to fund projects or scale growth by sourcing investment capital from an audience of investors. As Jordan Stephanou, Head of Sales at equity crowdfunding company Crowdcube, explains, “Large groups of people pool together individual investments to provide the money needed to get a company or project off the ground.”
Initially, crowdfunding was a way for founders to gauge interest in a business or project. But over the years, it’s evolved into a trusted way for those with business plans in hand or those who want their existing brand to grow to secure the funding they need to launch or scale.
Andy Trewin Hutt, associate director at Morrama, says that people who crowdfund today are “going out there to win, because you already intend on having a business.”
One of the most well-known and popular names in crowdfunding is Kickstarter, a platform that gained significant attention helping brands like Misen get off the ground and launch new products. Using Kickstarter, Misen has funded nine products and raised over $13 million.
The 2 types of crowdfunding for eCommerce
Businesses that plan to crowdsource capital need to be strategic with their efforts if they hope to convince individuals interested in their project to take the next step and invest. Investors want to feel confident that the money they give to a business isn’t going to be wasted on a poorly planned concept. But what motivates investors for one project won’t always drive investments in other projects.
The best crowdfunding campaigns customize their approach to their audience and target investors and goals. And while they often look very different from one another, generally, crowdfunding campaigns can be broken down into two types: equity and rewards based.
Equity-based crowdfunding
Equity-based crowdfunding refers to when individuals invest in an early-stage, private, or unlisted business in exchange for shares in the company. And according to Stephanou, an equity-based crowdfund “can positively impact your marketing and growth metrics. It’s a great method for building and engaging a community to drive your growth.”
Trading equity for funding gives investors a more personal level of connection to the project. And according to Hutt, that makes this type of fundraising ideal “for those kinds of higher-ticket items, which take longer to get a return on investment on.”
The individuals that invest in equity-based campaigns aren’t looking for an immediate return on their investment — they’re investing in a business because they believe in it. And they’ll want the brand to use their money for initiatives that support growth, like hiring an experienced COO to help scale operations. Stephanou explains:
“The benefits of an equity crowdfund go beyond capital. You get the backing of a community that comprises your most valued customers, avid fans, and biggest advocates, and running a crowdfund only strengthens these relationships. The businesses harnessing the power of their communities through co-ownership have a competitive edge that’s driving their long-term growth.”
“The benefits of an equity crowdfund go beyond capital. You get the backing of a community that comprises your most valued customers, avid fans, and biggest advocates, and running a crowdfund only strengthens these relationships."
Once they have a stake in your business, investors have a bigger incentive to support it. This means they’ll be more likely to help promote the brand, including referring the business to friends and family. And their personal tie to the business generally means their support won’t waver if the brand faces a hurdle.
Rewards-based crowdfunding
Revenue-based crowdfunding offers rewards to supporters who donate. And those rewards can be almost anything, from something small like a tote bag to something much more valuable, like a special collector’s edition release or discounted membership.
It is a great financing option for projects that aim to fund a product prototype and will need to drive sales to succeed. Besides funding, Stephanou explains that the value of rewards-based crowdfunding lies in getting “a steady client base and idea validation from the crowd.”
These types of crowdfunds also generate excitement by literally rewarding investors for their financial contributions. And the more excitement a project generates, the more likely investors will be to talk about it with their friends and online. This sets the official product launch up for greater success.
Once an entrepreneur or brand has had one successful project, they’ll be able to leverage that success with future projects. After a crowdfund ends, the highlights of the campaign will display on the fund organizer’s profile, which makes it easy for investors to see that a brand has a proven track record of success. The better a brand’s track record is, the more likely funders are to invest in future campaigns. This is why Hutt says you want to prove to investors that you’ve launched something “incredibly successful” on Kickstarter.
Why do eCommerce businesses choose to crowdfund?
Crowdfunding provides benefits that other types of traditional finance don’t, including the ability to implement campaigns and boost brand awareness quickly. Plus, unlike more traditional lending methods, whose repayment plans often influence business strategy, it allows brands to deploy capital when and how they want. Crowdfunding helps businesses plan strategically for the future Crowdfunding campaigns can act as a springboard for businesses to take products from development to product launch. And compared to other funding options like revenue-based finance, crowd-raised capital allows businesses to invest much more strategically.
Brands need to invest in things like market research and customer insights. And when a business enters a new stage, it often needs to grow its internal team by hiring experienced executives. Unfortunately, these investments take much longer to generate revenue, and their impact is much less tangible.
Adam Woodhouse, COO of SPOKE, says crowdfunding gives brands the capital they need to “invest in strategic initiatives that by definition probably have a high degree of value.”
Whereas loans and revenue-based financing options are typically used to fund short-term investments like marketing or inventory. According to Woodhouse, “You have to deploy the capital in places where you’ll bank the return on investment within the financing repayment window. So you put it in places where you have a robustly measurable return, like Facebook, like Google.”
With crowdfunding, you can look to use funds with a longer-term view.
Crowd engagement supports long-term success
A crowdfund doesn’t just help you raise capital, it helps to grow your audience by doubling down on current customers and making a big splash to attract new ones. Compared to other financing options, Woodhouse explains that “the attention [you get from a crowdfund] is a bit deeper and a bit broader than you get with a VC fundraise.”
Individuals that donate to or invest in your crowdfunding campaigns are also more likely to become engaged customers that want your brand to succeed. Brands are able to tell their entire story on the crowdfunding platform by writing a thorough description of the product, sharing photos, and posting videos. Hutt explains that this means investors “understand the business model. They understand where it’s being made, what it’s being made from, and then they buy it. So they feel invested in it.”
In SPOKE's case, these were some of the primary benefits that drove the decision to crowdfund. The brand was ready to grow and expand into the American market; it was time to invest in hiring, market research, and audience insights. Crowdfunding allowed SPOKE to do this by utilizing its established loyal customer base to promote the campaign and help drive awareness.
The result of the crowdfund was a genuine investment in the company. And according to Woodhouse, those investments extend beyond finance:
"We have people that are genuinely invested in the company. We can work with them to ask and answer a bunch of questions about what we should do, particularly on the product side of things,” he explained.
