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The Drapers guide to crowdfunding

Crowdfunding

An increasing number of fashion brands are turning to crowdfunding platforms to fuel growth and drive innovation. Drapers takes a closer look at the motivations, advantages and challenges for brands taking advantage of this unconventional business tool. 

Once the preserve of experimental tech start-ups, hipster breweries and wacky niche products, crowdfunding platforms are increasingly becoming a popular tool for fashion brands and retailers. As budgets tighten and market uncertainties weigh heavily on the industry, fashion businesses both new and old are turning to the platforms to help fuel growth or test product innovations with the backing of a crowd of consumer investors.

Crowdfunding allows businesses to raise money for a project or endeavour by receiving relatively small amounts of funds from a large number of investors. Two forms of crowdfunding are gaining traction in fashion.

The first involves investors funding a specific project in return for a variety of rewards – from a “thank you” to delivery of the finished product before it is available to the public. In the words of US-based crowdfunding site Kickstarter, which has funded almost 125,000 projects: “A project will eventually be completed, and something will be produced by it.” On Kickstarter, funders’ pledged money is only taken if the project reaches its funding goal, making it a comparatively low-risk way to invest.

To date, Kickstarter estimates that more than $100m (£77m) has been pledged globally to fashion designers on the platform. Brands and retailers including Wool & the Gang, SilkFred and The Idle Man have used it to raise funds, and an increasing number of fashion businesses appear to be testing the platform.

The other form of crowdfunding is facilitated by sites such as Crowdcube, which has so far generated more than £300m of investment. Here, investors fund a business itself – whether it is a start-up or an existing brand that wishes to expand – in return for equity. Again, the pledged funds are only taken if a project reaches its investment target.

Crowdcube co-founder Luke Lang believes the increasing pace of the fashion industry is prompting more brands to use the platform, led by a new breed of online, fast fashion players.

“We’ve seen a significant rise in the number of fashion-related businesses coming on to the platform,” he says. “As more brands launch online and are able to offer fast-changing lines to customers in a fast-paced, high-growth world, designers and fashion brands are looking for investment that can match this speed and ease of access in many ways.”

Crowdfunding also offers a solution for businesses that do not fit into other fundraising models.

Lang says: “Finding people willing to back the growth of the business with investment can be more of a challenge. Venture capitalists and ’angel’ investors [wealthy individuals who provide capital for start-ups, in smaller amounts than venture capital firms] are not always easy to find and can often make demands that fashion entrepreneurs are not comfortable with.”

It allows a more colourful and rich culture to thrive

Justin Kazmark, Kickstarter

Emily Bendell, CEO of lingerie brand Bluebella, which has raised funds on Crowdcube, says: “There does tend to be a funding gap in the UK for [medium-value] raises. There is an organised angel [investor] community, but the problem with the angel community is that the sort of investments it makes is tied to the expertise of people within that community. However, because the angel community is relatively homogenous, there are businesses that they don’t instinctively understand. There is a no man’s land between angel funding and venture capital funding that crowd funding can fill.”

As the angel investor community is 95% male, Bendell is also adamant that crowdfunding provides the opportunity to encourage more women to become involved in investment.

“I feel strongly that we should be encouraging more women to invest,” she says. “If we, in a very small way, have played a part in that, putting crowdfunding under the noses of our network, which is predominantly female, then that’s a good thing.”

Kickstarter vice-president of communications Justin Kazmark says that, with crowdfunding, “first-time creators are empowered to take risks on ambitious ideas. And backers are empowered to take a chance on those first-time creators. It allows a more colourful and rich culture to thrive.”

With the ability to fuel innovation, intrigue customers, drive business growth and gather investment, crowdfunding has huge potential for fashion businesses, both established brands and newcomers. Drapers explores fashion crowdfunding successes and takes learnings from their owners.

 

The product model

Organisation open front pocket

Organisation open front pocket

Knomo

Howard Harrison, co-founder of accessories brand Knomo, says crowdfunding can “de-risk” a product launch. Knomo sought £50,000 on Kickstarter to launch a “smart” backpack – if they pledged £314, backers would receive a backpack once it went into development. The project ended up raising £100,000.

Harrison explains: “We didn’t do it from a fundraising point of view. It was to de-risk a new launch by understanding the true demand for the product. In wholesale, generally you get it wrong – you over- or under-forecast. When people vote with their credit cards, you get a sense of how enthusiastic people are going to be.”

For Harrison and Knomo, crowdfunding was “fairly all-consuming”, but he stresses that the benefits went beyond the financial: “This is a whole new way of doing business and there was a whole new set of work required that wasn’t in people’s normal day jobs. It was a brilliant activity within the business – it united all functions and everyone was completely engrossed in it. It was time-consuming, but it was also very rewarding because you could see direct feedback and direct results coming in.”

We can see what people are responding to and assess the demand for bold ideas

Duane Holland, DH Ready

Footwear brand Anatomic & Co believes the cash injection provided by crowdfunding has the potential to facilitate more experimental product launches. Earlier this year, it ran a Kickstarter project for its “In Good Company” shoe, which can disconnect the owner’s smartphone at scheduled times to minimise “digital distractions”. The project failed to raise its target amount, but this was not necessarily a disappointment for Anatomic.

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1

Anatomic & Co

“Innovation and technology is at the core of what we do, and we always have innovations in the pipeline,” explains Moema Pimentel, managing director and chief designer. “The idea was to explore the demand. We wanted to create a limited edition and test the market for this kind of product.”

“This is a technology collaboration, so there are a lot of costs. It would have been very risky to put all that money in up front,” explains Duane Holland, founder and creative strategist at DH Ready, who worked on the campaign with Anatomic. “Crowdfunding felt like a very sensible, smart and modern approach to developing a limited edition, trying to get a bold idea out there and testing the water. We can see what people are responding to and assess the demand for bold ideas. It gives us a bit more freedom.”

“It is a great way to experiment and test an idea to validate the concept before diving in,” agrees Kickstarter’s Justin Kazmark. “You build a community of support while you find funding. You can see if the project deserves to move forward.

 

The investment model

Natalia body black bluebella ss17 01

Natalia body black bluebella ss17 01

Bluebella

Lingerie brand Bluebella turned to crowdfunding to fuel its growth. It raised £1m on Crowdcube last December to drive international expansion. Since the investment, sales have soared internationally – in February 2017 online revenues in the US were up 1,535% year on year. In return for their cash, investors received a variable equity stake in the Bluebella business, depending on the size of their investment.

For CEO Emily Bendell, the appeal of crowdfunding was multi-faceted, as it not only allowed the business to gather funds, but simultaneously built a network of brand advocates.

You are creating an army of brand ambassadors

Emily Bendell, Bluebella

Emily Bendell Bluebella chief executive

Emily Bendell Bluebella chief executive

Emily Bendell

“I really liked the idea of it being more than just investment,” she explains. “Essentially, you are creating an army of brand ambassadors. There’s a feeling of ownership, and I liked the idea of having this network that had provided the capital for the company, but would also be brand supporters.”

Crowdcube’s Luke Lang agrees this a common draw for young brands: “It enables businesses to engage with existing networks, and to establish relationships with potential brand advocates and customers. There is also the post-funding benefit of being supported by a crowd of investors, which can prove to be a significant source of skills, contacts and expertise.”

There are challenges, however, and managing a campaign requires an investment of resources from the company. Bendell stresses the importance of ensuring you can deal with the reality of a large pool of investors. Communication is key: your investors need to be kept up to date, but it may not be possible to consult them over every small decision your company makes.

 

Four crowdfunding success stories

SilkFred

Founded by Emma Watkinson in 2011, SilkFred raised nearly £150,000 through crowdfunding in 2013 and is reportedly eyeing a £100m flotation later this year.

Wool & The Gang

In 2016 the business raised more than £1m through crowdfunding. BlueGem Ventures, owners of the department store Liberty, acquired a £68m stake in the company in April.

Me & Em

The contemporary womenswear brand raised £1.2m through crowdfunding in March this year. It aims to invest in digital marketing and boost customer conversion.

The Idle Man

The menswear etailer raised £500,000 in an equity crowdfundraising in 2015. Having secured a further £1.4m in funding from angel investors and backing from Channel 4’s Commercial Growth Fund, it opened a “try before you click” store earlier this month.

 

  • Thinking of expanding overseas? Download our guide to international online expansion, covering Germany, the US, Japan, China, Brazil, India, Australia, the Nordics and the Netherlands 

Readers' comments (1)


  • Crowdfunding is a great way not only to raise funds but also engage with and grow your customer base.

    We are also seeing an increase in the use of mini bonds on crowdfunding platforms. These allow companies to raise funds and achieve the same marketing advantages BUT without having to give away any of their equity.

    Daniel Geller
    Associate
    Fashion Law Group
    Fox Williams LLP

    Unsuitable or offensive? Report this comment

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