By David Drake
Even before Crowdfunding became a market craze in the US, with the enactment of the Jumpstart Our Business Startups Act (JOBS Act), there are already notable success ventures that used the fundraising alternative to get backers.
The more famous, and perhaps most amazing, venture is that of confectionery chain Hotel Chocolat, located in the UK. Hotel Chocolat started off as a mail-to-order business. Now it is one of the biggest companies in Britain after having invested in other lucrative fields.
In 2010, the company contemplated on pursuing various projects which included putting up stores in high streets. Well aware of the difficulties regarding bank debts, the owners came up with one of the most inspiring ways to get their cash – financing by their customers.
Hotel Chocolat offered bonds to 100,000 backers coming from its “Chocolate Tasting Club” to raise £4 Million needed to fund its expansion and creation of manufacturing jobs in the UK. The offering had bonds of 2,000 and 4,000 pounds each. Quite surprisingly, instead of payments for interests, the backers got a far richer reward, chocolates.
With yearly payments of chocolates as dividends, 6 boxes (for 2,000 bonds) and 13 boxes (for 4,000 bonds), over a three-year term and with their investments back after the wait, Hotel Chocolat’s backers found the Financial Services Authority or FSA-approved “Chocolate Bonds” relatively sound, if not sweet.
This deal involved a no broker-dealer setting, without platforms or portals to advertise massively. The company was dealing directly with its investors.
Hotel Chocolat decided to go on with the move after consulting with its support base. Sending letters, with chocolates of course, to members of the Tasting Club, the company had to be sure that the unconventional scheme would get the backing needed to succeed. It did, and it was a hit.
The loyal crowd established by Hotel Chocolat was the main reason for its successful venture. The crowd placed so much confidence on the company’s financial management. It always takes two to tango, and when a company manages to get investor confidence the next steps will simply be cut and dry.
In this case, Hotel Chocolat founded its own crowd back in 1998, the “Chocolate Tasting Club,” and since then maintained a very dynamic relationship, or partnership, with the members.
I’m sharing this exceptional campaign i since it is a good reference for startups and Emerging Growth Companies, as we expect the US market to be more and more competitive. There is a need for these companies, especially those in consumer products and services, to come up with innovative approaches to get backers.
With the JOBS Act giving birth to Crowdfunding, access to capital formation will be the main battle ground. The fight for that space will entail a massive information drive and, unlike the enviable Hotel Chocolat campaign, startups would need online crowdfunding platforms to gain that inch and capture those investments.
I guess it would also be a healthy move for entrepreneurs to make it a default to involve investors in their campaigns, in order to establish an avid following. The more personal the campaign, the more personal the investments are.
Investors need to like what they invest in. And they’re going to make sure they play their roles and make projects succeed, not only because it’s their money that’s at stake, but it is they who are at stake. Hotel Chocolat banked on that and the Chocolate Taste Club responded.
There are startups using crowdfunding platforms that go through that thread, and the results have been very promising. From retail bonds to discounts on purchases, this trend of raising funds from customers is fast becoming a trend.
This will be most effective in fields like music or theater where investments get free albums of the artist they finance, or free tickets to a Broadway play; not to mention of course the money-back guarantee.
It’s a tight market and everyone is willing to try almost anything to come up with the best approach to fundraise. The bottom line though is that you have to get the best platform, using a cost-effective approach, with the most loyal backers and the more attractive campaign.
You can’t chew them all, but they can make you rich.
About the Author
David Drake is an early-stage equity expert and the founder and chairman of LDJ Capital, a New York City-based family office, and The Soho Loft Group – Impact Investing Media – a global financial media company with divisions in Corporate Communications, Publications and Conferences.