The webinar counted with two experienced speakers who represented the supply and demand side of this financing instrument: the reward-based crowdfunding platform provider “Verkami” and the SME “Cocoro” that has successfully raised reward crowdfunding.
Verkami is a leading reward crowdfunding platform in Spain and one of the three largest reward-based platforms at European level. Since its beginning, Verkami has successfully financed more than 7.900 business projects and raised more than 40 million euros, thanks to a network of more than 1.1 million contributors. Jonàs Sala is a Doctor of Computational and Applied Physics and co-founder of the reward-based crowdfunding platform Verkami which began to operate in the year 2010. He trains on crowdfunding issues as a lecturer for several university masters. Mr. Sala presented what are the benefits for SMEs of this type of finance, what might be the risks and how they are mitigated, and how it works in practice.
Cocoro is a company that designs and produces menstrual panties in Barcelona. It all started in 2016, with a crowdfunding campaign using the Verkami platform, which was a total success and definitely the first milestone of a project that hasn’t stopped growing. Ms. Clara Guasch is co-director of Cocorointim SL and Chief Communications Officer. She is also one of the four co-founders of the company. Ms. Guasch told its successful experience in raising finance through reward crowdfunding, why they decided to use this financing instrument, how they got to succeed in the finance raising campaign, and what should be considered by SMEs when raising this type of finance.
After an initial introduction on Altfinator project by Alberto Sierra from Zabala Innovation Consulting (as moderator of the webinar), each speaker made a 20 minutes presentation. The webinar ended with 10 minutes for a ‘questions & answers’ session.
Main topics discussed:
Jonàs Sala covered:
- Benefits for SMEs of this type of finance;
- Potential risks and how to mitigate them;
- How a reward crowdfunding platform works in practice.
Clara Guasch described:
- Why they decided to use this financing instrument;
- Her successful experience in raising finance through reward crowdfunding;
- What should be considered by SMEs when raising this type of finance.
Main conclusions:
Reward-based crowdfunding involves individuals contributing comparatively small amounts of money to business projects in return for some kind of reward, which often is a production version of the crowdfunded product, which is offered to contributors under more favourable conditions than general market conditions.
A reward fund-raising campaign lasts around 40 days. When it ends, there are two possible scenarios: either the business promoter has got the targeted funding and gets the money from backers/contributors that enables to finance the production, distribution and reward them with the new product, and the platform charges a 5% commission fee to the entrepreneur, or alternatively the targeted funding is not reached, then the money is given back to contributors, there are no costs for producing or rewarding, and the platform does not charge any commission fee. In other words, the crowdfunding raising campaign has almost no financial risk for the business promoter.
With a few backers, the business promoter can produce more units than with his/her own resources only. Once you finish your campaign, all cost are already covered and the risk is considerably reduced compared to a bank loan where a business promoter may be in trouble if he/she gets a bank loan, invest the loan in producing the new products and finally they are not sold and therefore find himself/herself in trouble to pay-off the bank loan. Such risk does not exist in a reward fund raising campaign where production is not started until the funding target has not been reached.
Reward crowdfunding helps business projects not only to raise finance but to test market acceptance before launching new products and it is a powerful marketing tool that is being progressively used by small and large firms too. It helps to validate the business idea, get feedback from end-users on the product (price adequacy, preferences on design/features, models, etc.), it leverages product recommendation and builds a community of “ambassadors” and investors for future fund-raising campaigns.
Verkami works closely with business promoters and offers its expertise along with the raising fund campaigns. As a result, so far more than 75% of campaigns published in its platform have reached their finance target and got funded. That is one of the highest success rates in comparison to other reward-based crowdfunding platforms. The managers of this platform advise and help each and every promoter to set a good target funding, a good reward scheme, and a good communication campaign design and planning.
Therefore, what are the key factors for a successful reward fundraising campaign?
- Estimate the right budget or crowdfunding target for your project, including the minimum number of units you need to produce and “pre-sell” (reward in exchange of a fixed contribution amount) in order to cover production costs, shipment costs for delivering the reward to your backers, platform and VISA credit card/payment platforms commissions that will be charged, VAT taxes, etc.
- Offer an attractive reward, at a better price than it will be sold in shops. Scale or define different levels of rewards according to different fixed options of amounts/contributions (for instance, offer just the product for the minimum fixed contribution option, the product with a supplement kit for a fixed medium contribution option, or several models/colours, or both the product and the kit and also free shipping for the highest option of a fixed amount -contribution).
- Set a very good description into your campaign, including good pictures, a good explanation about the features of your product, and about the entrepreneurial team who is behind the project. Explain the planned timetable to produce the products and when the contributors/backers will receive the reward/product.
- Communicate the campaign in all possible channels: social networks, podcasts, contacting co-working spaces, influencers, blogs, press, radio, etc. Approximately 2% to 3% of Facebook/Twitter/Instagram visits to the campaign use to convert into contributions.
- Plan well in advance the communication campaign: what you will do in each and every one of the 40 days of the campaign duration. And of course, implement and devote yourself proactively to it; it will be quite time-consuming. Success during the first days is crucial.
The SME representative explained that when they started their business in 2016 and wanted to move from the idea/prototype to a production scale, they explored three financing options:
- Bank: a guarantee was required; they didn’t have money for that guarantee, and they should give back the loan with a high-interest rate. They ruled out the bank option.
- Investors: either money had to be given back with interests, or investor asked to be partly owners of the company (part of the company needed to be sold to investors). They also ruled out the investors’ option.
- Reward-based crowdfunding: Many people spending small amounts of money and allowing the business promoter to pre-sell its product with very reduced risk. This was their option.
In the opinion of the SME, the reward fund-raising campaign requires specialized knowledge, time and money (for photos, video, social ads, prototypes for influencers, promotion, etc.). In fact, they had to ask for a loan to cover these campaign costs.
Cocoro’s campaign was a great success. They had planned a goal of a minimum production of 1.500 panties in order to start an e-commerce site, for which they needed 21.560 € and approximately 700 backers. They finally got to raise 169.625€ and produced 9.000 panties (6.700 sold) with 3.433 backers and 6 million people of audience reached.
For the SME it was very important to plan what to do BEFORE launching the campaign. This meant to select an adequate platform (they were focussed on a national audience, so they went to a platform operating at national scale), set the right funding target/goal (minimum budget to start production), select the reward (what is it we want to validate? What will our backers want?) and set the basics for the communication campaign (goals, key messages, identity, audience, channels, actions, and materials needed).
The business promoter must also be prepared for an unexpected success of the fund-raising campaign, i.e. be aware of what will be the consequences of each funding milestone if reached and analyse if the current plan of action will still be valid (e.g. will the promoter be ready for a bigger production?) That was the case of Cocoro, the success exceeded its initial production capacity and they had to look for other places to produce the product and for additional logistics to distribute the product/reward. They also rescheduled and communicated a new timing to its bakers’ community, asking them to wait a little bit more for receiving the reward (the backers used to be understandable to this type of delay warnings).
In a later company growing and expansion phase, the previous reward-based crowdfunding campaign can be supplemented by an equity crowdfunding campaign taking advantage of the community of contributors that already supported the business project at its early stage. That was again the case of Cocoro who after its experience with the reward-based campaign knew that they had a community that felt part of the business project, and they wanted to keep the project as open as possible (i.e. to avoid a single investor) and keep running the business on their own way. They also realised that, if they wanted to grow internationally, they needed to start having an international community: that is why they selected an international equity crowdfunding platform like Crowdcube for that equity raising crowdfunding campaign, which also was a big success. They got 300.000 € of equity investment which was equivalent to 134% of its initial fund-raising target.
They also reached one of the highest percentages of female investors in the Crowdcube platform (38% of investors in its campaign were women). They consider that women are more prone to invest through crowd-equity, than through more traditional means. According to the Verkami platform experience, approximately 30% of business promoters who have run a reward-based fund-raising campaign use to grow its community of backers around its business project by making a successive or second reward-based campaign. This second fund-raising campaign uses to be easier since you already have built a community of contributors on which you can rely. Yet, such a second campaign must be focused on a different -although related- project than the first one. If the second campaign focuses on the same initial product, then experience shows that it is better to go for an equity crowdfunding campaign than to repeat a reward-based campaign.
Watch the recording of the webinar HERE.
