Fundraising for start-ups or early stage companies has always been a challenging task as anyone who has seen the plucky contestants enter the Dragons’ Den on the hit television programme can agree. However, with a high number of food and drink companies emerging each year the competition to secure investment is becoming even more challenging.
There is no doubt that Scotland has developed a fantastic infrastructure to help nurture food and drink entrepreneurs with their business ideas but securing investment to take the business from an idea to a profitable business is something that requires more than just luck.
Several factors will determine whether a fundraising process is likely to be successful but four key areas that must be considered are:
- Business Plan – having a clear vision of how to execute your objectives and identifying a realistic timetable and assignation of who is responsible for the deliverables required.
- Funding Requirement – identifying the quantum, nature and timing of the funds that are needed to create a realistic and robust cash flow forecast with built in sensitivities is essential.
- Target Market – knowing who your intended customers, market or sector are that will use your product or service.
- Management Team – establish a credible team to deliver the plan and source outside expertise to fill any skills gaps.
One of the biggest challenges for early stage food and drink companies is the ability to demonstrate a commercial return for their product or service, i.e. who, when and how much is someone prepared to invest, and will this deliver an attractive return on investment. This is not a case of questioning whether or not the idea is a good one – it’s whether it has the potential to generate a profit.
Thankfully, we are seeing a steady flow of completed fundraising projects and there are many investors currently looking for new opportunities so now is a good time to find the right one.
As well as this more ‘traditional’ approach to fundraising, the rise of digital platforms has made it possible for businesses to raise finance directly from their end customers. Bypassing traditional channels, crowdfunding has grown in popularity in recent years and become a go-to solution for new and existing businesses. If your business is considering is as a finance option there are some crucial points to consider before embarking on your own round of crowdfunding.
Firstly, understanding crowdfunding and its implications is key. Traditionally, the finance of a new business, capital project or specific event requires a business to approach a small group of investors for a large sum of money, while crowdfunding targets a large number of investors to each invest much smaller amounts. Through the internet, a business can reach its end customers and those potentially interested in their offering and ask for investment while providing incentives for doing so. These incentives may include the purchase of equity, so loyal customers can watch the value of their shares grow – Brewdog has had great success with this model through its ‘Equity for Punks’ scheme – or they could simply offer the opportunity for stakeholders to donate to a cause they care about in exchange for future rewards. The benefit for the business undertaking the crowdfunding is the opportunity to receive the funds with minimal or no short term cash repayments.
The brewing sector has been pioneering in its use of crowdfunding. As an industry, it offers some good examples of crowdfunding in action, as its customers have wholeheartedly supported its efforts. In the last year, Brewdog’s latest round of funding brings the total raised through “Equity for Punks” to over £80m, allowing the craft beer giant to expand its brewing capacity and increase its international reach. Additionally, Fierce Beer raised £121k to open a brewery bar in Aberdeen city centre and the Northern Monk Brew Co & St Andrews Brewing Co raised £1.4m and £600k respectively to expand production. Loch Lomond Brewery also took this approach, raising an initial £550k to double their production and begin working towards a move into a brand new brewery and visitor centre by 2020.
With results like these, crowdfunding appears an attractive proposition. However, there are some key issues to consider:
- Do you have the cashflow to make repayments if necessary?
- Are you at risk of reducing your control of the business by diluting your shareholding?
- Is there a risk that the rewards offered to investors have an unplanned VAT impact on your business?
These are just some of the questions businesses need to consider before deciding if crowdfunding is the right approach for them when looking to grow and develop, and it is key to engage early with professional advisors early in any area of funding. Their knowledge and expertise can guide businesses through any of these processes and they will be able to advise on the best approach will, whatever stage of the business cycle they are at.
By Matthew Allan, Audit Senior Manager at Anderson Anderson & Brown LLP
To find out more about Matthew Allan and the Audit team, click here.