It was announced just before Christmas that Scottish micro-brewery Brew Dog had successfully raised £4.25 million of new funding.The unusual thing about the funding is that the funds were raised predominantly from Brew Dog’s own customers and that it is the third time that Brew Dog has successfully raised money in this way. Brew Dog’s approach will not be for everyone - in particular because they offered a mixture of equity and rewards (only public limited companies can offer shares to the public) and their “Equity for Punks” campaign relied on maintaining a high profile and generating significant PR (including driving a tank around the Bank of England!). It is interesting, however, that such options exist.
“The decision to go it alone and pursue an alternative form of finance is a bold one...”
There are other forms of “alternative” funding which might be of interest to family businesses. For example, a number of companies have raised finance from their customers (and the wider public) in return for a mixture of debt and rewards. In 2010 Hotel Chocolat raised £3.7 million in return for the issue of “chocolate bonds” - entitling bondholders to a return payable in cash and chocolate. In 2012 the boutique hotel guide and booking business Mr & Mrs Smith raised £2m through a bond offering 7.5% return, or a 9.5% return if the return was taken in credits to be spent through the company. The restaurant chain Leon went further, in July 2012, and issued a bond which offered no cash return but paid between a 10% - 15% return in discounts to eat at Leon restaurants. More recently, in September 2013 Naked Wines raised £5m from an oversubscribed issue of a fine wine bond paying gross interest of 7%, or 10% if taken as wine credits. At the most extreme end of the scale, companies which have a genuinely innovative product have raised money on a purely rewards basis - the most well-known recent example being a US company Pebble Technology which raised over $10 million against forward sales of its smartwatch.
The decision to raise money independently in this way is not to be taken lightly. Any form of crowdfunding needs a very significant contribution of time and will mean that the company will need to make public certain details of its business, making maximum use of social media. Equally, where a company issues mini-bonds, the money which is saved on traditional borrowing costs will be partially offset by increased professional fees and (probably) a higher rate of return payable to investors. However if some of the return is rewards- based (ie paid in the company’s products) the costs start to look more attractive. There are other advantages too. Unlike a conventional issue of equity, the issue of mini-bonds has no dilutive effect on ownership. A successful campaign is certain to raise brand awareness, and can help to lock in customer loyalty. Alternative finance can also help to leverage additional conventional finance and since mini-bonds are generally unsecured there is no need to give security over additional assets. However, while brand awareness is bound to soar for a successful campaign there may be a risk of considerable reputational damage if the fundraising is poorly handled or the company is unable to meet its obligations to bondholders so companies need to act prudently.
The decision to go it alone and pursue an alternative form of finance is a bold one and not without risk, but it may be of interest to businesses with a strong brand and loyal customer base. Moreover, while interest rates remain low, mini-bonds will continue to attract attention and may open the door to a significant new source of finance.