Throughout the past decade, crowdfunding has proven to be a vital source of startup capital for young entrepreneurs looking to get off the ground. But in a crowded marketplace where companies are constantly competing for venture financing and require millions of dollars to grow their companies, platforms like Kickstarter can’t cut it for established brands.
However, the last year has seen a surge in companies turning to equity crowdfunding websites such as StartEngine, Wefunder, Republic and Seedinvest. Unlike Kickstarter or GoFundMe, these online companies allow anyone to invest in a company in exchange for a small equity stake. Classified by the U.S. Securities and Exchange Commission (SEC) as Reg CF offerings, startups can open financing rounds online with a maximum offering of $1.07 million.
Equity crowdfunding websites service startups in all industries, and as the platforms grow food, beverage and alcohol brands are turning to them to raise money.
A cursory look through the listings on StartEngine show multiple established food and beverage brands with active campaigns, including Yerbae, Grady’s Cold Brew, Honeydrop, The Luving Company and Ola Brew. On Republic, sparkling tree water brand Asarasi sold out its $472,050 raise with over 1,000 investors and brands such as WellWell, Genius Juice and Little West still have open rounds. Meanwhile, Wefunder is home to campaigns by HunniCo, Live Free Foods, Hopsters and Red Bay Coffee Company.
Equity-based crowdfunding platforms have existed for about the same amount of time as donation-based versions — Wefunder launched in 2011, SeedInvest in 2012, StartEngine in 2014 and Republic was founded in 2016. But 2020 saw a significant spike in their usage; according to StartEngine CMO Johanna Cronin, total funding on the platform soared 236% this year to $147 million. First time investors joining the platform grew 256% year-over-year.
“With COVID-19 limiting many industries and shutting down others entirely, we’ve seen an increase in the number of applications from small businesses who need access to capital,” Cronin told BevNET. “And on the other side of the equation, investor demand has risen to meet that need.”
To date, StartEngine has been the top platform for beverage brands, which accounted for roughly $1.8 million in investments in November and $1 million in December, according to data firm Kingscrowd. Through 2020, Wefunder has remained a steady second, followed by Republic and Seedinvest. In November, the average beverage company campaign raised roughly $70,000 and in December the average per campaign was about $30,000.
Equity crowdfunding is also set to receive another boost this year: On March 15, regulatory rules dictated by the SEC will raise the cap on Reg CF offering limits from $1.07 million to $5 million. The rules change will remove investment limits for accredited investors and allow companies to utilize special purpose vehicles to facilitate investments.
According to Cronin, StartEngine also plans to launch a mobile app this year, making the platform more accessible for both startups and investors.
For many beverage companies utilizing equity crowdfunding, the primary goal of their campaigns have been to serve as bridge rounds, particularly as the pandemic has created uncertainty in the marketplace.
Grady Laird, president and co-founder of Grady’s Cold Brew, said his company began its StartEngine campaign in December 2019 with a goal of raising the maximum $1.07 million. Calling the traditional method of raising funds from private investors “frustrating,” Laird said crowdfunding was an appealing way of raising money that could carry the brand until it was expected to reach profitability this year.
Grady’s initially promoted its campaign by tapping into its email list and reaching out to existing customers — a common technique for brands launching equity crowdfunding campaigns. However, Laird said the company took it a step further, putting cards promoting the round in every online order shipment and adding neck tags to its bottled products in retail.
With over $900,000 raised to date from more than 1,000 investors, Laird said Grady’s could close the round at any time but will keep it open until it meets the maximum offering. He said the rolling capital has been helpful this past year, particularly as the company experiences seasonal lulls during the winter months which the campaign helped to make up. Much of the financing to date has gone towards expanding production capacity, hiring new employees and increasing online marketing.
“It was pretty dependable capital that we could kind of count on and make decisions from and it was coming in at a steady enough pace that we never felt the need to really accelerate it or spend a bunch of money on kind of online promotion advertising to try to drive it up quicker,” Laird said.
Andrew Lorig, president and CEO of lemonade maker Honeydrop, said his company had been considering equity crowdfunding for several years, but made the leap in late 2020 after moving past business hurdles created by the pandemic. Though it has been online for over a month, Honeydrop only began promoting the campaign this week and has raised just shy of $100,000 from over 100 investors. Lorig said the funding will help support the brand’s growth as it explores expanding the platform beyond beverages and into other categories such as beauty products.
Like Grady’s, Honeydrop has used crowdfunding as a means of securing consistent, rolling capital that avoids the pitfalls of private fundraising.
“$1 million isn’t a lot in terms of what our competitors are working with, but it’s still consistent capital that we can be raising on an annual basis instead of going to find the capital when we need it on an immediate basis,” Lorig said. “So it allows us to keep up with surging consumer demand, responsibly grow and scale our business. And it may not be as fast as we want, but like I said we’re doing it responsibly.”
Though the amount the company can raise is limited, Lorig said that turning consumers into investors creates a stronger affinity for the brand and increases word of mouth as consumers have an actual stake in the company’s success.
Lorig said the platform handles all individual investors as one item on the line sheet, making the process easier than seeking out friends and family. While Honeydrop is open to seeking out private investment in the future, he for the moment prefers the independence achieved through crowdfunding.
“We’re not closed off to independent institutional VC money, but this is an avenue that now gives us leverage in the game,” Lorig said. “We get to, based on comparable brands, set a value that we deem is appropriate. It’s no longer the VC saying ‘this is what I’m prepared to give you and I want X number of board seats.’ We set those terms.”
While the appeal of having total control over a funding round may be appealing for many brands, there are also benefits to doing it the old fashioned way. Brandon Ng, an investment banker with Houlihan Lokey, told BevNET that he was glad that crowdfunding has created more access to money and believed it was a good resource for bridge rounds and smaller raises, but said it may not be ideal for large dollar rounds.
“Having options is a good thing,” Ng said. “In certain situations, it has been a lifesaver for a lot of brands in a difficult time, like COVID. But if you’re a brand that’s been doing really well, there’s a lot of capital out there, even today. You might as well go with capital from someone who can add value to you as a partner.”
For some companies, crowdfunding plays into a larger investment strategy. Sagan Schultz, co-founder and CEO of beverage brand WellWell, said his company plans to use its campaign on Republic, with a max offering of $1.07 million, to help fill out a private round it is currently raising.
Nick McCoy, co-founder and managing director of Whipstitch Capital, said equity crowdfunding is a valuable tool for early stage brands, particularly at the current moment when COVID has led to a shortage of family office, angel, and friends and family investments. Startups such as WellWell using the platforms to supplement private raises, or small established brands such as Grady’s creating rolling cash flow, are likely utilizing it the right way, he said.
However, McCoy warned that the crowdfunding platforms themselve may want to introduce more oversight, and suggested entrepreneurs be conservative in assessing their own valuations.
“What’s going to be really important for the long term is these platforms need to get companies disciplined enough to actually make the services money,” McCoy said. “One of the issues on past platforms like these was that companies had too much freedom to name their ask without it being negotiable.”
Some companies have sought to use these platforms for larger raises — candy brand Sugarfina launched a StartEngine campaign last year seeking to raise $25 million (the campaign is a Reg A+ offering, allowing it to surpass the cap for Reg CF offerings). In the case of large raises, Ng is more skeptical of the strategy, suggesting that although institutional investors may ask for higher stakes, they also bring with them industry connections and relationships that can open the doors to long term growth. As well, due to the ‘fail fast’ nature of investing, Ng suggested that the experience of past partnerships makes them savvier advisors as they can help brands avoid common pitfalls. “Every dollar of capital raised is not created equal,” Ng said. “It just isn’t.”
In October, 18.21 Drinks co-founder and CEO Missy Koefod told BevNET that she liked the equity crowdfunding format because it “democratizes the investment process” and allows “anyone from my next-door neighbor to my mom to your grandma can invest in startup companies.” Her company had that month launched a campaign on Republic, which closed in December having raised over $273,000 from more than 600 individuals.
Todd Gibson, co-founder and CEO of functional sparkling water brand Yerbae, gave a similar reason for why he liked the platform, noting that the company has frequent direct contact with its more than 500 investors. Yerbae launched its StartEngine campaign in September and to date has raised more than $658,000 and plans to remain open for at least two more months.
Along with the regular updates and quarterly reports that institutional investors receive, Yerbae’s small stakeholders from crowdfunding also get perks such as discounts on product and limited hats and t-shirts. In turn, Gibson said his investors have helped open up new doors for Yerbae, including a connection with food service distributor Aramark.
“The majority of the people that are investing, these are business professionals, these are people that have connections in some way, shape or form,” Gibson said. “The average age of our investors on the platform is 46, so they have some life experience and they have some connections that could be very valuable.”
Still, the crowdfunding experience isn’t the same for everyone. While the campaign at Grady’s runs in the background of day-to-day operations, Gibson said he often spends at least an hour each day answering questions from current and prospective investors. As well, the company had to invest a share of its marketing budget into promoting the campaign.
While each equity campaign has a minimum check requirement, ranging from $100 to over $300 per person, there are issues that can arise from building a large base of small stakeholders. According to Schultz, of WellWell, one person nearly invested $50,000 in his brand’s campaign on Republic before later backing out. However, Schultz said that because of how crowdfunding investors are categorized, it would have been more beneficial for that person to invest as an angel rather than through the online platform, as the investor may have been able to negotiate terms.
Schultz also noted that the sense of stake instilled in small check investors can also have unexpected outcomes. This month, he said several of the brand’s Republic investors updated their LinkedIn profiles as investors in the company.
“I had new WellWell employees popping up on LinkedIn this last week and I was like, ‘oh, that’s funny, I didn’t hire anyone,’” Schultz said. “They invested in our Republic round, $100 investments, then went on their LinkedIn profile and put ‘Investor in WellWell’ as well as 40 other brands that they’ve invested in.”
While inviting unknown investors into the company’s culture comes with a degree of uncertainty, Schultz said the control over timing and the ease of use made equity crowdfunding a worthwhile experience for his company.
“The whole thing of trying to democratize investing, I think, can be very appealing to small emerging brands that are literally maybe even just trying to get a product to market,” Schultz said. “So I think it’s a really cool thing and I think it’s gonna gain a lot more traction in the future. I could definitely see this becoming a lot bigger. And I hope it does, honestly.”