Keep Calm and Crowdfund
What should you do when your start-up is struggling to raise money from VCs? Going to the crowd seems to be a popular alternative in such situations. But as Shyam Seshadri (MBA 2016) found out from the MD of Plumen, start-ups should probably consider going to the crowd anyway.
We meet for lunch at a chic gastro-pub in Spitalfields. This is where the City and East London meet, where suits and t-shirts blend easily, where the towering heights of Liverpool Street have, in their backyard, a number of small start-ups looking to punch above their weight. Plumen is one of them. The restaurant is brimming; as I take in my surroundings, I’m impressed by how ideal this setting is given that my objective today is to try to find out why every single start-up should consider crowdfunding.
Michael-George Hemus, Plumen’s co-founder and MD, appears as relaxed as he should, having just successfully closed a round of fundraising through Crowdcube. Did the crowd come through as he expected, I want to know. “The crowd came through. It was a lot of work to get them through,” he admits. “Brexit was a massive headwind.” He goes on to recount how investment interest and activity abruptly stopped right before the referendum, and how it took a lot of work to get things to pick up again. Plumen eventually beat their target of £500,000, closing well over £700,000. Nearly 60% of that came from big investors, while the rest came from “the crowd” — people the company didn’t know anything about, who now suddenly have a strong attachment to the company by virtue of being shareholders.
Founded in 2010 by Michael-George, noted designer Nicolas Roope, and LBS alum Ronnie Renton, Plumen is a multiple award winning designer lightbulb company looking to shake up the lighting industry. The eye-catching Plumen 001 and 002 bulbs will soon be joined by a range of designer as well as mass-market LED lighting products.
"Our story is a bit complicated for VCs ... we realised that we had to look for alternate sources of funding."
At institutions like London Business School, we spend so much time talking about entrepreneurship, and, inexorably, about Venture Capital firms being -the- source for raising capital. Why did Plumen buck the trend and go a different path? “Our story is a bit complicated for VCs. We’re too long-term a play and they want to see exponential growth. They want to know that you’re going to go really fast and that you’ve got all the answers.” Many start-ups might fit this profile perfectly, but then again, many others like Plumen might not. “It was early on when we realised that we had to look for alternate sources of funding.”
Plumen began the process thinking they’d raise from family funds and high net worth individuals. But very soon, it became clear that they were a bit too risky for family funds, and that they needed a series of individual investors to meet their target. “Individual investors like for there to be a lead investor to do the due diligence,” he notes, “and that really needs to be an institutional investor — a fund or a VC. So we knew crowdfunding was the only route. Crowdcube basically takes the role of lead investor without being an investor.”
"I was quite impressed by the amount of DD that there was ... any kind of fact that we stated, they rigorously checked."
And that might very well be the single biggest contribution that crowdfunding platforms make, perhaps even more important than raising cash. Says Michael-George, “There's a reputation that there is very little due diligence in crowdfunding, and actually I was quite impressed by the amount of DD that there was. They look at everything historically. They leave it up to the investor to sense check any of the forecasts going forward, but any kind of fact that we stated, they rigorously checked, down to asking for business cards of previous companies that we had worked for.” He goes on to cite an example, where one piece of marketing copy stated that Plumen was “well loved” by its customers. Crowdcube promptly came back asking for proof of this sentiment. And then there’s the thorny topic of valuation. Crowdfunding platforms are not investors, so they mainly ensure that the numbers add up. But crowdfunding is no less forgiving on the topic — valuations are routinely challenged by prospective investors on discussion forums, and Plumen needed to make sure they could defend their numbers.
As our food arrives, the conversation drifts off Plumen for a bit and we begin talking about other Crowdcube campaigns, successful and otherwise. Michael-George is able to quote facts and figures with remarkable ease, from which it’s evident that the Plumen team learnt a lot from studying predecessors. Just a few months ago, GoHenry raised almost £4 million against an initial target of half that amount. And then there were Sugru and Witt Energy, both of whom raised over 300% of their initial targets. Start-ups on two of the most popular crowdfunding platforms have raised a combined total of over £200 million to date. Plumen, it seems, was in good hands and company.
"Crowdfunding is an involved process that requires months of planning in the lead-up ... the whole company is on display."
At the same time, Plumen learnt a lot from less-successful campaigns too. Crowdfunding is an involved process that requires months of planning in the lead-up. “One of the early learnings was the importance of making things look consistent,” he tells me. “The whole company is on display. You could easily tell which campaigns took this seriously and which didn’t.” With this insight, Michael-George decided to delay the campaign launch so that Plumen could spend weeks scripting, filming, editing and finalising their video, working with experienced professional directors and film crew. Their website was updated to use the exact same language and graphics used in the video. Little effort was spared in this department — Michael-George even put a halt to work on a busy weekday to clean the office top-down, just so that a few seconds of footage could be filmed there.
Of course, the work is only half-done when the campaign launches - it requires continuous management over the course of its lifetime. “Once the campaign starts, you’re reacting to everything. You don’t have time to write your communications or your new social media posts, so we wrote everything in advance. We knew that we were meant to be putting up a new post today, it was ready already, copy-paste, done,” notes Michael-George. Plumen also organised two “open days” where prospective investors could come to their office, meet the team and ask questions.
"A well-run crowdfunding campaign can deliver much more than just cash — it turns customers into shareholders, and, thus, into evangelists."
So, how seriously should start-ups consider crowdfunding? Conventionally, crowdfunding has been seen as an alternative to VC funding, but a smart entrepreneur can use it as an effective complementary tool. A crowdfunding platform is not just a way for a company to raise money from individuals. It is a marketplace where three entities meet —start-ups, individual investors in the crowd, and institutional investors. A well-run crowdfunding campaign can deliver much more than just cash — it turns customers into shareholders, and, thus, into evangelists. It can get otherwise difficult-to-reach VCs to sit up and pay attention. Make no mistake about it — VCs come to shop at Crowdcube. And then, the crowd becomes that “other investor” a VC looks for before they decide to commit. A successful campaign provides a stamp of assurance and credibility that the start-up takes with it forever. These are tangible benefits and crowdfunding deserves to be elevated as a mainstream financing option.
So what advice would he give to other aspiring entrepreneurs who are looking to crowdfund? “You really need to be hitting 30% of your target within the first week to have a good chance of making it. That gives everything impetus. The most important thing to do is to have some investors lined up beforehand. The thing that we did well was that we lined up about £250,000 worth of investment before we even started."
What else does it take to please a prospective investor, I ask. "Everything has to look slick and in keeping in what you're asking people to invest in,” he tells me. “They [investors] are really looking for reasons not to invest. If you don't give them reasons not to invest, then they'll invest. Keeping stuff clean, tidy, organised and looking good is all really important.”
The LER would like to thank and acknowledge Nick Burton (MBA 2017) for making this article possible.