In the autumn of 2014 Taylor Street Baristas set out to raise £1.5 million through crowdfunding. The London-based chain of coffee shops did not fit the traditional profile of companies seeking funds from “the crowd.”
It is not a start-up. Rather it is an eight-year-old business with nine outlets and proven cash flows. It did not promise its crowdfunders small equity stakes or creative paymentsin- kind (“Be a VIP at our launch party!” … “You’ll get ten samples of our product in all the colors of the rainbow!”), which is the norm. Rather, this was debt financing for capital expenditure. The company wants to open a few more cafes and fund a barista training program. They asked the crowd to buy “Mini Bonds” paying an 8 per cent coupon over four years.
Crowdcube, Britain’s leading crowdfunding platform, arranged this alternative financial product: the Taylor Street Baristas “Coffee Bond.” It was wildly successful. Taylor Street raised £1.86m, blasting past its target, by January. The 505 Crowdcube-registered funders spent an average £3,700 per person: a small investment for the white-collar workers who throng the company’s cafes in London’s financial district.
The Coffee Bond shows how crowdfunding is maturing. Over the past five years this new form of finance has exploded in popularity in both the US and the UK. Crowdcube, Funding Circle, AngelList, CircleUp, and other crowdfunding platforms are moving confidently into areas of finance reserved for banks and sophisticated private investors. Consumer companies are best positioned to tap the crowd’s funds, because their most loyal customers already have an emotional investment in the brand.
“We have this incredibly regular set of customers,” says Richard Shaer CEO of Taylor Street Baristas. “We were fairly confident that we would be able to encourage this core group of customers to invest in our company. If they believe in what you’re doing they want to see you get better at it.”
“With crowdfunding you find consumers who know your brand and know your business better than a bank probably does and in quite a nuanced sense,” Shaer says. “They’re in every day. Banks are not in every day. They know the quality. They know the experience. They will have a better vision of the future of the business than I think a bank would.”
FUSE met Richard at one of Taylor Street’s cafes near London Bridge. It is tucked away in an alley away from the footfall of passersby. Yet the cafe is jammed at lunchtime. Flat whites emerge from clouds of steam with the frequency of a factory line. Each is made with artisanal care, and each costs nearly £3.
For months Taylor Street advertised its Coffee Bonds in its shop windows as if it was a new kind of flat white. That helped Crowdcube as much as it helped Taylor Street. Curious customers registered with Crowdcube to see how crowdfunding worked. If they had a penchant for investing in things they could eat or drink, they discovered many other opportunities. A chocolate company, an Indian winemaker, a cold-brew coffee company, two pizza restaurants, and a fancy brunch restaurant were among the equity investments on offer. For debt investors Crowdcube offered other Mini Bonds. The “Burrito Bond” of Mexican fast-food chain Chilango paid an 8 per cent coupon. Chilango raised £2 million, twice what it had solicited, from 700 investors.
Crowdcube’s growth over the past year has been “exponential,” said James Wise, a principal at Balderton Capital. The Londonbased venture capital company is one of Crowdcube’s earliest and biggest investors.
“We’ve seen a number of disruptions to traditional financial services,” James says. “Traditionally if you wanted to invest capital you were cut off from large parts of the markets, where opportunities were limited to institutions and wealthy people. Consumer investors were simply not aware of the opportunities. So crowdfunding uses technology platforms to open up those opportunities, to inform people about them, to make it financially viable. And that has only been possible in the last few years.”
Crowdcube, which has facilitated equity crowdfunding since 2011, entered the bond market in mid-2014. “Mini Bonds have traditionally been a proprietary area of small corporate advisory boutiques,” James says. “But Crowdcube thought: ‘If it’s properly regulated, why don’t we use our system to offer that to the crowd?’” “The bond market is interesting for crowdfunding because it’s new, and it faces a bit of a stigma in terms of crowdfunding being something you do if you can’t raise money from any other route. But that is not at all true, as you can see through the Coffee Bond. This is a way for businesses to engage with the huge user base they have already.”
“Crowdfunding could be even more relevant to consumer brands than it is to early-stage tech companies,” James says. “I see a lot of potential for consumer brands, because they already have a group of people passionate about what they do, and crowdfunding unlocks that relationship.”
“Maybe funding tech is not the best use for crowdfunding. Other crowdfunding platforms focus on tech, because they were built by tech advocates and backed by tech-based venture capital. It can be a little myopic. We [are Balderton] are tech investors, and we think tech is really exciting with great potential. But ultimately tech is a niche. Who’s thinking about the future of food? Of retail? Of publishing? That’s where the banks have failed. And the beauty of crowdfunding is that it’s a transparent financial platform that is open to everyone, no matter what kind of investor you are.”
San Francisco-based CircleUp pioneered crowdfunding for consumer goods businesses. Crowdcube is sector-agnostic and funds all sorts of businesses. They are two of over a thousand
crowdfunding organizations, which must navigate complex financial regulations and employ due diligence teams to keep scammers off their sites.
Crowdcube’s growth in 2014 captures the phenomenal growth of the industry as a whole. It took the company two years to reach £10 million in total funds passed through its platform. Twelve months ago less than £20 million had passed through. Today the figure is £55 million.
“I am confident that CrowdCube will become the single largest platform for investment in seed-stage companies in Europe,” James says. “It will overtake all the institutional venture capital investors.”
“We’re seeing that as the medium grows, the average amount people can raise also grows. It will always be a good place to raise small amounts, but you’re going to see the sums go from tens of thousands to millions of pounds, and then one day tens of millions of pounds – perhaps from there an actual public offering.”
Back at Taylor Street Baristas, Richard gives another reason for the success of the Coffee Bond. It is part of the wider trend of consumers getting involved in all aspects of what they consume. “People’s coffee tastes are changing,” he says. “They are demanding better quality coffee, better knowledge of the provenance of their coffee and their food, beer: everything that they put into themselves.”
Once they are satisfied with the company in terms of products, production chain, and brand values, why not invest in its expansion? Taylor Street’s diehard fans-cum-crowdfunders will reap an additional dividend from their investment: the knowledge that soon there will be two more shops (perhaps nearer to work or home) where they can get their daily fix.