Crowdcube breathes fresh air into investing

A novel way of raising capital and enhancing customer loyalty is being offered in the UK in the form of mini-bonds, but some argue they offer little return for their considerable risk

 
John Lewis
John Lewis is among the retailers for which Crowdcube has raised money. The UK company has promoted the mini-bond platform and says it now has 73,000 registered members 
Author: Jules Gray
November 10, 2014

Forging a strong sense of loyalty between a brand and its customers is something all businesses desperately want but few actually achieve. Making a customer not just return, but also promote a brand out of simple goodwill, is the dream of all marketing managers.

While companies spend staggering amounts of money on various ways of engaging with their customers, there have recently been a few novel approaches to harnessing customer loyalty, while at the same time raising money for the business. The most prominent of these are so-called ‘mini-bonds’.

Mini-bonds are yet another form of crowd funding – a method of financing that has become increasingly popular in the age of social media. However, while other forms of crowd-sourced finance can involve equity within the business, or amount to little more than a donation, mini-bonds offer investors an annual cash return, alongside a number of other attractive perks.

An attractive model
Crowdcube is the UK company that has promoted the mini-bond platform, successfully raising money for firms including Chilango, Nuffield Health, John Lewis and Hotel Chocolat. The company says it now has 73,000 registered members, who it describes as a “ready-made investor audience”. In 2013 the Bank of England described it as one of a number of firms that could be ‘revolutionary’ in the financial sector. Crowdcube has received regulatory approval in the UK.

Mini-bonds are yet another form of crowd funding – a method of financing that has become increasingly popular in the age of social media

The idea has been to source crowd funding for companies looking to expand with a range of financing models including equity stakes. Crowdcube is proving attractive with investors because it allows them to lend money to both up and coming companies and established brands that they might be supportive of and feel an affinity with. Mini-bonds also offer a fixed-rate of income for investors, as well as a lower-cost form of financing for businesses. At a time when interest rates around the world are at record-breaking low levels, such a bond is attractive.

Chilango has drawn the most attention for its use of mini-bonds. Its offer of eight percent interest on its bonds and numerous additional benefits has given the Mexican restaurant chain a novel way of attracting investment and strengthening brand loyalty.

Firms are able to offer a plethora of perks to those customers who have invested. While they will undoubtedly get some form of fixed return for their bond, they will likely also get a number of additional benefits. In the case of Chilango, ‘Burrito Bond’ holders are able to enjoy two free burrito vouchers and an invitation to a VIP party. The minimum bond investment is just £500, but those loaning the company more than £10,000 will be able to enjoy free food at the restaurant for the duration of the bond period.

While some of these perks might seem trivial, they help to foster a sense of belonging to a brand that is hard to achieve through traditional marketing. Eric Partaker, joint founder and CEO of Chilango, said in a statement of his enthusiasm for the mini-bond platform offered by Crowdcube: “Our Burrito Bond is the perfect way for us to engage with our loyal following as well as Crowdcube’s investor base and accelerate our expansion plans with additional growth capital. As big fans of Mexican food, we love everything that is vibrant, fresh and fun, and Crowdcube is all of these. Its mini-bond platform is a breath of fresh air among the complexity and expense of existing solutions.”

Such has been the success of the Burrito Bond that, on closing the bond issue, Chilango had raised £2.16m: well over 80 percent more than the initial target. The money is expected to be pumped into expanding the business into more locations across London and the UK. While this has obviously been a welcome boost to the company’s coffers, it has also strengthened the link between brand and customer. Partakar told The Economist earlier this year that the move had helped create a strong link between the brand and its bondholders: “We now have hundreds of extra brand ambassadors. People want an emotional bond with the place they invest in.”

Over £40m

raised through Crowdcube

96,000+

Investors

71%

of investors have invested in tech businesses

Crowdcube’s co-founder Luke Lang has talked of how the new mini-bond model could go further in revolutionising fundraising for companies, while also encouraging brand loyalty from customers: “Just as we revolutionised equity investment, we are now turning the mini-bond market on its head by taking away the complexity and costs for businesses who want to raise growth capital and cut out the banks, at the same time as presenting a unique way to engage with their customers, encouraging loyalty from existing customers and attracting new people to their brand. For customers and investors, the opportunity to invest in companies they already know, and want to support, as well as receive a regular financial return on their investment, is appealing.”

Other firms that have looked at raising money through the mini-bond system include solar power company Belectric, which recently launched what it is calling the ‘Big60million’ initiative. Offering investors annual returns of seven percent before tax, the mini-bond requires a minimum investment of just £60 and is hoping to raise £4m.

Another example includes online shaving company King of Shaves, which in 2009 offered investors a three-year mini-bond that would return six percent annually, as well as an additional batch in 2012. Hotel Chocolat also offered a similar scheme in 2010, although instead of a financial return, bondholders received boxes of chocolates. Similarly, Naked Wines offered interest on its mini-bonds of either seven percent in cash or 10 percent in wine.

Serious concerns
While all this seems like a great new way of raising capital for firms, there are some that have sounded a word of caution over mini-bonds. Henry Talbot-Ponsonby, founder and managing partner of VCP Advisors, a London-based venture capital advisory firm, says that, while mini-bonds might prove attractive to small investors, they are not the sort of thing larger players would be interested in: “For larger raises of capital, firms typically want corporate finance advisors to hold their hand. The absence of advisors in smaller deals means that the market will be capped at ‘mini-bonds’, until platforms like Crowdcube become advisory firms, or are bought by them. But even then, once you start raising bigger amounts, you are targeting institutional investors like funds, who are more focused on the deal fundamentals than brand identity.”

Mini-bonds are less about making money for the bondholder and more about supporting a business they feel a particular affinity with

Talbot-Ponsonby adds mini-bonds are in fact extremely high-risk forms of investment, while at the same time offering little in the way of a return: “The bonds aren’t really bonds because they are so high-risk. In actual financial, non-retail investor circles, they would be called junk bonds, but that doesn’t inspire much brand confidence.”

Another concern over mini-bonds is their unregulated status. They are not tradable, nor are they listed, which means they do not come under the protection of the UK’s Financial Services Compensation Scheme. Investors’ cash cannot be withdrawn until the bond has matured, meaning that, if the company collapses during this time, the bondholder will lose their investment.

It is perhaps because of these risks and relatively low returns that mini-bonds are less about making money for the bondholder and more about supporting a business they feel a particular affinity with. While crowd-funding initiatives are predominately aimed at start-up businesses that are struggling to raise capital from traditional financial institutions, mini-bonds seem to be a more appropriate method for established firms with a certain level of brand-awareness and loyalty.

Mini-bonds seem to be a great idea for medium-sized businesses that already have a good level of customer loyalty and big plans to expand their operations. However, were those firms to take a wrong step and start to lose a lot of money, it’s unlikely many of their bondholders would be too thrilled to have invested their money in return for a paltry annual rate and a few additional perks.