Crowdfunding – for farms too!
Raising capital. Got a brilliant business idea? But no starting capital? Maybe you should consider crowdfunding? Credit providers in the Internet invest in projects, ideas or companies – in agriculture too.
By Thomas Künzel
Four forms of crowd financing
|Type Relationship between investor and project initiator|
|Crowd funding Capital is often repaid in cash or kind (material).|
|Crowd investing In focus here is earning potential for the investor who usually expects a share in the business success over a defined period of time.|
|Crowd lending A classical contract is made between credit giver and credit taker. The entrepreneur gets a loan for a defined period and must repay capital and interest.|
|Crowd donation This involves donations, especially for charitable reasons and without any reimbursement. This form of financing is not suitable for company grounders and start-ups.|
Crowdfunding is a new way of financing, and one completely independent of banks, credit control agencies and rating services. The deal is very simple. You’re looking for investors to put their money into a project in return for shares or repayment in cash or kind. The more people that invest in a creative idea, the less cash each individual needs to provide for realisation of the project.
Anything can be financed
The capital might be for a new machine, renovation of the farm shop or a milk retailing dispenser. In theory, anything can be financed through crowdfunding. The process features collecting capital via a crowdfunding platform. This can be imagined as an online market place, where suppliers – in this case financers – and would-be borrowers (project initiators) come together. Nowadays there are numerous platforms where projects can be advertised and financing arrangements developed. The best-known platform in Germany, for instance, is Startnext, over which 90 % of the country’s crowdfunding capital is allocated. Anyone seeking support for a plan can register here, explain their project via a video, establish the level of contributions required from the »crowd« and arrange repayment methods.
1. Swarm financing still growing
The trend is finally gathering momentum. A good five years ago, the first crowdfunding platforms in Germany got started. Since then, this »swarm financing« has grown, the number of successfully financed projects, as well as the sums of collected capital, increasing year on year. In farming, too, the model is slowly getting a foothold.
In 2015 financing over crowdfunding platforms reached 9.8 m € in Germany. Since the start in 2010 through to end of September 2016, 33.5 m € flowed in over the platforms to almost 4,700 successfully financed projects. This is still small beer compared to the performance of US platforms such as Kickstarter or Indiegogo. Kickstarter on its own has already allocated a finance volume of over 2.7 bn US$.
2. Crowdfunding is not the only form of swarm financing
There’s also so-called crowd investing, crowd lending and crowd donation. These various forms differ in the relationship between the individual financial supporters and project initiators. Also different is repayment or other compensation for the financers where projects are successful. When all these forms are considered, firm grounders, existing companies and projects all together received from the »crowd« almost 102 m € – in the first nine months of 2016 alone.
3. Reducing business risk
The business risk is borne by the supplier of the capital. This is one reason why no huge sums for agricultural projects have been raised. The financiers take part by investing mostly just a few Euros and then go on to focus on other projects. This offers two advantages for the project initiators: they do not therefore have to give their investors any great say in the project and, if the plan fails, repayment pressure is less. Initiators are thus not only more independent from other capital sources but also work involved and costs are minimal compared to other external financing.
4. All or nothing
Crowdfunding functions according to the »all or nothing« principle. This means that a firmly defined amount (funding threshold) has to be collected by a fixed date. If this threshold is reached, or even surpassed, the money is paid out. If not, the campaign has failed and the financers get their money back. Before the threshold is reached, incoming cash remains in an escrow (third party) account. In this way, the risk for investors is reduced.
As well as the funding threshold, often a funding target is also defined. When this is reached, the crowdfunding campaign is automatically ended, thus avoiding any overfunding. Naturally, one cannot expect to receive the entire sum for the project in-hand. Think about the work that goes into marketing: e.g. flyers, expenses for »thank you« gifts such as coupons, etc. The crowdfunding platform also profits from a successful financing of a project via a proportionate commission from the collected sum.
5. What has to be definitely watched out for?
Most important for project initiators is the positioning of a good video on the platform, one that makes it clear what the project is about in detail, the added value offered, and why it is worth investing in. Moreover, communications should be personal so that partners feel directly addressed. Important is focus on the human story and allowing potential supporters into the genesis of the project, letting them share the experiences of ups and downs involved. Then comes the marketing. This must be good. Involved must be sending of regular newsletters, media involvement, distributing flyers, and so on. Admittedly, this is not easy for everyone. But for this form of financing it is crucial to success.
6. Grabs investors’ attention!
Ideas that serve a certain niche or clientele often have it easier to stir up enthusiasm within such a target group compared with when addressing a broader public. It is also easier to kindle interest in projects that hit a particular nerve, or apply to the prevailing spirit of the time. This is why crowdfunding can also be interesting for agriculture. The current trend towards regionally and ecologically produced food encourages extra interest in its production. Crowdfunding offers such consumers the possibility of coming into direct contact with the food producers.
7. Important marketing effect
In most cases, crowdfunding is not only important for financing. It also produces a positive advertising effect in that potential future customers are involved right from the start. This early involvement also helps first indications as to whether an idea is at all market-ready and has a chance of being successful. Through continual exchange with the »crowd«, the planned project can be not only thoroughly scrutinised during the funding process, but also improved. In end effect, those investing in a project become not only part of its grounding history, but also perhaps faithful customers.
»Persuasive brains«: Successful examples
There’s certainly no shortage of clever entrepreneurs amongst farmers who have put their trust in crowdfunding. Crucial from the start is a coherent business plan and persuasive personality. In return, the investors from the »crowd« might get goods from the project such as milk, eggs, cases of wine or maybe fresh vegetables.
Farm milk for self-bottling from the dispenser. The managing director of the East Brandenburg Fürstenwalder Agrarprodukte GmbH, Benjamin Meise, financed part of the investment sum for a milk retailing dispenser via crowdfunding. He produced a project webpage under www.visionbakery.com/milchquelle and presented his idea to potential investors.
Supermarket without packaging. »Original Unverpackt« is one of the most respected projects in the European farming landscape. Behind it is the first supermarket in Berlin-Kreuzberg to do without one-way packaging: No throw-away cups/beakers, no vacuum packaged vegetables, no plastic bags or Tetrapacks. For this idea, over 100,000 € was collected via the website www.startnext.com/original-unverpackt. As »thank you«, investors receive shopping coupons or (recyclable) carrier bags.
Riesling dividend. Wine producer Sybille Kunz from the Mosel region pays her supporters who helped finance the enlargement of her vineyard a »Riesling dividend« at the end of every year. The Munich brewery Giesinger Bräu (www.conda.eu/startup/giesinger-braeu) rewards customers who helped fund its new buildings through participation certificates, with food and drink as »interest«.