Member Exclusive   /   May 12, 2021

Why equity crowdfunding is becoming more popular among digitally-native brands

After polo shirt brand Baobab failed to close a deal on Shark Tank in 2019, the company turned to crowdfunding for capital. Despite the pandemic being in full swing in July 2020, the brand’s founders raised over $100,000 — surpassing the minimum goal — via fundraising platform Republic. 

In past years, alternative fundraising and lending methods have taken a backseat to venture capital. However, with the e-commerce boom and uncertainty that 2020 brought on, more emerging brands began to consider these financial paths. The trend has further been catapulted by the SEC raising the annual crowdfunding limit, from $1 million to $5 million, in March. All of these factors have resulted in more consumer-facing brands taking up the fundraising format.

The platform facilitating many of these campaigns is Republic. The company, founded in 2016, aims to expose brands to popular venture capital firms and high net worth individuals looking to invest in startups. Unlike Kickstarter or Indiegogo campaigns, which limit backers to product and discount-based rewards, Republic investors also expect some type of eventual monetary return. “Even if it’s only $100,” said Chuck Pettid, CEO of Republic.

To facilitate financial returns, Republic created “A Crowd SAFE,” an investment contract between investors and the companies raising capital. According to Republic, investors get a return form of equity in the company or a cash payout, “if the company is acquired, goes public or sells all of its assets.”

Pettid’s pitch is that crowdfunding is more equitable than other methods of raising capital. He noted that about 45-55% of successful Republic campaigns are by female or BIPOC-founded startups. However, crowdfunding’s seemingly sudden popularity “is no coincidence.”

“Five years ago, this wasn’t possible,” Pettid said, noting that the SEC’s limit raise in March was a major win for the format. In its first year of operation,Republic had four active campaigns that took six to eight months to close. 

“Today, we have 65 live campaigns, with many meeting the $25,000 threshold much quicker,” Pettid said, pointing to the current minimum goal to meet.

Using crowdfunding to build a following

“It’s becoming not only a viable source of capital, but also useful for brand exposure,” Pettid said, when talking about the benefits of crowdfunding. For example, since raising money on Republic, Baobab launched a business-to-business venture. 

Fashion brands with unique designs, in particular, tend to do well on Republic, Pettid said. Last December, Aera — a women’s vegan luxury footwear brand that launched in February 2020 — closed a $129,919 round via a Republic campaign. For Aera, equity crowdfunding was a viable option, given the brand officially launched right before the pandemic, said co-founder and CEO Tina Bhojwani. Originally, Area planned to grow by raising a seed round last year. “But given that we had to pause many of our business initiatives, we went the crowdfunding route as a bridge to keep our company going,” she said.

The money raised went toward several initiatives, such as content creation, digital marketing and production. It also helped fund logistics. That included integration with Nordstrom’s e-commerce channel, where the brand recently launched, said Bhojwani.

Season Three, a direct-to-consumer hiking boots and outdoor apparel brand geared at millennials and Gen Z, is also going the fundraising route this spring. The brand launched its Republic crowdfunding campaign in April and has already raised $52,070, well over its $25,000 goal. It has until August to close the campaign. Season Three officially launched in February 2020. 

Thanks to increased outdoor activities, Season Three’s month-over-month sales spiked over 900% over the last three months of 2020, combined. At the same time, the company was also trying to raise venture capital to meet the newfound demand amid the pandemic.

“We spoke to a lot of consumer-facing startup investors in the last six months,” co-founder Adam Klein told Modern Retail. “It seems that many VCs have moved on from apparel and footwear, with only a few angel investors still interested in our category.” Klein said that with the growth of e-commerce, there is more emphasis on tech-focused services and platforms than before. 

Instead, Klein and his Season Three co-founder, Jared Ray Johnson, were put in touch with Republic via an investor who originally turned them down. “Republic allows us to get smaller checks from fans of the brand, giving them a line on the cap table,” Klein said. 

“It’s a great way to build a community,” Klein said. “There are people within our 86 current investors who want to be advisors or invest further, so it’s got potential to be a stream of connections down the line.”

Season Three co-founder Ray Johnson said that past crowdfunding on Kickstarter proved there are people willing to front founders money to see a concept come to fruition. However, the Republic campaigns tap into a person’s ambition to be an investor. “These days, everyone from celebrities to athletes wants to be a venture capitalist, but it’s impossible for everyone to set up a firm and get started,” Ray Johnson said. “Crowdfunding allows individuals to start out small and support a company’s scaling journey.” 

However, running a crowdfunding campaign requires a lot of work on the brand’s end. Ray Johnson said that Season Three basically treated the crowdfunding campaign like a new product launch, and did email and social media outreach to promote it. On the other hand, Republic also also invests in marketing to help brands connect with the right investors. But the important draws are revenue milestones achieved and growth viability. Right now, about 70% of funding on Republic comes from the platform’s own built-in investor community. 

But it helps for brands to have an existing, large social following they can leverage, Pettid said.

Usually brand founders create decks for firms to consider, Klein said. But on the Republic page, most info is public — including annual revenue, projections and past investors. With a public-facing fundraising campaign, it also helps to be “hyper focused on profitability,” said Klein. Season Three is currently breaking even and is profitable on a per-sale basis, he confirmed. One plan for 2021 is to use the fundraised money to launch new footwear styles, socks and brand collaborations, Klein said. 

Jaime Schmidt, co-founder of early and seed stage firm Color, said that crowdfunding can be a smart path to early fundraising for consumer brands. “Aside from the benefits of speed and accessibility, it offers a priceless opportunity for building a community of ambassadors,” Schmidt said. Furthermore, this cohort of investors can double as a source of early feedback and insights, which are valuable for refining the product and growing the brand, Schmidt noted.

While crowdfunding has typically been seen as “lesser” than traditional venture capital, these perceptions are changing, said Bridge Ventures founder Charlie O’Donnell, whose early stage investments include DTC brands Hungryroot and Clare.

“VCs will sometimes tell founders that there’s ‘signaling’ involved in crowdfunding,” O’Donnell said. If you’re a founder who’s fundraising publicly while also having an open crowdfunding campaign, “other VCs will think that no VC wants to fund you,” he explained. The outside perception creates the illusion that founders had to “settle” for crowdfunding as a last resort.

But O’Donnell noted that despite crowdfunding’s reputation, there have been lots of examples of companies that crowdfunded and are doing really well. These include Allbirds, which began as a Kickstarter idea back in 2014 in order to gauge initial interest. More recently, consumer-facing design platform Gumroad capped off $5 million in investments from 7,303 backers on Republic, despite already having VC investing interest from AngelList founder Naval Ravikant and Basecamp CEO Jason Fried.

Despite some of the skepticism that remains around crowdfunding, “we think this is the ultimate way brands can raise money in the future,” Ray Johnson said.

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