When the numbers don’t add up

Now that it’s been a few weeks since I did the pivot, I’ve been working through my strategic growth plan for the Harvestcare hair and body line. Unfortunately, the numbers don’t add up to enough.

Adding up numbers

While I had run cost accounting numbers before, this time I was looking at potential revenue now that I have a sense of both consumer and retail customer orders. The challenge is that there just isn’t enough retail customers available right now, and direct to consumer orders is slow work with a new brand that I need to build even though larger margins.

On the retailer side, I have largely been targeting gourmet food places and natural grocery stores. All have shown interest in the line, but so far it’s the gourmet grocery stores that seem more willing to take a chance. However, they are largely only interested in hand soap and sanitiser which makes sense for their own customers.

The natural grocery stores are more interested in the full line, but some are worried about their own sales during these Covid-19 days and are not willing to take on new products right now.

When I map out a list of potential retail customers, I really need the domestic travel industry to come back to life which brings me back to the hotel line issue that I was trying to pivot away from. Ugh!

So here I am again trying to figure out how to make this business work financially. I mentioned my frustration to a friend today, and she said that I’ll probably figure out something else. That has turned my brain on again.

Now, I’m trying to give my mind some space to consider other ideas with small investments. Surely, there’s something else I can add to my product lines quickly that reduces plastic waste and where the numbers add up by itself or when combined with Harvestcare.

3 Important Questions before Crowdfunding

This week, I’ve spent a lot of time trying to understand the best practices in crowdfunding. With so many platforms out there, it’s hard sometimes to decide which one is best for your campaign, as well as, what can you do to put yourself in the best position for success. From that research, I’ve decided that these are 3 important questions to ask before crowdfunding.

Questions for Crowdfunding

1. Is your service, product or program best funded through a crowdfunding marketing campaign?

As I’ve shared before in this blog, I’m personally gone this route because I was concerned that if I brought in private investors for the initial cost of production (over $200k), that I’d have to give up too much equity at this point. This puts my company’s social purpose at risk as the more equity I lose, the less likely I can control how we make the products (i.e. recycled plastic in Australia which costs more to do).

Furthermore, from the three products that I have designed, I chose to Product #3 – my Escape No More product for the campaign. This product creates a temporary barrier to prevent a pet from escaping through a door or passageway.

Even though it’s most expensive product for me to manufacturer, I specifically picked this product for this campaign because I thought that it was the easiest one to explain with the most potential uses for a pet owner.

For me, the crowdfunding platform is a way to pre-sell and market-test my product idea before investing anymore into it. If it succeeds, I could also be building great marketing momentum for the next order, as well as investor interest.

2. Do you have enough financial backers willing to support the campaign to at least start it properly?

I’ve probably browsed hundreds of unsuccessful campaigns in my research that didn’t even have $100 in pledges when they ended. Some of them had obviously spent a lot of money in creating the videos and product/service ideas though. How could they fail if they had a great product prototype and video?

Well, nobody will support a product they haven’t heard about. Furthermore, it makes you wonder if the product actually solved their problem or fulfill a need?

Too many times I’ve spoken with inventors, idea people or techies that don’t want to do the work to sell the product. They only want to make it. Therefore, I suspect that these particular campaigns with few or no backers are either bad ideas or the products were made by those that expected the platform to do the working of selling for them. In reality, the platform is only a tool.

3. Which crowdfunding platform best meets your needs?

This has been the most time consuming question for me. I know that I have the right kind of product, and I believe that I have a lot of people that are interested in backing it – at least I have a really large network that say they are interested at this point.

However, picking the right platform required a lot more research. If I think about a crowdfunding site as only a tool, then the bigger, more popular sites like Kickstarter and Indiegogo have the best set of tools as far as I can tell.

This includes the way you initially set up the campaign with embedded videos, pictures and links. Furthermore, they tend to have more ways to communicate with your donors. I especially like the extra set of tools that Indiegogo has to place add-ons during the checkout process, as well as a referral system that might be useful mid-way through my campaign.

One of the areas that I think is quite important is the way that it shows currency and shipping costs – especially if you plan to open the campaign to more than just your home country. A lot of people are turned-off of buying something that doesn’t easily translate into their local currency on the homepage, and even more will back away during the check-out process if the shipping cost comes as a surprise.

I’ve also found at least one site where there wasn’t a way to add shipping easily to the check-out process. The owner of that campaign will have to contact each backer individually afterwards if it’s successful. Seems too painful to me especially when it’s built into other platforms.

While I’m still a month away from launching my own campaign, I still think these early insights and 3 questions before crowdfunding are worth sharing now.

How much do I need to raise for my first product?

From the beginning of this adventure, the most asked question has been, “What are you making? The second most asked question has been, “How much do I need to raise?” If I tried to answer the money question back in April when the ideas first came to me, my estimate would have been off by a mile.

The answer now that I have real info as of today? About $200k for Product #3!!

Yes, that’s a lot of money! The moulds will be made in China. If they were done in Australia, it would have been three times the price.

However, the manufacturing will be done here in Australia with Australian recycled plastic. We are currently trying to see if we can do it mostly out of milk jugs. Wouldn’t that be a great story where we can say that X number of milk jugs are used in every product?

Today, I just signed off on $7500 in prototype costs. That too is a lot of money out of my pocket personally. My manufacturer asked me if I wanted to sleep on it ,and I told him that I have been waiting to make this decision for 4 months.

It’s essentially all or nothing at this point. How much of the $200k do I need to raise? All of it.

If the crowdfunding is not successful, then I’ll need to look for a job and pursue this business as a side hustle. So, I might as well and go all in now.

Moving forward…

Raising funds via video

In a new business, there are lots of little things to prepare for big milestones. Fundraising is usually one of the more dreaded tasks for a start-up. However, it can also be one of the most creative if you’re raising funds via video.

I have two funding opportunities due in the next month. One is a grant that requires a 60 second video pitch to get past the first round. The other one is for a crowdfunding opportunity.

For the 60 second video, I’ve really struggled to write a script that covers the most important points in that short time period. That’s basically about 175 words with my speaking pace – hardly 2-3 short paragraphs.

However, when I started to storyboard the scenes, I realised that I could actually reduce my script by adding subtitles to the video with that info. What can I say in pictures so that words are unnecessary? By writing it this way, I managed to get the spoken narrative down to just 120 words which allows more time for cut-away scenes.

I just have to make sure I capture compelling video. This is not an easy task unless you know what you’re doing. And I don’t – at least not from a technical point of view. I reckon that I could easily spend 2 days or more on capturing the video and editing alone for the 60 seconds of content.

This is going to be even more critical to do well with the crowdfunding campaign. There, I have to make an entertaining movie to capture my audience’s attention and dollars. To do the video professionally might require it’s own fundraising effort! Luckily, I think I’ll have some sponsors to help with that one.

It’s the 60 second video that will have to be done completely on my own due to budget. I’ve never made a real movie before, but I have written short scripts for a cartoon series. The cinematography is going to have to be amazing to tell the story well which makes this a bigger challenge for me since I have very little experience here.

Still, it actually sounds like fun. I’ve been playing with the two storyboards in my head. I don’t have a lot of time left to get this sorted, but if I have to do fundraising, I might as well make it as fun and creative as possible.

After all, I can’t control whether or not the funding is successful. However, I can give the audience the best show possible within my abilities and budget.

Why I’m considering crowdfunding

I arrived back in Australia yesterday, and spent today at a crowdfunding class sponsored by The Mill House Ventures. They are a local social-enterprise incubator in my hometown. The presenter was the CEO from Start Some Good which is a crowdfunding platform specifically for social-enterprises.

I’ve been considering crowdfunding as a funding option for a while, and it’s not just about raising money. My two major reasons are:

  1. It could validate the market value of my product ideas which will also increase the value of my business; and
  2. It could fund my first mould without having to give away any equity.

The second reason is more important than the first to me as giving away too much equity too early to investors could jeopardise the social mission of the company. I can already hear them asking me why should we make these products from recycled plastic in Australia when it’s cheaper to use virgin plastic in China.

This is something that people have already warned me about as the rights of shareholders apparently overrides any social mission even if I’ve written it into the Constitution.

I considered a not-for-profit model too, but it really limits the ability to raise funds from outsiders. Furthermore, because we are focussed on selling consumer products to achieve our social mission, the business lends itself naturally to a for-profit structure.

After taking the class today, I’m convinced that this is the right way to go for one of my products in particular. It fits the criteria well, and essentially sets me up to pre-sale products before investing further into the moulds. Plus, if I get accepted into the Mill House program, they’ll give me resources and a little bit of marketing money to increase my chances of success.

After the class, I ran into the manager of the local innovation grant which I looked at earlier. I asked him if it would jeopardise my chances of getting the grant if I received a little money for the crowdfunding campaign. He said it might actually increase my chances because it validates that someone else thinks I have a good idea.

With that info, I now have about two weeks to submit my application for both the crowdfunding program and the grant. I just need the final numbers from my manufacturer so I know how much money I need. That meeting will occur on Wednesday next week when I fly up to Brisbane.

How to bring on investors?

The Constitution template that I used for my company has 20+ different kinds of shareholders identified – from ordinary to founder to nearly the entire alphabet. While I had a few companies in the past, I’ve never brought on investors to help fund the businesses before. So, this is all new to me when the capital required for my new business exceeds my savings.

It’s incredibly common to hear start-ups talking about bringing on investors whether in person or in books and interviews. We also talked about this at business school too, but I naively thought shares were issued in order of the time of when you received in investment i.e. A to Z. This doesn’t appear right.

Why is it that no one really gives you the step by step of how to bring on an investor for your business?

For instance, which of the 20 different shares do I try to “sell” first? Some have voting rights, some have dividend rights and some have both. Also, if I use convertible notes (loans that eventually change to shares), what kind of shares would they normally convert to, and what about employee share options? Which ones should they get?

If anyone knows of a good book, please let me know. Otherwise, I’ll share on this blog as I gather more info. I still have so much more to learn.

Funding via notes

This afternoon I met with an organisation that’s overseeing a grant opportunity. The challenge is that the funding round doesn’t close until the end of the September, and I obviously can’t depend on it either. The potential max grant is also nowhere near my financial needs even for the first product. So, I really need to become more serious about how I’m going to fund this business should everything work out okay from a product cost perspective.

My contact today mentioned notes as a funding option. I’m familiar with convertible notes which are essentially loans that turn into equity later if I bring on large investors. I’m also familiar with notes that can act as short-term loans, typically with a high interest rate. Both are certainly options that result in debt rather than giving up equity early.

Still, I was really interested in learning more about the SAFE note that he mentioned. After further research, it seems to be a newer way of obtaining financing without giving up equity or issuing debt early. Instead, it appears to offer share options at a heavily discounted rate should an equity funding round ever occur in the future.

I’ll have to ask my private equity friend about this further as this can definitely be an option, but I need to understand it much better before I can make that kind of decision. It’s really good to know that there are other ways of funding this business though.

Investors advice from friends

Spoke to three female friends today who gave me some good advice about financing my business. One’s a successful entrepreneur who has built and sold a company. One’s an investment banker. And one’s been in the angel investing / start-up world for as long as I’ve known her.

It’s interesting to hear their different perspectives about the risks of taking external money. The big thing is the loss of control including the potential to lose the environmental mission if my investors’ values are not aligned with mine. I’m so lucky to have friends like these as supportive advisers too. I’m sure I’ll seek their advice again when I get closer to that decision point.

Moulds – first estimate costs for Product #2

Received rough pricing estimates for the moulds of my “easiest” of three products (Product #2) from Manufacturer #1. Two options above the $30k mark with GST. Yikes! That’s expensive. The cheaper of the two ($9k difference) combines two parts into the same mould. The other option is for 2 separate moulds. I’m going to need to rethink my funding model. I could go broke with the moulds before I even have a product to sell.

Approved early design work to start for Product #3

Pitch to business accelerator

Gave a business pitch to a bunch of mentors and investors at a local business accelerator. It was a really good experience, and it validated my business concept. The question now – what support do I need from them? Honestly, I’m not sure yet, though I know that I will eventually need some investor support.