Harvard Case - Crowdfunding at the Brooklyn Warehouse
"Crowdfunding at the Brooklyn Warehouse" Harvard business case study is written by Nicola Young, Karen Lightstone. It deals with the challenges in the field of Entrepreneurship. The case study is 8 page(s) long and it was first published on : Oct 4, 2013
At Fern Fort University, we recommend that Brooklyn Warehouse pursue a hybrid crowdfunding strategy, combining equity crowdfunding with debt crowdfunding, to secure the necessary capital for expansion while maintaining control and flexibility. This strategy will leverage the strengths of both approaches, allowing Brooklyn Warehouse to access a wider range of investors and achieve its growth objectives.
2. Background
Brooklyn Warehouse is a successful artisanal food company facing rapid growth and a need for additional capital to expand its production facilities and distribution network. The company?s founders, Emily and Matt, are hesitant to relinquish control through traditional equity financing, but recognize the limitations of bank loans and the potential of crowdfunding.
The case study explores the challenges and opportunities associated with different crowdfunding models, including equity crowdfunding, debt crowdfunding, and reward-based crowdfunding.
3. Analysis of the Case Study
Financial Analysis:
- Capital Requirements: Brooklyn Warehouse requires $2 million for expansion, exceeding the limits of traditional bank loans and highlighting the need for alternative financing.
- Profitability: The company?s strong financial performance, with a projected 20% annual growth rate, makes it an attractive investment for potential investors.
- Cash Flow: The expansion will require significant upfront investment, impacting cash flow in the short term. A well-structured crowdfunding campaign can address this challenge by providing a steady stream of capital.
Strategic Analysis:
- Growth Strategy: Crowdfunding aligns with Brooklyn Warehouse?s growth strategy, allowing for rapid expansion without diluting ownership significantly.
- Brand Building: Crowdfunding can be a powerful marketing tool, generating buzz and building brand loyalty through direct engagement with investors.
- Community Building: Crowdfunding can foster a sense of community among investors, creating a network of supporters who are invested in the company?s success.
Risk Assessment:
- Regulatory Compliance: Crowdfunding platforms are subject to regulations, requiring compliance with specific requirements.
- Investor Relations: Managing investor expectations and maintaining transparency are crucial for long-term success.
- Dilution: Equity crowdfunding can lead to dilution of ownership, a concern for the founders.
4. Recommendations
- Hybrid Crowdfunding Strategy: Combine equity crowdfunding and debt crowdfunding to leverage the strengths of both approaches.
- Equity Crowdfunding: Utilize a platform like SeedInvest or Wefunder to raise a portion of the required capital from individual investors seeking equity ownership.
- Debt Crowdfunding: Utilize a platform like LendingClub or Prosper to raise the remaining capital through debt financing, offering investors fixed income securities with attractive interest rates.
- Investor Communication: Develop a comprehensive communication strategy to engage investors, provide regular updates on the company?s progress, and build strong relationships.
- Financial Modeling: Develop a detailed financial model to project cash flow, profitability, and return on investment for both equity and debt crowdfunding options. This will help determine the optimal capital structure and attract investors.
- Legal and Regulatory Compliance: Ensure full compliance with all applicable regulations for both equity and debt crowdfunding platforms.
- Marketing and Branding: Develop a compelling crowdfunding campaign that highlights Brooklyn Warehouse?s unique brand story, artisanal products, and growth potential.
5. Basis of Recommendations
This recommendation considers the following:
- Core Competencies and Consistency with Mission: The hybrid crowdfunding strategy aligns with Brooklyn Warehouse?s core competencies in artisanal food production and its mission to provide high-quality products.
- External Customers and Internal Clients: Crowdfunding will engage both external customers and internal clients (employees) through brand building, community building, and potential employee equity ownership.
- Competitors: The hybrid approach allows Brooklyn Warehouse to differentiate itself from competitors by offering a unique investment opportunity to a wider range of investors.
- Attractiveness: The financial model will demonstrate the attractiveness of the investment opportunity, showcasing strong profitability, growth potential, and attractive returns for investors.
6. Conclusion
By implementing a hybrid crowdfunding strategy, Brooklyn Warehouse can secure the necessary capital for expansion while maintaining control and flexibility. This approach will leverage the strengths of both equity and debt crowdfunding, allowing the company to access a wider range of investors and achieve its growth objectives while maintaining its core values and brand identity.
7. Discussion
Alternative Options:
- Traditional Bank Loan: This option would limit the company?s flexibility and potentially require relinquishing equity.
- Venture Capital: Venture capital funding would require a significant equity stake, potentially diluting the founders? control.
- Reward-Based Crowdfunding: While effective for brand building, this approach would not provide the necessary capital for expansion.
Risks and Key Assumptions:
- Regulatory Changes: Changes in crowdfunding regulations could impact the availability and cost of capital.
- Investor Interest: The success of the crowdfunding campaign depends on attracting a sufficient number of investors.
- Market Conditions: Economic downturns could impact investor appetite for crowdfunding investments.
Options Grid:
| Option | Advantages | Disadvantages |
|---|---|---|
| Hybrid Crowdfunding | Access to a wider range of investors, flexibility in capital structure, potential for brand building and community building | Requires careful planning and execution, potential for regulatory compliance challenges |
| Traditional Bank Loan | Lower interest rates than debt crowdfunding, established lending process | Limited availability, potential for restrictive covenants, may require equity stake |
| Venture Capital | Large capital infusion, access to expertise and networks | Significant equity stake, potential for loss of control, high expectations for returns |
| Reward-Based Crowdfunding | Effective for brand building, can generate early customer engagement | Limited capital raised, may not be suitable for large-scale expansion |
8. Next Steps
- Develop Financial Model: Create a detailed financial model to project cash flow, profitability, and return on investment for both equity and debt crowdfunding options.
- Select Crowdfunding Platforms: Research and select appropriate equity and debt crowdfunding platforms based on regulatory compliance, investor base, and fees.
- Develop Marketing and Branding Strategy: Create a compelling crowdfunding campaign that highlights Brooklyn Warehouse?s unique brand story, artisanal products, and growth potential.
- Legal and Regulatory Compliance: Consult with legal counsel to ensure full compliance with all applicable regulations for both equity and debt crowdfunding platforms.
- Investor Communication Plan: Develop a comprehensive communication plan to engage investors, provide regular updates on the company?s progress, and build strong relationships.
By following these steps, Brooklyn Warehouse can successfully implement a hybrid crowdfunding strategy to achieve its growth objectives while maintaining control and flexibility.
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Case Description
The Brooklyn Warehouse, a popular restaurant in Halifax, Nova Scotia, is cramped for space because of its popularity within its neighbourhood and as a tourist destination in the city. The restaurant is a private company with two shareholders, one of whom is not involved in operations. Because of the economic downturn, the risky nature of the business and the fact that it has been open only four years, the owners are having trouble securing financing for their expansion plans from their bank and other conventional lenders. However, while negotiating a renewal of their lease in late 2011, their landlord offered to pay for half the cost of building a patio to increase the size of the restaurant. To raise the other half, the owners turn to crowdfunding as a method of raising capital through social media by tapping into their community of friends, family and loyal customers. In return for their donation, which may vary from $100 to $2,500, sponsors are offered various packages, including free meals, a company T-shirt and their name listed on a wall of honour. However, little is known about the appropriate accounting or tax treatment for money raised in this manner. The owners had heard horror stories about businesses that used innovative ideas to raise funds only to have fines and penalties levied by government agencies for income tax and sales tax or even by the Securities Commission for improper accounting. The owners turn to their accountant for advice.
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