I can see this working for a few niche markets that fall in between the gaps of kickstarter and VC. One market that immediately comes to mind is microbreweries. Small to midsize microbreweries have pretty good margins because they are usually selling their beer directly out of their taproom (as opposed to distributing their product, which results in a few other people taking a cut of your sales). But expanding to the next size up can be fairly capital intensive (relative to the size of the business) and there are not a lot of ways to finance that. My guess is it's a lot of friends and family money, or 'scraping the barrels' for cash in the company. Some breweries have managed it through kickstarter. But kickstarter seems to work better for product focused companies with a pre-order dynamic.
The advantage of crowdfunding would be that you can offer some upside to your supporters (M&A[1] or maybe dividends?). Assuming you are already established and are trying to take it to the next level, you can generate support for your crowdfunding campaign by advertising to your existing clientele. They already have a connection to the business and that can also result in creating a small army of brand ambassadors.
There are probably a few other niche businesses out there that could follow this playbook. Use existing local support/community to help fund expansion. One possible hang up is that there would need to be a path to an exit or some type of return. With the microbrewery market, as mentioned below, M&A is happening, but for other markets that don't have that, I would be interested to know if dividends are a possibility.
[1] There is a decent amount of M&A activity going on as the major beer companies try to maintain market share as the micros take over.
There's embedded survivorship bias here that is distorting your analysis. The median successful microbrewery does a fine, if quiet, business. But most new business starts, especially in the food and hospitality sectors, fail. Lots of attempts at microbreweries never find a market fit, or are unable to execute with sufficient margins to stay afloat.
Kickstarter works because nobody funds a Kickstarter with the expectation that they'll be able to return to those funds later to fund college, a house purchase, or a retirement. That's not the case with equity crowdfunding.
Oh, I am in no way claiming this isn't a risky investment. But I have seen a trend in the microbrew market where a lot of these failures[1] tend to occur as they try to expand. The general pattern is they load up on debt to fund expansion, but hitting even a few bumps during that time (slump in sales, construction delays) can send things into a tailspin. As mentioned in the previous post, the economics of these taprooms are really good (500-600% markup, costs about $1 to make a pint, which they then sell for $5-$7), so microbreweries don't quite face the same pain points that restaurants do (super thin margins). But expanding operations tends to be a huge pain point, because unlike a restaurant, you need to build out the new brewhouse, and then there is a lead time before your brewhouse is pumping out beers (the more sought after beers these days require a decent amount of fermentation/aging). So if you took out a risky loan to finance the expansion, as you can imagine, it only takes a few small things to go south before the whole operation tanks. But if you finance the expansion using equity, you would probably have a lot more flexibility as you don't have to worry about default.
My thought is that crowdfunding could be a good financing option for someone like this[2]. They have already established themselves, but are trying to get to the next stage. If I was local beer fan, I might support them on kickstarter, but if they offered a crowdfunding option, perhaps with some perks like an annual tasting, than I would probably be a lot more enthused. Also keep in mind, that a lot of specialty microbreweries already have 'fan clubs' that cost a few hundred dollars a year. In return, you get access to limited releases. It seems like a creating a 'lifetime fan club' for a few thousand dollars would be doable, with the added bonus that the supporter gets some equity.
BrewDog is an increasingly bizarre case study in the microbrewery/crowdfunding space. Their 'Equity For Punks' money- raising efforts received a wide range of legal opinions in different jurisdictions.
Pretty sure no one expected -- given their very loud anti-'sell-out' rhetoric -- that they would sell a 22% stake for £100M to a private equity firm (TSG Consumer Partners) and actually deliver a serious return to said 'punks.'
Oh wow! I am only mildly familiar with them (mostly been hearing about how they have been trying to enter the US market). I didn't realize they crowdfunded. But yeah, this is a really good example of why microbreweries could be a good niche for crowdfunding. Operating your own brewpubs is a really good business because of the markup, but the challenge is in the expansion phase.
Also, looks like they are offering another round of equity in the US[1]. I was under the impression that crowdfunding was limited to $1M, but looks like they are raising $50M under 'Regulation A+'. Not sure what that is.
The advantage of crowdfunding would be that you can offer some upside to your supporters (M&A[1] or maybe dividends?). Assuming you are already established and are trying to take it to the next level, you can generate support for your crowdfunding campaign by advertising to your existing clientele. They already have a connection to the business and that can also result in creating a small army of brand ambassadors.
There are probably a few other niche businesses out there that could follow this playbook. Use existing local support/community to help fund expansion. One possible hang up is that there would need to be a path to an exit or some type of return. With the microbrewery market, as mentioned below, M&A is happening, but for other markets that don't have that, I would be interested to know if dividends are a possibility.
[1] There is a decent amount of M&A activity going on as the major beer companies try to maintain market share as the micros take over.