Analysis: Could customers become your most important investors?

In a letter accompanying its intention to float, Deliveroo founder Will Shu set out his rationale for offering stock to customers. 

“We plan to offer our customers across the UK the chance to own a part of the business,” he said. “We are proud to be enabling our customers to participate in a future float and have the chance to buy shares. Your loyalty and custom have helped build our business. I want you to have a chance to share in our future.”

Retailers have often looked beyond traditional capital fundraising routes in the past, such as Hotel Chocolat’s chocolate bonds in 2010 or John Lewis’ partnership bonds, which closed in 2016.

Hotel Chocolat’s bonds gave investors returns in the form of chocolate or gift cards rather than capital and were issued before the retailer listed on the AIM. It repaid over £6.4m in these ‘mini-bonds’ in June 2018 and co-founder Angus Thirlwell said at the time the retailer’s profitability meant it would no longer raise them. 

John Lewis launched its bonds in 2011 with customers able to invest up to £10,000. Investors were guaranteed a 6.5% return over five years split between an annual cash return of 4.5% with an extra 2% return in vouchers.

John Lewis’ director of financial services Alan Drew said while they had proven popular, the retailer had no desire to revisit them any time soon. 

”We did consider issuing a further bond as the customers and partners who had bought into it said they really liked the opportunity to invest in a business that they cared about and trusted to look after their money,” he said. 

“We don’t have current plans to offer another retail bond but it’s something we may consider in the future. We are also interested to see how customers’ desire to invest in local or sustainable investments creates opportunities for different types of retail investment in the future.”

Other businesses, such as Brewdog, have made crowdfunding of equity a plank of their business model, to great success. 

‘A side of shares’ 

Those interested in buying shares in Deliveroo can register on the app, once they have made at least one order. Through the float, they can apply to buy up to £1,000 worth of shares. 

Deliveroo’s long-term customers will be prioritised if the £50m pot is oversubscribed and the offer is being marketed as “great food with a side of shares”. 

Overall, Deliveroo is expected to be valued at more than £7.5bn following its IPO and is expected to take advantage of a dual-class share structure of A and B shares that will last for at least three years and limit new investors’ voting power.

Deliveroo’s IPO is only open to customers rather than retail investors generally, in that respect it differs from other recent successful retail floats such as The Hut Group, Moonpig and Dr Martens, which were all institutional placings.

“You’re basically asking Joe Public, who knows little about the company and nothing about investing, to buy shares – the riskiest form of investing – in a loss-making company”

Banker

Alongside its intention to float, Deliveroo unveiled its financial results for the year, which showed that while transactions on its app soared 64% to £4.1bn in 2020, it still made a £223.7m loss. 

One banker said: “If Deliveroo couldn’t make a profit when restaurants and pubs were closed and people couldn’t go out to eat for the eight or nine months of the year, what hope do they have of making a profit when things start to get back to normal?”

He says one of the big dangers of this model is the PR disaster that would follow if Deliveroo collapsed in future.

“You’re basically asking Joe Public, who knows little about the company and nothing about investing, to buy shares – the riskiest form of investing – in a loss-making company,” he says. 

“If it all goes wrong, it’s going to be a nightmare.”

Strengths and weaknesses

Companies have explored this avenue of funding before, though the majority have been privately owned.

One such business that deployed the model is brewery and pub operator Brewdog. Investors do not just expect a return on investment in the traditional sense but instead draw other benefits such as lifetime discounts in Brewdog bars and online, exclusive merchandise offers and invitations to the company’s AGMs, which pre-Covid were closer to live events.  

Vice-president of alternative growth Sarah Warman says Brewdog’s co-founders turned to crowdfunding having ”maxed out their options with banks” and have not looked back since. 

”The Equity Punk community [customer investors] is incredibly aligned with our plans – we are very transparent about what we’re doing and why, and they’re able to feed back and support what we do next. They help us find new bar sites, design beers and develop new approaches to challenges the business is facing,” she says.

”With our private social network for shareholders, we can float concepts by them and get instant feedback from a wide variety of people – you just can’t do that with traditional funding.”

Brewdog has 180,000 such customer investors globally. However, Warman says the model, while much more flexible than traditional investing, does have its drawbacks. 

”Having 180,000 shareholders absolutely comes with challenges. For example, keeping everyone in the loop on what we’re doing is tricky but we post updates frequently on our private Equity Punk forum and update our community annually at our AGM, which consists of a lot more beer and music than your average AGM.

“Raising money this way is also not without its problems, as we come under the scrutiny of the Financial Conduct Authority and there are a lot of long and challenging legal processes we have to undertake when we crowdfund under a prospectus in the UK.”

Partner at retail corporate finance adviser Argyll Partners Chris Steed believes the customer investment model offers emerging brands, in particular, a route to finance they might not otherwise be able to access, without interference from larger institutions.  

“For younger brands, it offers access to capital, and the valuations you can get through some of these platforms are very strong. Businesses seem to be able to achieve valuations which professional investors might shy away from,” he says. 

“There’s also a quid pro quo there, allowing these businesses to raise money at better valuations without the meddling and interference of a professional investor”. 

However, he concedes that fundraising through this model does not include some of the benefits institutional investors offer beyond the capital alone.

“One of the big advantages of the traditional investment route is these big investors bring more than just money. They bring expertise, they bring contacts, they bring corporate governance – all that sort of stuff that you might want.”

What do customer investors want?

While the banker may be sceptical about Deliveroo offering investment to customers, he says it is a model that allows consumers to feel as though they are getting in on the ground floor of a business they believe in. 

“Not only can it be a really good and different pool of liquidity to tap into, but it can also be used to effectively deepen relationships with existing customers in your ecosystem,” he said. “If you’ve got a highly engaged group of loyal customers, this is one way to keep them engaged. You can give them a return on investment in other ways apart from just money.”

Warman agrees. Brewdog is currently on the cusp of reaching its £20m equity fundraiser target and she says the vast majority of its customer investors just want to ”be a part of our journey and support us as we grow”.

The business has pledged to reinvest every penny raised “into innovative sustainability projects and initiatives”, and Warman says that commitment has supercharged its fundraising efforts. 

”Since we evolved this last year to focus much more on sustainability, we’ve only seen a doubling-down on this, as our most recent crowdfunding round has surpassed £19m – more than double our last round, and more than double our initial goal for this round.”

Steed offers another example in the form of sportswear brand Huub. The direct-to-consumer retailer, which specialises in gear for triathlons and other endurance sports, recently raised over £1.3m from customers. 

“The valuation for Huub was very high but the customers won’t be thinking about that when they invested. They’ll be thinking if I invest in this brand that I love then I’m a part of it. I’m helping the brand grow and become more successful,” he says. 

“There’s a whole series of emotional, non-financial reasons why people might invest in that brand.”

While alert to possible pitfalls of customer investors, the banker also observes there is a lot of money “sloshing around” in individual investors’ accounts after a year of home working through the pandemic: “People are going to be sitting on 12 months’ worth of savings and asking what they can do with it all”. 

The money and appetite are there for customers to turn investors. If the Deliveroo float goes without a hitch, it could begin a new era of customer-backed retail floats.