Get Your Customers to Fund Your Business – NakedWines Did It!

NakedWines.com

Many companies, particularly tech startups, get funding from venture capital groups or angel investors – individuals who fund a startup in exchange for a stake in the business or return on the investment. Crowdfunding is a less traveled road, but NakedWines.com, a company founded by Rowan Gormley, is blazing its own path in an industry known for its traditions.

NakedWines.com has brought more than 200,000 wine drinkers worldwide together to invest more than $5 million a month in indie winemakers, giving winemakers a chance to follow their dream of producing their own wines while providing investors – NakedWines.com calls them “Angels” – the chance to drink top-shelf wines for 40% to 60% off the retail price. In an interview, Gormley describes the thinking behind NakedWines.com’s business model:

Q: Why is a customer funding strategy right for the winemaking business?

A: In the traditional winemaking and distribution model, there are three players: the winemaker, the middleman and the consumer, and almost all of the profits go to the middleman. Winemakers barely scratch out a living, and customers routinely get ripped off with outrageous markups. Crowdfunding turns this model on its head, cutting out the middleman. That means winemakers get to pursue their dreams, and Angels who invest $40 a month get access to fine wines at prices even those on a modest budget can afford.


Q: How does a customer funding model change things for a business rather than going with a more traditional approach like venture capital or shareholders?

A: Customer funding requires absolute transparency and honesty. For a lot of businesses, that's hard. It means you're accountable to loads of people rather than just one or a handful of investors. Your transparency exposes your successes and failures to the competition, and you need suppliers who are just as excited about your devotion to transparency as you are.


Q: What do customer-funded businesses need to do differently than traditionally funded businesses once they’ve raised their startup money?

A: Be honest. Customers only fund projects that they believe in, and they only trust companies that deliver what they say they will. Every time our customers put money into one of our winemakers, the wines have to taste better than the wines the customers can buy in a shop. And the price has to be better. If you try to pull the wool over peoples’ eyes, you lose their trust, and then you lose their business.


Our policy is to let the customers decide – it is their money, after all. People will only fund our winemakers if they have a say in how the money is invested. We also believe in the power of crowdsourcing for knowledge and strategy, not just fundraising: We have over three million customer ratings on the site, which we use to decide which wines we are going to keep, which wines we are going to grow and which wines we are going to improve. NakedWines.com’s social aspect is very important to building and sustaining this valuable community.


We encourage customers to talk to each other and to interact directly with winemakers because the best way for people to gain confidence about a wine or a winemaker is to speak to other customers and directly to winemakers. Angels can follow winemakers and post comments about wines they’ve tried, and we don’t edit what they say or remove negative comments or criticisms. We think customers need to see both sides of the story to make up their minds.


Q: Why is it so important to build strong relationships with your customers (no matter how you were funded) and keep them in the loop about your business updates?

A: In the wine business – or any other business – things happen. A bad vintage, an earthquake like we had in Napa a while ago or any number of other unexpected events. When you have a great relationship with the customer, they support you when things go wrong.


Q: Do you have any tips for maintaining relationships with your backers long after the campaign is over?

A: The way we’ve been successful in maintaining relationships is to get customers to give feedback directly to our winemakers. We give them a platform to interact, so that in the end, they become friends. And friends are way more loyal than customers

 

Matthew Toren
 

Matthew Toren is a serial entrepreneur, mentor, investor and co-founder of YoungEntrepreneur.com. He is co-author, with his brother Adam, of Kidpreneurs.org, BizWarriors.com and Small Business, BIG Vision: Lessons on How to Dominate Your Market from Self-Made Entrepreneurs Who Did it Right (Wiley).