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Customer Crowdfunding Saved My Business

In Uncategorized on May 3, 2011 at 4:08 am

By David Edwards, Owner, New Mexico Tea Company, Albuquerque, N.M.

I opened New Mexico Tea Company in 2006. The company was self-funded, and I didn’t have any real experience or business plan. I just wanted to create a specialty store for tea drinkers. I was learning as I went.

When I expanded the retail tea store into a restaurant, I quickly realized I was in over my head. The expansion and ongoing expenses came close to putting the entire company out of business. Faced with few other options, I got creative and tried the one idea that I thought had a chance of succeeding: I asked my customers for money.

Here’s what happened.

In over my head

As soon as we opened, customers told me I should I serve tea in the shop. I resisted that suggestion for a long time because retail and restaurants are totally different models, but I finally gave in after two years. The reaction was overwhelmingly positive, so I decided to expand by renting the shop next door. Between the additional rent and the employees I needed to hire, costs added up quickly, and I soon realized this wasn’t the direction I wanted to go.

I closed the tea bar after just three months, but it was already too late: Paying off the additional expenses sent the business into a dangerous downward spiral. We didn’t have enough money to buy new product. We were selling less and bringing in less revenue. It’s tough to break out of that cycle without some kind of outside intervention. If I didn’t get additional funding, the business was finished.

Microfinancing

I tried to get a personal line of credit, but my average credit score and lack of collateral convinced my bank to reject my application. My “unreliable” income as a small business owner was a liability. Instead of wasting time applying for loans from other banks, I decided to try another method.

I’m a big proponent of Kiva’s microfinancing platform, so I began looking for microlending platforms that serve small businesses in the United States. At the time, nothing seemed like a good fit. Then I realized I already had a good relationship with the 4,000 customers on my monthly email list — why not ask them for help?

In June, I sent out an email newsletter to my customers explaining the situation: I needed $5,000 to pay off our vendors and order more tea. Without those funds, the store would close.

I gave customers several options if they wanted to support the store. They could purchase a $50 gift card (for $55 in value) or a $100 card (for $115 in value), but they couldn’t redeem them for six months so that I could use the revenue to pay off our debts. Or, they could grant me a loan of $500 or $1,000, which I would pay back over a six-month period with 10% interest. If I couldn’t raise the $5,000 I needed, I would refund everyone their money.

Customers come through

My biggest fear was that my customers would think I’d mismanaged the finances or that the company was going downhill, and therefore wouldn’t want to invest. But that didn’t happen at all: I was flooded with gift card purchases and loan offers. In the first week, I raised more than $10,000 — double what I’d needed.

I paid off my vendor debts and pre-paid for the following tea shipment so I wouldn’t find myself unable to place an order again. I also set aside a large chunk of the money to carry us through the next few months if sales were slow.

As it turned out, my financing problem helped boost sales over the next few months: We received some local press about the situation, which got people excited about our success story. Most of the customers who’d bought the gift cards kept coming in on a regular basis to buy tea, even before the cards could be redeemed.

Expanding again

Our 2010 revenue hit $150,000 — 20% more than the year before. And because we’ve cut some staff and other expenses associated with the tea bar, our cash flow is much stronger. The store is no longer in any danger of closing, and I feel much more prepared to manage future risks. We’re even considering expanding to other retail locations.

I owe our good fortune to our customers. I’d built a strong base, and when we needed their help, they were there for us. Still, I don’t take them for granted, and would be very hesitant to ask for money again — I don’t want to abuse that relationship.  I believe if you treat your customers with respect, they will treat you in kind.

David Edwards opened New Mexico Tea Company with his mother, Dianne Edenfield. They maintain a 90/10 partnership split.

– As told to Kathryn Hawkins

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