Zero Co is on a roll. Their product is slick and customers love it. They raised $5 million in a crowd-funding round on Birchal, and in the same week venture investors also tipped in a cool $8 million.
Since then, customer growth looks healthy, and they’ve unveiled their custom-made bottle washing robot that could revolutionise the circular-economy.
They’re a social enterprise, they’re mission-led, but don’t for a minute think that means they’re not a highly-commercial and competitive operation.
Founder Mike Smith and his team are based in Byron Bay, and they want nothing less than to change the world, and they’re taking a whole bunch of community investors along with them!
OnImpact spoke with Mike about what it means to be a social enterprise, advice for founders looking to raise through equity crowd-funding, and a surprising lack of interest from impact investors.
Crowd-Funding is Very Different to VC Funding
For Mike, crowd-funding was always part of the plan. The concept of bringing customers and everyday Aussies along on the journey with him was core to the strategy.
“We’re trying to build a people-powered solution to the plastic problem. And there’s no better way to align the interests of our community, our customers, the planet and our business than to have our community own us. That way we’re all financially and environmentally aligned.” Mike says.
And, their community were just as eager. When they launched, they broke all the records, and they soon hit the legal limit of $5 million.
But for their scaling ambitions, $5 mil wasn’t going to cut it, so they went to venture investors, and family offices, and again, the energy was there; they raised another $8 million the same week.
It was a huge week, with thousands of retail investors putting their money on the line, including family and friends, to back his business that was barely a year old. While at the same time signing term sheets with Australia’s leading venture firms.
It’s a rare dynamic, and Mike soon realised the two groups of new stakeholders were dramatically different.
“My friends and family all jump in on this thing, and I don’t think I fully comprehended the level of pressure that would put on me, and also the potential for it to make me potentially more conservative than I probably should be as the founder of a fast growing startup.” MIke says.
“But when you take VC money it’s completely different. They know the game, they know there’s a huge failure rate in startups, and they expect you to go really hard and burn money fast.”
For Mike, there was a challenge in managing the divergent expectations of these two different groups, in parallel.
“It’s put me in two different headspaces, and that’s probably been the biggest challenge, just my internal mindset.” Mike says.
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Advice for Founders Looking to Raise a ‘Community Round’
The concept of equity crowd-funding is relatively new, and Zero Co is a powerful test-case. There will surely be other founders looking to the company’s progress and experience, and Mike had some advice.
“Founders need to be strategic about the planning process of going down the equity crowdfunding route. You’re accepting money from everyday people, it’s a very different level of responsibility to taking sophisticated investor funds.” Mike says.
“And importantly, it’s easy to get carried away with valuations. We went in with a very modest multiple, by crowdfunding standards, we had a multiple of four times revenue. Prior to us the top 20 largest equity crowdfunding campaigns had an average multiple of 35, which is just so unreasonable.”
An added benefit for Zero Co was having a venture round happening at the same time, so they felt there was sound market basis for the numbers being put forward.
But beyond the numbers, the core point of doing a crowd-fund round is to give your most die-hard fans a way to be part of the journey, and there’s a big opportunity to put their energy to use in building the brand.
“Founders should also make sure they’ve got a really well thought out plan of what you want your shareholders to go and do for you. Because the whole concept of equity crowdfunding is that you’ve got 1000s of advocates now, and unless you’ve got a really tight plan around what that could look like, it’s gonna be hard to get the core benefits.” MIke says.
Impact Investors Declined
There was, however, one group who are conspicuously absent from the Zero Co share register, and that’s impact investors.
Mike explained that their mission-led model was clear, and they pitched to some of the key impact funds, but none invested.
“I was surprised, and a little bit disappointed, to be completely honest with you. Because I thought that we would be a great candidate for impact investing, given we’ve got some proper runs on the board now.” Mike says.
“We’re not just a little backyard startup. Prior to doing the last round we were doing $1 million a month in sales, in under a year, so we’ve scaled pretty quickly. And of course in terms of impact, we’re solving a really large fundamental problem in the world. It’s not like a touchy feely, pretend impact business.”
Mike calls their approach ‘Mission-Business 2.0’. He recognises the work of social enterprises that have gone before, but he wants to take it deeper, integrating impact into the product itself.
From the first bottle that was sold, they were reducing plastics going to landfill, and that’s because their bottles are reusable, plus, they’re manufactured with 50% ocean plastics. And of course the refill pouches are refillable too, they can be mailed back to HQ.
“The early mission-led businesses, like Thank You, and Who Gives a Crap, are really great examples but the business model depends on them making a profit, and then diverting that to good in the world. But essentially their product is just a product.” Mike says.
“Which is powerful, but the challenge with that business model is most startups fail, and very few of them actually ever get to profitability. And so you’re essentially selling a product to people, and using the goodwill and your profits to fund projects, but the core product of your business isn’t doing much.”
Zero Co wants to accelerate the potential of the circular economy, and their systems are showing the potential of innovation in manufacturing and supply chains.
“We’ve already pulled almost 900,000 water bottles worth of rubbish out of the ocean. It’s what we do every day, the business starts with ocean cleanups and then turns that rubbish into a commodity that can be monetized to fund the next ocean cleanup. It’s the essence of a circular economy.” Mike says.
But it’s still hard to beat the economics of virgin plastics.
“Our 500ml hand-wash bottle costs us about almost $2, just to make the bottle. But right now our competitors are making these from Virgin plastic, and it costs them about 35 cents. That’s the reality.” Mike says.
“Thank You brand have got one of the largest market shares in Australia in handwash, and they pay 35c for their bottles. It’s tough.”
Many have tried before, but few have gone as deep into re-imagining the entire manufacturing as supply eco-system as Zero Co.
After spending big on research to build a custom-made pouch cleaning machine, they’re finally opening the doors to show the public how it’s done. They have a video due for release very soon.
The challenge is real, but Mike and the team knew that from the start. They’re up for it.
“What we’re trying to do is gradually increase the percentage of ocean plastic that goes into these bottles. At the moment, this is made from 50%, Ocean Beach and landfill bound plastic.” Mike says.
“The ocean and beach plastic is a really expensive stuff, but we want to get this to 100%. So, while that will increase costs even more, we hope that it will be offset by the efficiencies we get with scale.”
With more customers choosing to use Forever-Bottles, and making the effort to post their pouches back to the team for refilling, the company can grow and keep the process of innovation happening.
The circular economy is here.