Crowdfunding refers to the practice whereby projects or ventures are funded by raising the necessary finance (mainly from a large number of people), with those individuals usually contributing relatively small amounts, and is done in almost all circumstances via the internet.
Commonly referred to as an example of “alternative finance”, crowdfunding has emerged from outside the traditional financial system, allowing entrepreneurs to access money without having to go through regulated banks and capital markets. Of course, the traditional system continues to work closely with businesses large and small and presumably won’t be going away anytime soon, but crowdfunding represents an additional avenue that businesses can explore when they are looking at the fundraising options available to them.
The different types of crowdfunding
There are different types of crowdfunding – for example, debt crowdfunding (investors will receive their money back with additional interest), reward crowdfunding (investors contribute to a funding goal with a view towards receiving a discount on a product or service), and donation crowdfunding (where individuals contribute to a particular cause because they believe in it and with no tangible return due to them – in other words, it can be another way to make a charitable donation).
However, here, we are going to focus first and foremost on equity crowdfunding, which, put at its most simple, involves investors backing a business – usually an SME – and in return taking an ownership stake, in the form of unlisted shares or securities.
One of the big pluses of crowdfunding is that it streamlines the process. Businesses don’t have to go to banks or VCs; instead, they can go directly to the wider public and pitch their wares on platforms dedicated to bringing companies and individual investors together.
Businesses will tend to attract an eclectic mix of investor-types via this route, running the gamut from friends to family to random individuals to clued-in investors keeping an eye out for the next big thing.
On these platforms, the wisdom of the crowd prevails – if an entrepreneur makes a compelling pitch and enough users buy into their vision, they will most likely secure the funding they are looking for; if they don’t make a solid case, then they probably won’t.
Is crowdfunding a good route for your business to take?
The amount of UK equity-based crowdfunding grew from £28 million to almost £550 million between 2013 and 2020
Crowdfunding won’t suit every business, but neither necessarily will the more traditional route. Smaller businesses seeking relatively modest sums to fund expansions won’t necessarily find it easy to secure the funding that they need when going to the established sources.
VCs most likely won’t be interested as they will be looking for deals with the potential for bigger returns, while banks – as has been an issue at times post-Great Recession – may or may not be willing to offer attractive loan terms. Many businesses have found themselves facing that dilemma, and in that situation, crowdfunding represents a viable and practical alternative.
In the United Kingdom, equity crowdfunding is not merely an alternative means of securing investment, it has become a thriving go-to option. The size of this market has grown consistently throughout the last decade and looks set to continue to do so into the future. In the seven years from 2013 to 2020, the total annual volume of equity-based crowdfunding here grew from £28 million to almost £550 million.
How does crowdfunding work?
If you are an entrepreneur looking to either launch a business or expand an existing operation, and you decide that you want to go down the crowdfunding route… how exactly do you go about it?
- The first thing to do is to identify the equity-based platform that suits you best. While all basically offer the same service, they can have different conditions around important points like how long the campaign will be allowed to run and what limits are in place on how much can be raised. It’s also important to be clear on who is likely to see your pitch. Certain platforms may attract different kinds of backers, so be clear that the platform you choose is going to attract the right eyeballs.
- Once you identify the platform you wish to use, you must then apply to and be accepted by that platform. This will involve completing various forms and providing whatever relevant documentation is requested. Among the information typically requested will be details around the proposed investment, any appropriate risk warnings, and whatever cooling-off period will be put in place for investors.
- Once you identify, approach, and are accepted by your preferred platform, the next step is a key one – you get to make your pitch. The pitch is basically a marketing campaign and is vital to get right. You might have the best idea your sector has ever seen, but if you don’t communicate it clearly and make the overall proposal seem genuinely attractive to investors, then you may not secure the funding you need to proceed. You don’t need to read between the lines here to appreciate the importance of getting this right. You need to describe your product or idea, explain why you want to fund, how much you hope to raise, what the equity stake involved will be, and what share price will be set. The reality of equity crowdfunding means that you will have to share a lot of business information with random strangers who may or may not go on to invest in the company – financial statements and forecasts, a realistic business plan, general company information, and a current value estimate for the company.
- The platform you work with will assign a set timeframe to your fundraising campaign. If you are successful, the platform will release the funds to you and handle the issuing of share certificates to your investors. If you don’t hit your target within the specified time period, you may be able to extend the deadline, depending upon the circumstances.
What are the pros and cons of equity crowdfunding?
As with any other means of acquiring capital, there are potential upsides and downsides associated with equity crowdfunding.
Among the advantages are:
- Equity crowdfunding can be a clean and relatively fast way to raise funds. Note the emphasis on ‘can’ in that sentence. Just because something ‘can’ happen doesn’t necessarily mean that it ‘will’ happen. There is no guarantee that you will raise money quickly or that you will even hit the magic number that you have in mind. A crowdfunding platform brings with it the opportunity and the possibility that things will work out exactly as you hope, but there are no guarantees.
- The process of pitching your business through the platform means that you may attract a lot of attention and buzz, above and beyond whatever funding target you have set. On a related note, you may also get to increase brand awareness.
- It’s a more time-efficient way to raise funds, in that you get to approach a broad base of investors at the same time, rather than pitching to them one-by-one.
- You’re not creating fresh debt, so any funds raised can be pumped directly into the business.
- Even if you don’t succeed in meeting your funding target, you can still potentially reframe that as a positive, in terms of the process is a learning experience. You can gain fresh insight into how feasible an idea or a business is based on the response you receive on a crowdfunding platform. If sufficient investor interest doesn’t follow a strong pitch, that sends you a very clear message – at the very least the idea or business needs to be tweaked before you look to continue with it.
Among the disadvantages:
- While we can reframe setbacks as a learning experience, depending upon the specifics of the situation, you may also come to think of an unsuccessful fundraising drive as time wasted.
- By its nature, equity crowdfunding is a very public exercise. That being the case, if you are associated with a fundraising effort that does not succeed, this may be damaging to your business reputation, particularly if you are a startup and have no track record of success to balance against an isolated setback.
- In some respects, equity crowdfunding is designed to bring in small investors. This is certainly a plus in many respects, but it can be a turn-off for large investors, which may or may not become an issue down the line.
- While it is a fundamental part of the process, giving up equity in itself isn’t necessarily a desired outcome for the entrepreneur, but it is perhaps a necessary evil.
- If you end up with a large number of investors, you then have the added headache of keeping them up to date on how the business fares on an ongoing basis.
How do you have a successful crowdfunding campaign?
A successful crowdfunding campaign requires a lot of commitment in both time and resources
There is no such thing as a sure thing. Any investment represents a risk. Not every business will succeed and neither will every equity crowdfunding effort. However, while there is no sure-fire recipe for success. Crowdfunding experts, when asked, consistently offer up the same key points on how entrepreneurs can give themselves the best chance of success.
Among the points emphasised over and again are:
# Be ready: It might seem obvious, but it still needs to be said. You must make sure that you’re ready to focus on the campaign when the time comes. This means more than simply having your pitch ready for day 1, it’s also about the timing of the campaign. So, if there is a time of year when you typically expect to be particularly busy or key personnel are likely to be on annual leave, try to ensure that the campaign doesn’t launch around then. You want to be able to devote as much time and focus to the campaign as possible, so try to schedule it accordingly.
# Be realistic: Don’t set the bar too high with your fundraising target, but don’t set it too low either. Most platforms will insist that you hit your target before releasing any funds to you – an ‘all or nothing’ approach – so if you’re over-ambitious with your target you might hinder your own prospects. In a different way, if you set too cautious a target and your idea resonates with investors, you may achieve your goal very quickly, but know that you may have inadvertently left money on the table by not backing yourself and your idea more strongly.
# Be conscious of the need for a social media strategy as a lead-in: The work doesn’t begin on day one of the campaigns. If you want to maximise your chances of success you will look to build awareness around you and what you do in the weeks and months before the campaign actually launches, and this will involve a concerted effort on all your social media channels as you look to increase your base of followers. Once the campaign has been formally launched, the challenge then becomes one of sending regular updates and continuing to nurture the community you have created.
# Connect with your audience however and whenever you can: Take every chance you get to put yourself in front of potential investors and look to connect with them. Speak at conferences, “work the room” at events you attend, ask for email addresses, make special business cards with the campaign URL details – leave no stone unturned as you look to make as many people as aware as possible of you and your idea, and, ideally, positively disposed towards both.
# Be an effective storyteller: You have a story to tell, so learn to tell it well. Try to craft a narrative, don’t speak in bullet points. Humans love to tell stories and we love to hear them, and we especially love to hear good stories that grab our interest and make us care. Make your story one that people will care about. Also, lest it needs to be said, stick to the truth, but present all those relevant facts in as compelling a way as possible. If you do that, the odds are that you will grab your audience.
# Have a press plan: Consider developing a press strategy specifically for your crowdfunding campaign. Know the outlets to approach, try to identify the correct journalists to contact, and then send them an announcement and details of the campaign well in advance of its official start date. If you contact journalists by email in the first instance, always follow up with a phone call the next day or the day after. Remember, journalists are always looking for stories. If you go to one with a well-constructed narrative, you’ve already done half their job for them.
# Make your campaign video as good as it can be: If you’ve been using your pre-launch time effectively, you’ll have already put in a massive effort by the time you get around to creating your campaign video. Even if you’ve done everything right up to this point, you still can’t take anything for granted. A so-so video or one that doesn’t do justice to your idea could blow all the momentum you have generated and maybe even sink your campaign just as it formally begins.
You don’t need to include every detail or fall into the trap of thinking that more means more (it can do, up to a point, but beyond that point “more” and “even more” can become counterproductive). Brevity is key.
Cover everything that needs to be mentioned, but doesn’t outstay your welcome. The last thing you should do is make your video sound like a love letter from you to you.
Be clear, the purpose of the exercise is to impress viewers and make them want to invest in your idea/company. Any content that does not serve that overarching goal should be excluded.
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