Getting started with crowdfunding
Securing finance to help you start your own business has become a lot more difficult recently. Previously, banks would lend money with comparative abandon. Today, they're more reticent, despite government interventions and encouragement.
There is, however, another way of raising cash to fuel your business dream: crowdfunding. You've probably heard the term and maybe even explored sites such as Kickstarter. If not, crowdfunding enables you to present your business plan to a potentially huge audience of internet users.
If they like what they see, they may help you finance your dream. As you read on, we'll explore crowdfunding. We'll look at how and why it started, and how you can use crowdfunding in its many different forms to finance your new business. We'll explore how to access the crowd correctly and how to ensure your project makes the best possible start.
We'll also look at how you can invest in other people's dreams. So, come with us as we explore the crowdfunding revolution.
The not so silent revolution
Crowdfunding – the business of borrowing cash from a pool or crowd of investors – is big business. In a report, business consultants Deloitte claimed that in the UK alone, crowdfunding portals or pools raised £1.9 billion of investment capital during 2013. This compares with just under £1 billion in 2011.
Globally, crowdfunding's vital statistics are simply astounding. Reliable figures are hard to come by, but Kickstarter's own metrics suggest its users have pledged $1,423,220,414 at the time of writing.
That's just Kickstarter; many other platforms have risen since its inception. If you want further persuasion that crowdfunding is a sector you need to understand and watch, take the case of ElevationLab. The company wanted to make docking stations for Apple devices.
Don't imagine some kind of piano-black Apple pastiche here, though. Think manufacturing processes that would make Rolls Royce blush and products that would make Jonathan Ive cry tears of joy.
According to Massolution, Elevation's Kickstarter funding drive was the first individual campaign to reach the $1 million milestone.
In all, it pulled in a total of $1,464,706 from Kickstarter investors. A few months later – in April 2012 – Pebble Technology, maker of boutique smartwatches, drew in $1 million of investment in just 28 hours. Overall, Pebble pulled in an amazing $10,266,845 of funding.
The four types of crowdfunding
Crowdfunding is growing at a huge rate. To find out more about the sector, we spoke with Julia Groves, managing director of the UK Crowdfunding Association.
"The UK Crowdfunding Association is a trade association formed in 2012 by 12 of the leading UK crowdfunding platforms," Groves explained. "Our mission is to promote crowdfunding as a viable and valuable way for UK businesses, projects and ventures to raise funds from the contributions of the people… At present, we have 24 members who are operating UK platforms, and 10 affiliated members, which are pre-operational."
As we spoke, she explained that crowdfunding is very much an umbrella term for four key types of cash-generating approaches. The first, she told us, is referred to as the donation model.
Here, supporters simply give cash to a start-up and don't have any expectation of a return. Just Giving's Yimby.com is a prime example of this style of working.
Next up, we have reward-based crowdfunding, where givers donate with the expectation of receiving something in return.
This style of funding was embraced by David Braben, a man famous in computer gaming circles as the comaker of the 1980s classic space-trading game, Elite. In an effort to fund a remake of the game – Elite: Dangerous – Braben launched a Kickstarter campaign.
A donation of £10 bought you a regular newsletter and updates on the project. If you gave £30, you'd receive a digital copy of the finished game. Contribute more and you'd get bigger and better returns. In all, the project pulled in over £1.5 million in donations, and Elite: Dangerous is now on sale, with several expansion packs available too.
If you're interested in this kind of funding, Groves pointed to Crowdfunder and Indiegogo as firms that you could explore.
Next up is the loan or debt model. Here a business borrows its funding and promises to repay the money with interest. Abundance Investment, Funding Circle, Funding Empire, Money&Co and Trillion Fund offer start-ups access to this kind of funding.
The fourth type of crowdfunding is equity funding. Here, Groves told us, "Support is provided in return for an equity stake [or share] in the business." Funding platforms such as Crowdcube, Seedrs, Angels Den and Syndicate Room embrace this kind of model.
Picking the right crowdfunding platform
Choosing the correct crowdfunding platform can appear daunting, particularly when you add in another type of platform: hybrid. Here a funding platform might offer a mix of donation, gift, debt and equity based deals.
So, how do you pick the right fund for your business? Groves explained: "One of the real beauties of crowdfunding is that not only can you raise money but you can galvanise an army of ambassadors who will feel connected and part of your project.
If you plan to operate your business in the UK, then having such a supporter base here in the UK will probably better serve your needs than a US platform." Beyond patriotism and convenience, there are also legal considerations to bear in mind. Groves told us: "Also, you need to be aware that in terms of equity crowdfunding, the UK is the world leader and this is largely down to supportive regulation. The US does not currently allow equity crowdfunding by ordinary investors, so you really need to consider where you intend to be based and, indeed, where your future customers will be based, who may well turn out to be your biggest investor fans."
It's also worth considering how the individual crowdfunding platforms make their cash, too. Most of them charge commission. Rates typically vary from around 3.5% to 8%. So, when looking for a funding platform, you'll need to choose between donation, gift, equity, debt and hybrid crowdfunding platforms. Which one is right for your business comes down to your personal ethics, ambition and the type of project you're planning.
Get the ball rolling with crowdfunding
When you've decided upon the type of funding you'd like to use, you need to find a funding website or platform that supports it. This can appear daunting, because there's an ever-expanding number of funding platforms to choose between.
Your initial approach to a platform is then very important. We spoke to Alysia Wanczyk, Seedrs' marketing director, about what actually happens when an entrepreneur and a funding platform meet each other for the first time.
She explained, "Once a business completes their online investment campaign, it comes through to our review team. The team then goes through and initially rejects any campaigns that are patently unviable, incomplete or plain silly. Those that proceed are carefully reviewed to ensure that every statement they make is fair, clear, not-misleading and truthful."
Unlike eBay, where the process of adding sales posts or landing pages is highly automated, Seedrs' registration system is much more human.
Wanczyk continued: "This [checking process] often requires a bit of a back-andforth email and phone exchange between us and the entrepreneur, to ensure we receive supporting evidence for every statement. Once both parties are happy with the campaign, we set it live to potential investors to review – with the peace of mind that what they're reading is reliable.
From there, it is up to investors to look around, ask questions and decide for themselves if a business is worth investing in."
Pass or fail?
Funding campaigns usually last for around three months, Wanczyk told us. The question is, of course, what happens if you're successful? We asked Wanczyk whether the cheque arrives the next day. She explained: "Once a campaign has hit its funding target, we conduct a further due diligence process to ensure that all legal and structural matters are in order with the company. It is all very straightforward."
What this boils down to is essentials such as registering the company with Companies House, setting up a company bank account, and completing taxation documents. And if you're not so lucky? Wanczyk told us, "If a start-up doesn't reach their target [within three months], their campaign is taken down and each of the investors is given their investment back and notified.
Sometimes, a business is given feedback from investors and potential investors and they take down the campaign themselves to change it and re-submit it."
8 tips to make your campaign a success
1. Research, research, research
You need to understand the market you're planning to launch into. This means scoping out your competitors and any hurdles that might need to be overcome.
In essence, think about doing a SWOT analysis of your idea. Going through this process is essential because you'll most definitely be quizzed about these sorts of business fundamentals as you progress from the idea stage through to funding.
And don't think investors will go easy on you just because you've never been through the process before. Investors will certainly have lost money before and they'll be mustard keen to avoid doing so again.
2. Get thinking straight
An idea doesn't have any value, no matter how good it is. It is the execution of the idea that creates value. So, don't get hung up on your initial concept.
Rather, think and talk about the business that you're building around the idea. You should also be able to explain your business succinctly, maybe in just one sentence. Be sure you can explain the problem you're looking to solve and how your business will solve it.
If an investor doesn't understand your business – even if it's amazing – they'll pass it by.
Your business's reasons for being – its mission statement - should be echoed consistently across all communication channels at all times.
3. Planning and milestones
Taking a project from an idea to a fully-fledged business can seem very daunting. For this reason, Tim Davies – investment director of Seedrs – writes about giving yourself a series of achievable goals.
Beyond providing you with both encouragement and direction, having a solid plan also looks good to investors. You might, for example, raise capital so you can achieve phase one, and then return to the funding market and ask for cash to begin phase two.
If the first chapter of your business story was a success and your investors are happy, you should find it easier to entice a second wave.
4. Raise just what you need
Spending other people's money is fun, but you'll have to pay it back. So, it pays to work out exactly how much money your business is going to need. This means you will have to pay less back and, also, it will serve to convince prospective investors.
Anyone looking to invest their own money in a project is much more likely to trust somebody who can show that they're serious about cash management. So, get your calculator out, fire up Excel and then work out the exact sum of money your business needs to work, and – at this stage – no more.
5. Make a video
The most potent way to tell your business's story to prospective investors is to make a video. You don't need to make an epic – consider three minutes the maximum length of time you have to convince people.
When you're planning your video, ensure you communicate your business's key pledges and the problems you're looking to solve very clearly. It also helps to have a logo at this point, too, because it conveys permanence and solidity.
6. Don't go live just yet
Veequo founder Matt Warren – writing on his firm's blog – offers a great tip. Before you launch your funding campaign, talk with your friends and family, and persuade them to promise some small contributions. When your campaign does go live, their financial support will give your project an instant lift.
This is beneficial because investors don't generally like to be the first to pledge money. Rather, they prefer to see a project that's already generating some momentum and is already going somewhere. So, don't hurry into going live as soon as you can.
It pays to get some early, pre-backers primed and ready first.
7. Embrace social media
When your campaign is up and running, you need to be able to create a real buzz around it. Just sending out a press release is probably not going to be enough. You need to be fanning the flames with social media.
There is, of course, a huge number of platforms to choose from. If you have limited resources, you need to focus your attention on the ones that investment professionals are likely to use: LinkedIn and Twitter. Get your team involved, too.
The key is to have a constant output of messages. Don't splurge and then go quiet. And don't view social media as a one-way street. Talk with people who take the time to message you.
8. Don't forget offline, too
It's easy to rely purely on digital promotion to promote digital products. There is, however, no substitute for getting out and meeting prospective investors face to face. There are lots of meet-ups where new businesses can network with professional investors.
To find out about such gatherings near you, try visiting Lanyrd. It's a site that chronicles a huge number of professional events that happen around the world. In many regards, it's the ultimate diary. Alternatively, look up Silicon Roundabout on Meetup.com] The point is, don't just sit back and expect investors to find you – there's a dizzying array of projects vying for their attention.
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