What is crowdfunding and how could it work for you?

By Jake Martin

3 min read

CrowdfundingThis guest post is by Luke Lang of Crowdcube. He gives the lowdown on crowdfunding, which has been hailed as “the next big thing” by a number of business commentators.

The task of securing investment is notoriously difficult for any public, private or social enterprise.  Few people who submit business plans to angel investors, venture capitalists or similar sources of funding are successful in raising the money they seek.

For social enterprises, where profit maximisation is not the main objective, this is often a far greater challenge. Angel investors and venture capitalists remain elusive to all but a few. Banks tend to adopt a risk-averse approach to lending and the Government’s recent agreement will not necessarily make it any easier. Demand for finance continues to outstrip supply.


Out with the old

To some extent little has changed since the 18th century where entrepreneurs with bright ideas went cap in hand to wealthy individuals. However, a Velvet Revolution has begun and start-up enterprises are increasingly using the internet to bypass this archaic model of business finance by finding investment from a ‘crowd’ of ordinary people.

How it works

Using ‘crowdfunding’ sites means lots of people, like you or I, can contribute small amounts of money in support of a venture, making it far easier to raise finance.  So the company that’s looking for £50,000, for example, could find 1,000 people each contributing £50 instead of relying on one or two individuals.

Entrepreneurs showcase their business and investment potential to micro-investors by uploading a Dragons’ Den style video pitch, images and supporting documents. People can support an idea, person or business by investing small amounts of money in exchange for shares in the business.

Top five tips for crowdfunding your business

  1. Make sure you’re investment ready.  It is crucial that your business is investable and demonstrates to investors how they will realise a return on their investment.  You need a good business plan and financial forecasts to give potential investors all of the information they need to know to make a judgement on whether or not to invest.
  2. Create a compelling pitch. People are more likely to invest in a business that they are already passionate about or a story that is too compelling to ignore. Your crowdfunding pitch should be one, or both, of these things. What makes your business unique? And how will you take advantage of this opportunity?
  3. Tell people about your pitch. Crowdfunding needs to be driven by the entrepreneur. Once your project has launched, you and your team need to actively promote it and spread the word with marketing and PR. Successful projects are those where the entrepreneur doesn’t sit back but is very active in letting everyone know about the opportunity they are offering potential investors.
  4. Maintain pitch momentum. It is important that you have a burst of activity for launch but that you also plan ahead to try and maintain a drip feed and future activity. You need to manage your campaign so that you maximise every opportunity.
  5. Maintain investor relationships. Once you have reached your funding target you need to build relationships with your investors.  They are potential customers, brand advocates and suppliers of your business so you will need to do your best to keep them happy.

Crowdfunding in action

Launched in early 2011, Crowdcube makes it possible for the general public to buy shares in start-up and growing businesses.  Since launch the website has funded seven deals totalling over £1.4 million and has over 6,300 registered investors.

Examples of the businesses that have benefited from crowdfunding include:

  • Fairtrade bodycare business, Bubble & Balm was the first to be funded on Crowdcube, raising £75,000 of growth capital in return for 15% equity in the business.
  • Personal Development Bureau raised £25,000 of seed capital in return for 15% equity in the business.
  • Kammerling’s, the brand behind a ginseng-based alcoholic spirit, successfully raised £180,000 capital from 85 investors to ensure the next stage of its expansion.
  • The Rushmore Group recently secured a record crowdfunding investment of £1 million from 143 investors.

 

 

 

Information may be abridged and therefore incomplete. This document/information does not constitute, and should not be considered a substitute for, legal or financial advice. Each financial situation is different, the advice provided is intended to be general. Please contact your financial or legal advisors for information specific to your situation.

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