Crowdfunding is an alternative funding solution that bypasses the bank and appeals directly to would-be investors in your venture. Using the internet, entrepreneurs, start-ups and anyone else with a hot business idea or community project, can talk to thousands of potential investors with just a few clicks. It’s still a relatively new concept, so how does crowdfunding work in practice and is it a realistic way to fund a small business?
How crowdfunding works
Interest in crowdfunding has grown dramatically in the UK, as have the number of crowdfunding platforms, and it’s a sector that’s still developing. Typically, you set up a profile of your project on an online platform such as Seedrs, Crowdcube, Funding Circle – to name just a few – and people opt to invest or donate money to your business concept, social enterprise scheme, or cause. The fundraising is coordinated and administered by the online platform who charge a fee (often based on a % of the funds raised) for their services.
Different forms of fundraising
According to the UK Crowdfunding Association (UKCFA) the three main forms of crowdfunding are:
• Donation or reward crowdfunding – This is when people believe in what you are doing and aren’t necessarily expecting anything back in return for their investment. The sums involved may be quite small, from a few pounds up. Reward crowdfunding is when, in return for their donation, investors may get free tickets, access to an event, a gift, regular updates on the project, a namecheck on a crowdfunded album cover, and so on. Popular UK sites who coordinate this type of crowdfunding include JustGiving and Abundance.
• Debt crowdfunding – Here, investors hope to get their money back plus interest. Also referred to as peer-to-peer lending. Some forms of debt crowdfunding – where small sums go to poor communities, for example – no interest will accrue on the loan. Sometimes called microfinance, this type of crowdfunding often appeals to investors with a strong social conscience.
• Equity crowdfunding – With equity crowdfunding, investors put in money to the project in exchange for a number of shares or stake (equity) in the business. The value of the shares – with the exception of community shares – can go up or down, depending on the success of the project.
Crowdfunding for a small business
Crowdfunding can be a welcome solution for a small business, especially those who are struggling to source finance from a bank or other type of lender. But it’s also a model that may appeal to entrepreneurs or start-ups looking for like-minded investors who are willing to back their brand, project or services.
Businesses of all sizes can pitch for crowdfunding, deciding in advance the size of investment they’re after and what size of stake in their business they’re willing to give away in return.
Depending on the crowdfunding platform, there may be a minimum amount that individuals can invest, such as £10, but no upper limit. Providers will usually have an all or nothing funding policy, so if a start-up is looking for £20k and only attracts £5k, they don’t get the funding.
How to attract crowdfunding
Getting your project or idea noticed is easier said than done in a market where thousands of others are vying for crowdfunded capital. Below are a few tips to help you stand out from the crowd.
• Tell a compelling story. Let people know who you are, why you believe in your business, what you hope to achieve and how their investment can help the business flourish. Be engaging as possible.
• Don’t pitch too high, but only ask for as much as you need.
• Do your research and anticipate what investors are likely to ask.
• Be prepared to speak to lots of people via the crowdfunding platform and give clear answers. Avoid jargon and use simple English.
• Be open and honest at all times.
What can go wrong?
Before deciding to use a provider, always check to see if they are authorised by the Financial Conduct Authority (FCA) to avoid scammers. It’s also important to remember that by asking for crowdfunding you’re disclosing your business plan to the public, making it easier for someone, including a competitor, to steal your ideas.