Crowdfunding has become an increasingly popular way to secure investment funding. And though this is still a relatively new method of growing investment capital for business projects, the entry costs are low and many popular crowdfunding platforms are quite straightforward to access.
Some entrepreneurs may be reluctant to consider this route without some clarification about just what crowdfunding can, and cannot, achieve. So, here’s a look at some of the specifics of this new funding concept.
What is crowdfunding?
There are three basic crowdfunding models:
Equity-based crowdfunding gives private investors a percentage of company equity in return for the funds pledged.
Practically speaking, the individual investment could be as small as £10 and SMEs can raise from £10,000 upwards with no maximum limit.
This can be a good way to make contact with venture capital sources and networks of angel investors. As an entrepreneur, you pitch to investors en masse via a website.
If your proposal is accepted by this market, a successful crowdfunding application can be worth more than just the cash benefit.
Loan-based crowdfunding is a lot more like traditional business finance except that it’s private individuals in combination who together advance money like a bank lender.
Interest rates are usually very competitive (average annual interest around 8.4%), individuals lend anything upwards of a £20 minimum, and a business borrower can secure £5,000 - £250,000 over one, three or five years.
There are also some stringent legal regulations to safeguard borrowers, lenders and the finance industry.
Reward-based crowdfunding is where individuals sign up to something like a pre-purchase agreement for goods or commit to supporting a product development project.
In return, they receive some form of tangible reward. It can be a tough assignment to ‘sell’ a project/prototype many months before production, but it can be achieved. For instance, Pebble Watches secured pre-orders worth $10.3 million via this route before their smartwatch became a world beater.
The advantages of crowdfunding
Clearly, a successful crowdfunding project saves applying for a bank loan or credit, and is a more accessible option for businesses who can’t reach wealthy investors.
It also streamlines proactive discussions with investors and may mean you could offer a reward instead of giving up business equity. In addition, a crowdfund application can be an extremely practical way to test the market, and a well-run campaign can also generate momentum for your product or idea and help to establish a market presence.
It is an excellent way to accelerate your business, which may be of critical importance.
The challenges of crowdfunding
One big challenge is that crowdfunding won’t ‘find’ you investors, because there is no such thing as a tame crowd of investors just waiting to give their money away.
Those who make a success of their crowdfunding project, invariably leverage their own networks and bring these people together on a crowdfunding platform.
This then creates interest and momentum which, provided your ideas have worth, then spreads outwards as others begin to consider whether they too should become involved.
Although the context is not the same as a traditional loan application to expand a business, there is still plenty of work to do if you want to secure your funding.
For instance, your launch will require careful preparation and impressive materials, and really is a campaign in every sense. You will also have to invest time and (some) money if you are to succeed.
This is all the more important when you consider that the result of a poorly managed crowdfunding attempt may result in a ‘false positive’ - a failure which you (wrongly) attribute to a poor product but may actually be down to a poor launch or a lack of effort on your part.
Crowdfunding is not always the best route for some types of funding. For instance, some upmarket product applications may fail
because they are not a good fit with the concept of crowd funds. And furthermore, it can be hard work remaining transparent with all your investors, as well as deciding exactly what form of remuneration they should receive.
Despite having its own set of limitations and considerations, crowdfunding can still be an ideal way to secure the money you need to expand your business. Just be sure you're aware of the challenges and pitfalls so you know what it’s best to avoid.
By Jo Thornley, Head of Brand and Partnerships at Dynamis. Joining in 2005 to co-ordinate PR and communications and produce editorial across all business brands. She earned her spurs managing the communications strategy and now creates and develops partnerships between BusinessesForSale.com, FranchiseSales.com and PropertySales.com and likeminded companies.