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If you’re looking to fund a new business venture through crowdfunding, where do you begin?
Last updated: 15 Jul 2020 6 min read
Crowdfunding has emerged over the past decade as an important new source of investment for start-ups and growing businesses – in particular those that might struggle to raise funds via traditional routes.
Crowdfunding platforms like Kickstarter, Indiegogo, Funding Circle, Crowdcube and Seedrs match individual investors – often paying as little as £10 a time – with entrepreneurs and companies looking to finance expansion, new products or one-off projects.
Typically, crowdfunding falls into three different categories:
Debt crowdfunding, where a business raises money as a loan from a large number of individual private lenders using a platform like Funding Circle.
Equity crowdfunding, which involves selling a stake in the ownership of your company to a group of industry investors through a platform like Seedrs or Crowdcube.
Project crowdfunding, where a business raises money usually for a specific project such as a new product. In return, backers might be given discounts on buying the product, or simply the chance to make a purchase before the rest of the market.
Each avenue has pros and cons, says financial consultant Bart Dalton. “Depending on who you’re taking debt from, you’d better believe in what you are doing because you’re putting a personal guarantee – your house or your school funds – on the line,” he explains. “With equity crowdfunding, you are giving away a share in your business so you need to take a good look at the legal documents – most people don’t use a legal team when they deal with these platforms.”
In some cases, Dalton points out, raising money via crowdfunding may put limits on a business’s ability to seek investment further down the line. “For example, sometimes the crowdfunding will have to be paid off before you take the next round.
“Bear in mind also that when you are giving away equity, you are letting a lot of people into your business – and that has the potential to change your world.”
Equity or project crowdfunding is especially suitable for consumer goods brands, says entrepreneur John Stapleton, founder of food brands such as New Covent Garden Soup and Little Dish. “The UK has seen an explosion in food and drink start-ups in the last five to seven years, with many fuelled by the easier access to funds that crowdfunding has provided,” he says.
“The most important thing when you are crowdfunding a product is that you have a manufacturer that completely agrees to your prices, timescales – and that you have built in a factor for something going wrong” Stefan Knox at Bang Creations
“This is particularly the case for brands with a purpose and a strong backstory. Millennials and Generation-Zs are attracted to ‘being part’ of an aspirational brand with a strong and purpose-led message. Such brands are especially suitable for crowdfunding as they are easily related to by the relatively unsophisticated investor.”
“A lot of early-stage businesses hear about crowdfunding, and if they are having difficulties raising money, they think: ‘Well, I’ll just go to a crowdfunding platform and loads of people will invest in me,’” says Philippa Sturt, managing partner at London-based law firm, Joelson. “Unfortunately, I don’t think it’s quite as simple as that.”
Sturt points out that businesses often don’t realise that, in order to go live on an equity crowdfunding platform, they need to have already raised at least 50% of their target themselves.
“That percentage is set by the platform, and it is hard to pin them down on an exact figure. They look at how they think you are going to do on the site, and then set a percentage. B2C [business to consumer] businesses tend to do better, so that percentage is likely to be lower. A B2B [business to business] client I worked with last year was asked to find 85% of the money before they were allowed to go on the site.”
A lot of work needs to be done before your project can go live on a crowdfunding platform, says Ben Keene, co-founder of Rebel Book Club. “We went with Crowdcube, and once we had submitted our pitch for them to check, we had more than 30 compliance requests,” he explains. These were to check that the company could verify the variety of claims and assertions made in its pitch to investors.
“Compliance on Crowdcube is very thorough. But it’s there for a good reason, so that when investors read a pitch, they know the due diligence on the claims has been done and the numbers and stories have been proven.”
Stefan Knox, founding director of design agency Bang Creations, has raised money himself on Kickstarter and also advised a number of clients on how to get crowdfunding right.
One common mistake he sees businesses making when funding a product is in getting their pricing right. Knox says: “Take a company that has made something for £12 and sold it for £25 on Kickstarter – their backers like the product and the business thinks it’s a success.
“Then they go to retailers who say: ‘Yes, it’s a £25 product, we’ll buy it from you for £10.’ A lot of start-up businesses have caught a cold that way – after they kickstarted it, they had to do the real-world scenario of distribution, agents, warehousing, logistics and so on. And they realise too late the sums no longer add up.”
1. Negotiate when you can
Philippa Sturt says many businesses don’t understand that most aspects of their crowdfunding agreement – from the platform fee to the shareholder agreement – can be negotiated. “But there’s a point at which you have to decide whether or not you want to do it,” she says.
2. Ask whether opening up to crowdfunding is right for your business
“A really easy way of getting information on a competitor is by putting £25 into their business through crowdfunding, and then you get access to their management accounts,” Sturt explains. “So if you’re in a particularly competitive marketplace, crowdfunding might not be for you.”
3. Make sure you can deliver
Stefan Knox says: “The most important thing when you’re crowdfunding a product is that you have a manufacturer that completely agrees to your prices, timescales – and that you have built in a factor for something going wrong. The worst thing you can do is let down your backers.”
Strategy and Planning