A guide to crowdfunding

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21/09/2017

Crowdfunding is when you use an online platform to raise capital, rather than the normal method of borrowing from the bank or seeking capital directly from angel investors, friends and family.

It allows businesses the freedom to raise capital from anyone; investors, customers, colleagues, peers, even strangers. Like anyone in search of funding, successful campaigns rely on a solid idea and a detailed business plan – including financial forecasts and cash flow statements – to convince people it’s worthwhile to support your venture.

Typically, an established third-party crowdfunding platform is used to promote a campaign page, with incentives for investors in the form of rewards or equity. A reward might be pre-order of a new product, or services offered in exchange for funding support; equity would be a share of the business offered in exchange for capital.

A good example is BloomVC. They are independently owned and operated in the UK, and are funded by some of the UK’s top entrepreneurs. Since 2010, they’ve assisted small business start-ups using the crowdfunding platform. They’ve helped small business owners with ventures from bespoke jewellery to a charity choir. There’s even a business that manufactures an environmentally friendly candle in Scotland that has benefitted from BloomVC’s assistance.

How crowdfunding can help your business

Crowdfunding offers a funding alternative for businesses that possibly don’t qualify for a loan, or don’t want to apply for a loan. It may be because you don’t want to have the obligation of paying a loan back, or you want to spread the risk of the business across a number of people. Crowdfunding can also give you exposure to a wide group of people, who may contribute knowledge as well as money.

Here’s what you need to know about launching a successful crowdfunding campaign, including information on three platforms designed to raise business capital.

Tips for launching a campaign

Crowdfunding campaigns don’t tend to go viral; they gain traction because they appeal to the people you already know – your network – as well as investors who are searching for an opportunity and people who are in your target market.

Successful business crowdfunding campaigns have these things in common:

• They tell a compelling story and convey passion for an idea, connecting like-minded people who share your vision and enthusiasm.
• They offer backers high level, time-limited rewards that can include the product or service.
• They use every means available to sell a great pitch, including detailed business plans, product images and video demonstrations.

Choose the right platform

Here are three options for creating a winning business crowdfunding campaign:

• LendingCrowd – Crowdfunding Scotland, LendingCrowd is Scotland’s leading peer-to-peer lending company. With 100 years of combined credit experience each loan application is considered on a case-by-case basis. The organisation is for both investors and small businesses needing assistance. You don’t have to have thousands of pounds to qualify as investor – you can build your portfolio with small amounts of capital. For small business applicants, there is a rigorous screening and credit process before they’re accepted.
• Crowdfunder UK is a community of over 600,000 people who are funding the change they want to see. They have funded business ideas, charities, community groups, sports clubs, political movements and much more. They specialise in projects that are mostly charity and non-profit, investors can make a selection of projects that interest them, and they’ll work with business owners to boost brand awareness
• The UK Crowdfunding Association promotes the interests of crowdfunding platforms, their investors, and clients. They are successfully cooperating with regulators and lawmakers to take the industry forward as a force for positive change in the UK’s financial sector.They have a strong focus on protecting investors and businesses and have both debt and equity crowdfunding options.

How to increase your chance of crowdfunding

Like any financial option, crowdfunding has its drawbacks so try to;

• Address any difficulties with complex projects. Crowdfunding works best when the business idea is simple enough for everyone to understand, not just professional investors. Make complicated or technical ideas appeal to crowdfunders with a detailed business plan.
• Ask for realistic capital funding. With very rare exceptions, crowdfunding targets are usually around £100,000 or less.
• Stick to what you’ve said. Once you receive the funding you need, don’t make drastic changes to your business. Similarly, stick to your timelines to enhance your reputation and your brand.
• Realise it’s usually easier with consumer products, where people can more easily understand what they’re investing in. It can be harder to access crowdfunding for B2B products or services. The general public may not have the industry or market knowledge to invest in that space.

There’s also the question of intellectual property protection. Your IP will end up in the public domain, so you may decide to keep some information back. Funders can then sign a non-disclosure agreement or confidentiality agreement to protect you.

Summary

Crowdfunding can be a smart, cost-effective way to get funding for your business. It can also offer an unadvertised side-benefit: priceless feedback from your backers that can help tweak your idea before you move into production, allowing you to launch an even more successful business.

However, keep the challenges in mind. Remember: be crystal clear as to why you are raising funds and why others should support your project.