Crowdfunding is an alternative method of raising finance for a business project. Unlike traditional angel investment, in which just a few people typically take a larger share in a business, with crowdfunding an entrepreneur can attract a ‘crowd’ of people, who may not have invested in shares before, each of whom takes a small stake in a business idea, by contributing towards an online funding target.
Crowdfunding is not new. In 1997 fans underwrote an entire US tour for the British rock group Marillion by pooling their money. The film industry first used Crowdfunding in 2002 and a Trade Association for freelance workers raised £100,000 in 1999.
In the UK there are two main types of crowdfunding:
Equity crowdfunding mainly used for funding start-ups and each investor receives an equity stake in the company and Debt crowdfunding, which is not used for start-ups, the company has to be at least two years old and the money is a loan over 1, 3 or 5 years.
The main benefit of crowdfunding, other than raising much needed capital, is that it creates a strong network of support for your company. The equity model is especially good at creating ambassadors for your brand, promoting it amongst their networks, family and friends and often becoming returning customers themselves.
How does it work? Although the rules differ from site to site, generally an entrepreneur will pitch his/her idea, set a fundraising goal and set a deadline for raising funds. Potential lenders or investors can review the pitches and decide if there are any they would like to support. Many entrepreneurs will also offer incentives to investors in the form of discounts and special offers. If the total required is not raised then the funding does not go ahead. The procedure for a lending crowdfunding site is not quite the same. On these sites you have to decide what interest rate you want to receive and then you bid for a portion of the loan.
How do I choose which crowdfunding site to use? Here are my six top tips
· Choose the right site. Do you want equity or debt?
· Know your target audience and pitch accordingly
· Plan ahead. A first class business plan is essential, good special offers for the investors are important and make certain you keep the interest going and have news items ready for each week of the investment cycle.
· Be passionate., include images and think seriously about a video to really get your message across
· Make certain you explain exactly how the money is going to be spent
· Do not leave it to the crowdfunding site to find all your investors for you. Leverage all your family and friends and publicise it on all your social networks. No one wants to be first to invest so make certain that a family member invests a small amount right at the beginning and keep the momentum going. It is easy to get investors at the end but difficult to get them at the beginning.
If you are a small start-up with a product that can catch the general public’s imagination then equity crowdfunding may be the simplest and only way you may get your company up and running. If you are an established company but the bank will not lend to you, then debt crowdfunding could be the answer.
Crowdfunding is still only a small part of the fundraising scene in the UK, but it is growing fast and if the banks are not careful they will soon start to see a dent in their customer base. If you need funding then it is certainly worth your while looking into crowdfunding.