Crowdfunding platforms offer small companies a way to raise large sums of capital from a variety of minority investors, customers or lenders in a short time frame. This form of business fundraising is proving increasingly popular and is not just used to fund enterprises but also social movements, creative projects and more.
Startup Crowdfunding is on an increasing trend up as many startups are now seeking to fund their enterprise this way, especially in times of economic downturn is becoming increasingly popular and is a great way for businesses to raise capital.
What is crowdfunding and how does it work?
Crowdfunding is revolutionising the way businesses and projects are being funded, allowing small companies to raise funds by through a large number of small investors, customers or lenders (there’s even now options when it comes to crowdfunding for nonprofits).
In more general terms crowdfunding is the idea of using the power of the internet to amass small amounts of funding from lots of individuals to raise a meaningful amount of money for a business, project, product or cause. Within crowdfunding, there are three major models of raising funding that have become popular, these are equity-based, loan-based and reward based.
Equity-based crowdfunding is where individuals and private investors receive a percentage of equity of a company in return for their funding/investment. The main providers to date of equity crowdfunding in the UK are Crowdcube and Seedrs, where individuals can invest as little as £10 and small businesses/startups can raise a minimum investment of at least £10,000, with there being no maximum limit on the amount a company can raise.
These type of platforms offer unprecedented access to the average person to invest in new and growing companies in a way they were unable to do before, they also offer better access to more traditional private investors such as business angels, venture capital funds and angel investment networks or syndicates (most will require you to have SEIS advanced assurance).
What equity-based crowdfunding investors think is important
Equity Crowdfunding Investors want to know something about the issuer, and its offering, much like a father wants to know about the boy who wants to date his daughter. It’s about the Why. Regardless of the ultimate lack of relevance for a pre-revenue stage company’s financial projections, investors like to see them in excruciating detail. The details of, and rationale for, a Company’s go-to-market strategy is of significant interest.
They also like to measure if the company’s social media activity is commensurate with the type of offering and size of the amount of funding requested. On top of all of that, the Cap Table and exit strategy need to be reasonable.
Raising money from equity crowdfunding investors is a different type of hard. In the world of entrepreneurial finance, backers are smart and quite discerning. Those who will back your company care about resolving the macroeconomic trauma that has prompted this need for alternative finance. The new fact that market acceptance trumps technical risk (for most offerings) means there are benefits of completing a successful crowdfunding round beyond just cash. There are, however, practical implications of this rise of the “presumer” (defined a consumer who interacts in different ways with a product pre-launch).
In all cases the entrepreneur seeking investment pitches for funding via a website, explaining what they do and what they would use the money for.
Bond/debenture based crowdfunding is an alternative to equity
It’s uncommon but in some cases instead of equity, investors are offered a financial obligation (a bond or debenture). There is no fixed percentage return, but if the borrowing company does well, the upside potential for the investor is greater than with the below loan-based crowdfunding.
This is where investors lend money to startups in much the same way as a bank loan. In this scenario, private individuals combine together to act rather like a bank and lend to a business, though this type of loan is typically much riskier (as the lender is directly exposed to the borrower’s credit risk). This type of borrow cuts out an intermediary and connects lenders and borrowers directly using an online platform.
Providers of this type of crowdfunding include Funding Circle, where individuals can lend a minimum of £20 and businesses can borrow up between £5000 and £250,000 for a period of one, three or five years. Lenders receive a fixed rate of monthly interest agreed in advance by the two sides. To date, Funding Circle has lent a total of hundreds of millions of pounds to thousands of companies with an average annual interest rate of 8.4%, which in most cases is a better interest rate than you could hope to get from a bank. Other popular platforms such as Zopa, Ratesetter and Funding Circle are all loan-based.
Legal requirements for lending/borrowing through crowdfunding
For this type of crowdfunding, there are also pretty strict legal guidelines that have been in force for a few years in the UK now to protect the lenders and borrowing businesses. The rules for loan-based crowdfunding include the following:
- All information about the platform must be clearly and plainly presented to all investors.
- All communication must be fair and not misleading.
- The lender’s money is ring-fenced from the crowdfunding platform itself, so if the platform suffers financial problems, the lender’s money is safe.
- There must be guarantees in place so that loan payments continue to be made if the platform goes out of business. This could include measures that allow for 3rd parties to bail-out the platform.
- If there is no secondary market for the loan, the investor must be free to cancel the loan within 14 days, with no reason required.
- Investors have access to the financial ombudsman service for complaints.
- Prudential requirements of £50,000 or a percentage of loaned funds imposed on crowdfunding platforms, which must be ring-fenced.
- Crowdfunding remains outside the Financial Services Compensation Scheme (FSCS)
Reward-based crowdfunding is where individuals pre-purchase products or agree to support a products development, cause or project and in return receive a reward. This reward can be in the form of appreciation, the actual product once development is finished or even dinner with the creators or said product/project among more crazy rewards.
For startups and small businesses, this type of crowdfunding is only really possible if you have a product and some very good marketing skills, as you have to get people to purchase a product that probably doesn’t exist months or even years before they might receive it
To further illustrate the concept, here’s an example of one of the biggest reward-based crowdfunding stories to stories to date; Pebble Watches raised $10.3 million dollars in pre-orders for their Kickstarter campaign for their innovative smartwatch product that took the world by storm.
Who is crowdfunding for and what do you need to know?
In terms of businesses, anyone with a UK-based limited company can apply for funding on Crowdcube or Seedrs. Those seeking funding via Funding Circle must be either partnerships or limited businesses, have at least two years of published accounts and have no outstanding County Court Judgements over £250. Other platforms vary and there are some different rules for different types of crowdfunding and investors/businesses but overall it is a much easier process to set in motion and run than more traditional forms of lending and investment.
How much can you raise?
Crowdcube will facilitate investments of between £10,000 with no upper limit; Funding Circle will enable loans of between £5000 and £250,000. As per above, other platforms vary, you can check out our list of crowdfunding platforms below for further details. Be aware the total amount you get will be affected by the fee structure for any crowdfunding platform you use, they typically will take a percentage of the total you raise or an upfront fee, sometimes both.
Advantages of crowdfunding
Crowdfunding accesses untapped funding resources and effectively bypasses the banks, so providing useful competition. It can also be a much quicker way of securing funding – Funding Circle says that once posted on their website, funds can be available within days rather than the weeks or months it can take for a bank to make a decision.
Disadvantages of crowdfunding
Equity-based crowdfunding is a particularly risky proposition for investors – with two in every three start-ups going bust, and few businesses successful enough to eventually be sold, the chances of individuals getting their money back are uncertain at best.
Basics of preparing for a crowdfunding campaign
Be prepared to have lots of individuals believing they have to right to offer advice to – and get involved in – your business, and at the very least expect regular updates in return for their £10 investment, loan or pre-sale. Be careful about making you and your business too accessible to them in the early days – it may be charming at first but will quickly become irritating and hard work.
Do your homework. Look at how much other businesses have raised – and for what – using crowd funding, and pitch your proposition accordingly. The materials you provide to an equity crowdfunding investor should be accessible, professional, and detailed. You do not want to have reason to say after the fact “I should have made time to make it shorter”. Make sure that you maintain timely and high-quality interactions with everyone before, during and after your raise. If you have a pig, don’t put too much lipstick on it. Be honest about where you are. Embellishment will be sniffed out early.
Know your crowdfunding laws & regulations
The Financial Conduct Authority (FCA), the regulator responsible for all financial securities and investment products, now largely regulates crowdfunding. A few years back crowdfunding was been broadly unregulated, with most of the major platforms signing up to voluntary codes of conduct instead.
The introduction of FCA regulation in recent years for crowdfunding platforms has been a mixed blessing, on one hand making crowdfunding safer and therefore attracting new investors who were previously discouraged by the risks. On the other hand, the feeling amongst startups is mixed, with some believing regulation has been restrictive and is discouraging investment.
Whatever you believe in terms of regulation, most of the major platforms are already members of the UK Crowdfunding Association (UKCFA), where their voluntary code of conduct is similar in principle to what the regulation requires (take a look at this). They also believe it will encourage smaller firms to either adhere to the same professional standards or exit the market. It’s worth taking a further look at FCA regulations, the UKCFA code and other laws in relation to crowdfunding prior to getting into a campaign.
Knowing the rules and guidlelines of crowdfunding platforms
Beyond pure regulation, you should also be very clear on the rules of any platform your considering as an investor or business raising funding. Take for example a key rule Crowdcube enforces, whereby start-ups seeking money have to secure investor backing for the full amount asked for by the deadline to get the money. If they only manage to get pledges for some of that amount, they won’t get any of it at all.
The reasoning behind this is investors are investing their money on the assumption that the entrepreneur will be able to use the total investment specified to grow their venture – if they don’t actually get much of the money, that makes the prospects for the business a very different proposition.
List of crowdfunding platforms & websites
Seedrs was originally UK focused and based, and has now expanded its platform out to investors and startups across Europe. They focus on fundraising investment for startups in exchange for equity. One of the key benefits to their system is they operate a nominee structure holding shares on behalf of investors, simplifying the process greatly for startups and investors. As to fees, you create your campaign and only pay a tiered fee if your fundraising is successful.
Targeting/ Audience: UK and Wider Europe
Type: Equity Crowdfunding/ Startups
Crowdcube are currently one of the world’s largest equity based platform for startups looking to raise investment. Whether you’re looking to raise £100,000 or millions in finance, the reach and network around the platform make it a strong contender to list on for those looking for equity funding.
Targeting/ Audience: UK and Europe
Type: Equity-Mini Bonds Crowdfunding/ Startups
One of the original UK Crowdfunding sites, Crowdfunder is primarily focused on reward-based funding for individual projects. They’ve also acquired PeopleFund.It, meaning they have a massive network/ reach to an engaged audience of funders.
Targeting/ Audience: UK
Type: Reward Based Crowdfunding/ Creative/ Startup/ Tech/ Community/ Sports
Formerly Buzzbnk, Fundit.Buzz is focused on supporting/ funding social ventures aiming to make an impact. They can fund businesses, individual projects and a range social ventures.
Targeting/ Audience: UK
Type: Reward/ Equity Based Crowdfunding/ Social Ventures/ Social Enterprise Focus
The first crowdfunding platform to launch in the UK, WeFund focus on funding creative projects from music to design/ theatre and much more. They have a wide reach in the UK and are a strong place to run a campaign for creative projects.
Targeting/ Audience: UK
Type: Reward Crowdfunding/ Creative Projects
Raise/ Fund: Not available.
Founded in 2010, Sponsume are primarily focused on artistic projects but also cater for startup/ technology projects. An offshoot company from an Oxford University professor, the platform is now globally focused and has a wide audience.
Targeting/ Audience: UK and International
Type: Entrepreneurial/ Artistic Projects – Reward Based
Raise/ Fund: Not available.
How to successfully crowdfund with 6 data-driven tactics & strategies proven to work
Now you know what crowdfunding is and how it works its time to learn how to prepare and market a successful crowdfunding campaign.
First off there’s a lot, we businesses get wrong about crowdfunding. As the industry grows larger and first serious studies become available, we can see clear trends and crowdfunding best practices begin to emerge. As Slava Rubin one of the founders of IndieGoGo puts it “I used to have a lot of opinions” “Now, luckily, I don’t have to have opinions. We can talk about data.” So here are some of his top data-driven tips for successfully crowdfunding your project:
1. Start your campaign early
It may work for Kevin Costner, but the ‘build it, and they will come’ mantra just doesn’t apply to crowdfunding. If you only begin promoting your Kickstarter campaign once it goes live, you might as well be ready to pronounce it D.O.A.
According to industry experts, the fate of most crowdfunded projects is usually decided months ahead of the actual launch, which is when the majority of your marketing efforts should transpire. Most projects are only live for 30-50 days. Rather than squeezing all of your promotional prowess in such a tight time window, you should focus on building an actionable lead database beforehand.
For some projects such as the Gender book (raised 320% of what they asked for), launching the crowdfunding campaign was nothing more than a carefully-planned finish line. They’ve done most of the hard work in the four years before the launch, building their email list, bonding with an audience, and continuously hyping their project.
Think of your campaign launch as your product’s kickass graduation party. If you want your friends, family and most of your prospective buyers to show up, you’d probably make sure to invite them well ahead of time, right? Instead, what many project leaders do is tell people about the party as it’s already well underway, and then act surprised when most of them fail to show up. So what exactly should you do before your campaign goes live?
2. Be a community-building machine
Still, think you can get away without some heavy lead building before launch? Stand still while I throw some hard-boiled data at you. Indiegogo says you’re five times as likely to get funded if you raise at least 25% of the overall goal in the first week. Other studies suggest visitors stay on the project page 31% longer and are 22% more likely to donate once you’ve managed to raise the first 40%. Bottom line: either you bring your own canned audience to the campaign, or it’s your project that’s likely getting canned.
So how do you pre-build a community of dedicated backers? First, if you always felt shy about leveraging networks and asking your contacts for help, now’s a perfect time to step way out of your comfort zone. Abusing your social media channels is often a must for securing initial traction for your campaign. Data says that for every order of magnitude increase in Facebook friends (10, 100, 1000), the probability of success jumps dramatically (from 9%-, 20%, to 40%). When even your closest friends get tired of hearing when your campaign’s supposed to go live, it means it’s working.
Still, don’t count on friends and family to solo carry your project. Here’s where a little online marketing 101 goes a long way. You should have a slick landing page at least six months in advance, with a clearly stated value proposition and a few prototype photos (if you have one ready). Set up a lead gen form where people can sign up to receive updates about the product, including – you guessed it – exactly when the funding starts.
Then, it’s up to you doing everything you can to direct relevant traffic to your landing page. Whether that’s sending press releases, link building or continuously reaching out to influencers, this is where most projects sink or swim. In the end, successful crowdfunding is little more than effective marketing.
3. Analyse similar crowdfunding campaigns
As more big data on crowdsourcing slowly becomes public, it’s easy to forget there’s priceless info already available to anyone interested. You just have to know where to look. Crowdfunding is still a naively transparent industry. Two of the biggest platforms, Kickstarter and Indiegogo both choose to keep all of their campaigns on the site even long after they’ve ended. As a result, there’s a huge collection of actionable insight to be borrowed from similar projects in the past, regardless of whether they were successful or not.
Trying to get your wildlife documentary funded? It would be foolish not to check how other filmmakers tackled the same idea in the past. You get to directly analyse their pitch, see which perks and rewards seem to perform best for your niche, and try to determine why some made it while others failed. Case studies are awash, so why not replicate what’s already been proven to work? Embrace your crowdfunding doppelgangers. They can teach you a lot about yourself.
Direct competitor analysis also allows you to reverse-engineer most of their marketing efforts. Even a simple Google search lets you see which blogs, industry influencers and news outlets covered projects similar to yours in the past. If wildlife-enthusiast.com published a lengthy review of another crowdfunded film six months ago, he’s gonna love your project. Voila, your outreach list just became that much more relevant!
4. Specialise your outreach message
Crowdfunding is stressful. You get one shot at pleading your case to the public, so of course, you’ll want your pitch to win over as many eyeballs as possible. After all, it’s called crowdfunding for a reason, right? Trying to appeal to the mainstream rather than your particular niche is only a good idea if you’re selling something everyone wants. In other words, unless your product is free pizza, you’ll want to personalise your campaign message.
Kittyo attributes it’s crowdfunding success to a laser-focused outreach strategy. They too felt the allure of large media outlets praising their product but knew they’d mostly just get ‘drive-by traffic’, which rarely converts. Soma, on the other hand, was covered by Huffington Post, Forbes, Mashable and many other industry giants. Their best-converting feature? A post on good.is, a niche publication with ‘only’ about 400k monthly readers.
Most successful campaigns typically have less than 1000 backers. It’s not about winning over everybody. It’s about finding 1000 souls that are going to feel truly passionate about what you created.
5. Keep updating
Once their project goes live, most campaigners turn idle quick. They’ll probably share it a few times on Facebook, perhaps even shoot a couple of emails, and then spend the rest of their time anxiously staring at the progress bar.
Ready for some more hard-hitting numbers? On average, a successful crowdfunding campaign will have at least four updates. Furthermore, campaigns that update their followers on a regular basis raise 126% more money than those without any updates. It turns out people tend to give more money to projects that make a conscious effort to engage with them. I know: mind=blown.
But what if nothing noteworthy happened since your campaign launched? Well, campaign updates don’t really have to be groundbreaking pieces of news. It can be as simple as: ‘We made it to 25%! Thank you!’. Otherwise, if there’s been any progress in product development, if you had a productive team meeting or just wanted to share some additional info about your creation, feel free to let everyone know. If you can post an update in the form of an image/graphic or a quick video, even better.
Still, campaign updates shouldn’t be limited to your campaign page. Being vocal on social media is a given, but you should also try re-engaging your outreach list with follow-up news, as well as interacting with niche forums and community influencers. Most of all – organise! Campaigns that had a day-to-day marketing plan in place raised almost 300% more. That’s three times as much free pizza.
6. Be in good company
Being on Kickstarter is kind of like being in high school again: social proof really helps. There are two ways in which this is relevant: On average, a team project does much better than a solo project. Based on various data from various platforms, teams raise anywhere between 38% and 300% more.
Why is this? Well, it might just be a sound marketing strategy, as you effectively multiply the number of networks you can leverage. But other than that, team projects may simply invoke more confidence in potential backers. Investing in anything’s a risk, and people could feel safer knowing that more than one person’s been involved in product development.
The chances of dealing with a mad scientist decrease with every additional person backing up his claims. Either way, having more than one perspective can certainly help, so consider grouping up before launch. Affiliating yourself with influencers helps. This is yet another effective way to offset the investment risk. If you can get reputable individuals or businesses to endorse your product, it sends a clear message to your audience. And a resulting PR bump is not negligible either.
A final example of a successful crowdfunding project example
Alex Kammerling became one of the first British businesses to secure finance via crowdfunding when he raised £180,000 through Crowdcube from 85 private investors in return for a combined equity stake of 23%. He will use the money to grow his small business, Kamm & Sons, which makes and sells a ginseng-based alcoholic drink.
Alex said crowdfunding was a model which really appealed to him: “I would much rather give equity away than take out a bank loan. I have opened myself up – my business plans are on the website and all my projections of what I am doing. That kind of honesty is a very modern way to do business. It means you have to be completely transparent. I was very nervous about it, but it has been brilliant.”