It is important to understand the many ways to fund business growth, so you can choose the most suitable ones for your situation.
Use our blog series to discover your options, and read the advantages and disadvantages of each financing method.
Part 8: Crowdfunding
Crowdfunding has recently become a popular way to fund business growth, via an online platform. It can be useful for new and existing enterprises.
Crowdfunding involves persuading a large amount of people to put a small amount of money into your business for a specific purpose.
The funds may or may not need to be repaid, and investors may or may not require a share of your company.
For further information see https://www.ukcfa.org.uk or watch their video here:
Advantages of Crowdfunding
-
Access capital from investors, customers or lenders quickly
- Business may keep the money
- May keep ownership of business
- May repay less of the investment than with traditional loans
- PR for your business
- Some types less regulated
- May obtain a better interest rate
- Obtain feedback on your product from lots of investors
- Develop loyal customers
Disadvantages of Crowdfunding
- Have to offer incentives
- No guarantee project is funded
- Successful campaigns take time, effort and money, so slower than some traditional forms of funding
- Usually get nothing if don’t meet target
- Investors may lose their money
- Unsuccessful campaign may produce negative PR for you
For further information see https://www.experian.co.uk/business-express/hub/guides/crowdfunding-small-businesses/.
Types of Crowdfunding:
Donation Crowdfunding
People donate money because they believe in a cause, and do not expect repayment or any reward in return.
Example platforms for donation crowdfunding include JustGiving and
Kickstarter.
Reward-Based Crowdfunding
Raise funds online by pitching your product idea and offering rewards to investors if your target is achieved.
Rewards are not equal to finance invested, but may be unique or sought-after, such as T-shirts, club membership, dinner with the founder, or Launch invites.
Attractive ideas and rewards are needed to secure money. For example, fans contributing towards creating a new console game and getting a pre-release copy, or a name credit.
Example platforms for reward crowdfunding include Kickstarter and Indiegogo.
Debt Crowdfunding
Most similar to a traditional loan – investors should be repaid their money plus interest, often on a monthly basis.
Also called Peer to Peer lending – it can be more risky for lenders, although there are regulations to protect them.
Example platforms for debt crowdfunding include Funding Circle, Ratesetter and Zopa.
Minimum investment £20, minimum loan £5000, maximum loan £250,000.
Equity Crowdfunding
Investors receive shares (equity) in the business in return for financial investment. Also known as Seed Capital.
Example platforms for equity crowdfunding include CrowdCube and
Seedrs.
Minimum individual investment £10, minimum investment raised £10,000, no maximum amount raised.
These platforms allow individuals to invest in companies in a way that was previously impossible. Additionally they offer better access to business angels, venture capitalists and syndicates.
Equity investors require detailed information about the business – its motivations, projections, people and strategy.
For more information see: https//entrepreneurhandbook.co.uk/crowdfunding/
How To Succeed At Crowdfunding
1. Research how much – and for what purpose – other businesses have raised. Gain actionable insights from similar projects into what succeeds.
2. Establish a professional website to demonstrate credibility to investors. Clearly state your proposal and encourage e-mail sign-ups for updates.
3. Start your campaign early – create a lead database, build an e-mail list, bond with your audience, and promote your project to your community.
Search for blogs, influencers and news channels that covered projects similar to yours, to generate a relevant outreach list.
4. Create a compelling story – people tend to use emotion to decide whether to invest. Providing background details and reason for the product helps.
5. Produce a high quality video to bring your campaign to life. For advice see https://brilliantbusinessblogs.com/2018/11/08/video-marketing-what-to-post/amp/.
Using social media contacts and networks to spread the word and build traction is essential.
7. Personalise your outreach message and channels to be attractive to your particular niche, not a mainstream audience, to maximise conversion rates.
Successful campaigns typically have less than 1000 backers. Find individuals passionate about your creation.
8. The first week is crucial – experts say raising 25 – 40% of the overall goal in the first week greatly improves your chances of raising the rest.
9. Maintain timely, high-quality and honest interactions with stakeholders before, during and after your campaign.
A successful crowdfunding campaign will have at least four updates. Experts agree engaging with followers on a regular basis raises substantially more money than no updates.
Examples include: ‘We made it to 30% – Thank You!’; product development progress; productive meeting updates; new information about the product; images, graphics or videos.
As well as your website and social media, re-engage your outreach list, niche forums and industry influencers with follow-up news.
Sample List of Crowdfunding Platforms
Check online for the latest platforms and terms before crowdfunding.
Seedrs – equity fundraising for startups. Similar platforms include Fundable, SeedInvest and Seedups.
Crowdcube – one of the largest equity-based and loan platforms for startups.
Crowdfunder – reward-based funding for individual projects.
Fundit.Buzz – reward/equity funding social ventures, for businesses, groups and individuals.
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