Crowdfunding has rapidly become a common way for both new and more established businesses to raise some additional funding.
Arguably easier to undertake than more traditional fundraising models, it’s a popular choice for many businesses. It appeals particularly to businesses who may not want to take on debt and/or those who might, at least in the early stages of getting established, struggle to gain the attention of angel investors and venture capitalists.
More established and sophisticated investors tend to want to see that a business is strong, with a good risk profile, before they hand their money over. And while that’s understandable, it can sometimes feel as though it’s impossible to get your business to that stage without a significant injection of cash.
That’s where crowdfunding comes in. You can still ask for a large amount of money – but instead of asking one entity to take a punt on your business, you can ask tens, hundreds, even thousands of people through crowdfunding platforms, where the investors effectively share the risk amongst them by chipping in a small amount each.
Crowdfunding in the UK: how it works
1. Crowdfunding is generally an online, platform-based fundraising solution, so you’ll need to be registered and, in some cases, undergo an acceptance process by the platform owner, before you can start working on raising funds
2. Once you’re registered and accepted as a permitted fundraiser, the platform sets up a crowdfunding page for you, enabling you to fundraise a certain amount of money in a maximum amount of days. The platform will take care of all the admin and paperwork.
If you’re offering shares in your business in return for the investment, (called equity), you will need to be clear on the valuation of your business, how much you want to raise in the crowdfunding process, and what that amount equates to in equity (e.g. the percentage and type of control that your crowdfunding shareholders will have over your company once they have been issued with their shares). If you’re offering prioritised delivery of products in return for the money being invested (called product-funding), you’ll need to be clear on what product your investors will get and when they may reasonably expect delivery of the product.
3. Your fundraise activity is often called a campaign. You’ll need to include an enticing description of your business and usually also a good quality demonstration video on your crowdfund page. When all the content is ready, your campaign is then launched and promoted to everyone who has access to the platform and who could be a potential investor for you
4. In exchange for incentives such as equity (shares in your business) or prioritised delivery of first-edition products, people who are interested in your business contribute to the fundraising goal by committing their preferred level of investment directly through the webpage.
5. If the fundraising goal is met, the money is transferred to the fundraiser’s bank account (minus any fees charged by the platform owners), the legal and administrative paperwork is all finalised by the platform and the investors receive their incentives.
Three main types of crowdfunding campaigns
Worth considering if you have a healthy amount of equity to spare, this is a type of fundraising where you exchange shares in your business for financial investment. The investors can be anyone and they can invest as much or as little towards your goal as they like.
Convertible equity campaigns:
If you’re planning a large fundraise in the future but need an injection of cash sooner, convertible campaigns enable you to do so without compromising future investor negotiations by valuing your business too early (when there may be scepticism about the level of your valuation). With these types of fundraising campaigns, you receive the funds from investors immediately and, in return, these early investors receive a discounted share price on their equity in the larger funding round, placing them in a more favourable position and compensating them for the risk that they take now. (Your business should be expected to make this subsequent funding round within the next 6-12 months.)
This is a type of fundraising where actual products are given to people in exchange for their investment. It could be worth considering if you have an idea for a product but you need some cash for the first production run. It works a lot like presales, as people who are interested in the product can give you the money up front for theirs through a crowdfunding platform. Platforms like Kickstarter specialise in this kind of campaign funding and indeed, these types of campaign are often now called kickstarter campaigns.
Advantages of crowdfunding
• You have access to a huge pool of investors; i.e. the entire general public
• There are a number of ways to encourage investment, so you don’t need to give away equity if you’d rather not
• You build brand recognition through the marketing and PR efforts of your crowdfunding campaign
• A successful crowdfunding campaign can act as a valuable endorsement to secure funding from larger investors in the future
• You get to gauge the market’s interest in your project from the outset
• The crowdfunding platform often gives support in the way of administration of legal documentation, SEIS and EIS tax guidance, marketing advice, and even ongoing support once the campaign ends
• To make the process simpler for you and to protect shareholders’ rights, some platforms (such as Seedrs) acts as the nominee shareholder on the behalf of all investors
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