The Benefits of Crowdfunding

The ‘how to’ guides for businesses start-ups often don’t give much in the way of alternatives when it comes to funding. SBT turns to Nicole Carman to give an overview of how start-up businesses can benefit from crowdfunding to get their ideas off the ground…

 

As access to bank credit continues to prove difficult, increasing numbers of start-ups and small businesses are turning to crowdfunding, which has now overtaken the venture capital and angel investment sectors. Using a crowdfunding platform can be an attractive alternative to traditional methods of raising capital, but with an average of 80% of campaigns failing to hit their target, is this new kid on the financing block a viable option?

Crowdfunding can provide start-ups with the financial boost they need, usually at low-risk. It can be a great way to test a product before it’s fully developed, provide proof of concept and receive valuable feedback whilst growing an audience and market; but with increasing competition in this funding space, how can you maximise your chances of success?

Businesses can raise crowd finance by offering equity, rewards or by seeking donations. With over 700 alternative finance platforms to choose from it’s essential to find the right one for your business. It may seem logical to spread your bets and sign up to as many websites as you can, but to achieve success, a great deal of preparation must go into each individual campaign, so think wisely before doing this.

As founders of a new start-up app that deals with device dependency, Glued, we recently used an equity crowdfunding platform, Seedrs where we successfully raised just under £60K. Other similar sites are: Crowdcube, Fundable, SeedInvest and Seedups, who all specialise in start-up investment. Seedrs stood out for us because it was the first UK platform to gain FCA approval and at its most simple, focuses on seed-stage businesses with investors able to pledge as little as £10, thereby reaching a much wider audience. They take care of all the legal requirements including share distribution and they will also register your company for SEIS. This government tax relief scheme offers up to 50% tax rebate to your investors, which is an incredibly attractive proposition well worth sharing with your network.

Many equity crowdfunding sites have a strict qualification policy and only accept a small percentage of the applications they receive. Ensure that you research every aspect of your business, the competition and the market before you begin the application process. You’ll need to decide early on how much to value your business, taking into account possible monetisation strategies and potential to grow. Take your time over this; look at valuations made by other similar businesses and work out exactly how much equity you need to raise. If you’re accepted, you’ll need to supply evidence to back up every statement in your pitch.

For those who are reluctant to give away shares then the alternatives are to offer a product or service or to ask for donations. Regardless of which crowdfunding platform you choose, you will need to build up anticipation and importantly, some funds before the campaign goes live. Momentum is king in crowdfunding and often it’s an all or nothing deal, where if you fail to reach your target within a set period of time, the crowd gets its money back in full and you get nothing. Your chances of success can be as high as 70% however, if you raise just 10% of your target in advance of going public. Before we launched Glued we reached out to friends and family to ensure we already had that 10% of funds committed. This definitely helped our campaign.

Offering pre-sale products and exclusive rewards is also a well-recognized route to getting a crowdfund project off to a great start. Use your database and social media and get your audience ready to pledge making it clear exactly how they can do this by sharing the link as far and wide as possible. Setting up a unique hashtag on Twitter is also a good idea so that you can see who is following your campaign.

Finally, think carefully about how much investment to seek. It’s worth noting that on Seedrs and other platforms, it is possible for your campaign to overfund. If you ask for a lower amount from investors, you will likely reach your target more quickly and more easily. It’s tempting to go for a higher amount at the beginning, to give yourself a longer runway time, but remember that as soon as you reach your target, you automatically become a stronger proposition and others will want to jump onboard. With Glued we set our target lower than what we really needed but as soon as we hit that target, we started to experience a dramatic acceleration in investors and closed our campaign at 233% funded. In terms of the basic psychology of this phenomenon it would appear that no-one want to be the first to the party!

Crowdfunding may appear to be an easy option where you just sit back and watch the money roll in. It isn’t. However, if your core business is good, you work hard and plan carefully prior to launching your campaign then success can certainly follow.

 

Nicole Carman is Co-Founder of www.glued.to helping families to reduce their screen time.

Email: nicole@glued.to