What is Crowdfunding and How Does it Work?

Crowdfunding enables companies to raise money from a large number of people – i.e. from “the crowd”.

Typically, investments range from £10 to tens of thousands. Crowdfunding has changed the rules of the fundraising game; some sites offer debt, some equity, there are even sites where the business raising money can ask for donations or offer gifts in exchange for investment.

One of the best-known debt crowdfunding sites in the UK is Funding Circle, for equity, it is CrowdCube, and for an example of the gift based approach you can check out Kickstarter. You only need to Google ‘crowdfunding’ to find a multitude of sites, which you can use to raise money.

What do you need to do to successfully raise money via Crowdfunding?

Register with your chosen site; it is usually free to do so. Create your business plan and a short video that explains who you are and what you will do with the money you raise. It is best to specify the amount you plan to reach, and outline exactly what you will do with it. Have a look at other companies that have raised money on the site. Learn what works and what doesn’t by reviewing both companies that are doing well, and those that aren’t succeeding. Perhaps their business plan is not sound, their video needs work or the market for their product doesn’t exist.

Sites like CrowdCube have a very serious vetting process, which includes testing your business plan and assessing whether there is, in fact, a market for your product. Our sister company, Add Then Multiply, has helped clients raise money with CrowdCube in the past, and were told that only one in three companies that apply actually pass the vetting stage. Statistics on the CrowdCube site from 2018 (click here) indicate that 60% of companies that make it through are successful in completing their funding.

How does it work?

It depends on the site. With Funding Circle the crowd offers loans to the company, which are typically repayable with interest over 3-5 years, and loans are always backed by a personal guarantee from the entrepreneur.  On CrowdCube, companies offer shares in exchange for money given by investors. Conversely, sites like Kickstarter offer gifts in exchange for donations.

One entrepreneur we know needed £5,000 to publish her book. She offered different gifts depending on the level of investment. For £10 she would give the donor a signed copy of the book, for £100 a signed copy and invitation to the launch party, while a donation of £1,000 was rewarded with a credit in the novel. This is a good way of raising smaller amounts of money with low risk for both investor and company.

What kind of business can use Crowdfunding?

All sorts! Provided you have a solid business plan and a clear vision. Even the smallest startups can successfully raise money through crowdfunding. Perhaps you haven’t made your product yet, but are confident of the market. As long as you have clearly laid out your plan and the milestones you hope to achieve, Crowdfunding can be for you. Our sister company, Add Then Multiply, raised over £300,000 on CrowdCube for a company whose final product was not complete.

Statistics on the CrowdCube site from 2018 (click here) show that the most common sectors are Technology, Internet Business, and Food & Drink. According to the 2020 Q4 report, CrowdCube managed to fund 238 campaigns with 10% of them raising over £1 million, this all despite an ongoing pandemic. So, you can aim for the stars – just ensure your plans for growth reflect this!

How involved are the investors?

By its very nature, crowdfunding raises money through a multitude of investors. This, paired with the relatively low sums invested, means that companies tend to maintain a large degree of control. Businesses will have the names and contact information of their investors and will update them on progress and development but essentially, they are not involved in the day-to-day business. The investors pay in money and are given loan notes, shares or gifts in return.

This is in contrast to Angel Investors and private equity firms who tend to have far more control over business strategy.  More on that in future posts…

Conclusion

Crowdfunding is arguably the best method for companies who aim to raise up to £750,000 and are doing so for the very first time. In order to succeed, ensure you have a solid business plan and articulate your vision clearly. Do your research and commit to producing an enticing, informative page so that prospective investors can see what milestones you hope to achieve with their money. Done right, this is an accessible way for small companies to raise money and awareness at the same time.

Stay tuned….

Tomorrow, we take a look at Angel Investors.