Crowdfunding exploded onto the internet a few years ago. Since then early platforms like Crowdcube or Kickstarter have seen hundreds of new crowdfunding platforms emerge onto the scene.
What exactly is crowdfunding? How does this fundraising strategy compare to other options? What do you need to know before you try it? How can this help you launch and grow your startup? You`ll get answers to these questions in the following blog article.
What is Crowdfunding?
Crowdfunding is a way to raise money from a large number of people – it is basically democratizing this process. Investing in a new company was previously the preserve of professional investors. Crowdfunding throws wide the doors so anyone can make a micro investment in a new business that interests them. Large groups of people pool together small individual investments to provide the capital needed to get a company or project off the ground. Individuals, charities or companies can create a campaign for specific causes, and anyone can contribute. With lots of investors contributing, these small amounts add up to a large, pooled investment that can be used for various purposes by a small business, such as to bring a prototype to market.
Originally Crowdfunding was a way for more unique, quirky and less traditional business ideas to secure funding, however it has grown rapidly it is now also being utilized by bigger more established players.
From your phone you can browse almost endless campaigns and invest with a couple of clicks. Crowdfunding platforms do much of the detail and heavy lifting work for those seeking capital too. Such as payment processing, legal disclaimers, investor updates, and bookkeeping.
Crowdfunding can raise huge sums for example in 2017, Hopster raised £4.8m on Venture Founders for its ad-free TV and learning app for kids, while businesses such as JustPark raised £3.7m on CrowdCube and pay-as-you-go workout business Core Collective raised £2m on Seedrs.
Different Types of Crowdfunding
There are several types of crowdfunding platforms: equity crowdfunding, peer-to-peer crowdfunding, rewards-based crowdfunding and donation crowdfunding. We`ll dig a bit deeper into every of the four funding options. there will be room for that afterwards.
1. Equity crowdfunding
An equity crowdfunding platform, such as CrowdCube, allows small business owners to sell shares in their company in exchange for funding. It’s a similar approach to raising money from venture capital firms or angel investors, but with lots of smaller investors buying tiny chunks of equity in your business.
Equity crowdfunding involves a start-up launching a fundraising campaign. This outlines the level of equity available, and how much money it is trying to raise – essentially valuing the business. For example, if a business puts up 25% of equity and wants to raise £250,000, it is valued at £1m. Investors can then buy a portion of the available equity.
Indeed Dealflow.eu has a special deal with the Equity Crowdfunding campaign Crowdcube, from which all portfolio companies can profit. It allows all Dealflow.eu portfolio companies to be fast tracked to their live campaign. Crowdcube already served as a platform for a lot of very successful campaigns such as the Revolut campaign which has resulted in Revolut being the UK`s highest-valued Fintech. This is only one of the various reasons that make the support of Dealflow.eu so attractive for rising European start-ups. We can only encourage you to apply for our dedicated support via this link: https://dealflow.eu/registration/
There are several benefits of Equity crowdfunding.
First of all the good quality investors – Many angel investors use the platforms full time, so, along with financing, a start-up can benefit from angel support and advice. Once in, investors may continue to invest in the business over the longer term.
Secondly, you can use the advantage of pooled investments. Some equity crowdfunding platforms pool all the investments from individuals into a single investment that buys shares in your business. Therefore you need to only deal with one point of contact rather than lots of individual investors.
2. Peer-to-peer crowdfunding
Peer-to-peer crowdfunding platforms pool investments and lend money to businesses. The expectation is that the startup will be successful, and the crowdfunded investment will be paid back along with interest. It’s a similar approach to getting an unsecured loan from a bank. It’s sometimes referred to as ‘debt crowdfunding’.
As you’re not issuing equity or shares, nor tangible assets such as plant equipment or premises, it’s effectively an unsecured loan. Default and you won’t have assets exposed to investors.
Peer-to-peer crowdfunding is more suitable for less mainstream businesses. It tends to attract investors interested in niche businesses that would find it difficult to secure traditional funding.
3. Rewards-based crowdfunding:
Rewards-based crowdfunding platforms allow businesses to reward investors in ways other than simple equity or interest. Rewards can be the chance to test prototypes, lunch with the founders or getting one of the first models off the production line. Rewards are usually tiered, so the more money someone invests, the greater the reward.
There are no equity or interest swaps in exchange for funding and as rewards can be inexpensive, it’s a cheap way to raise finance.
However rewards-based crowdfunding is usually all-or-nothing. If the fundraising goal isn’t reached, no money is invested. This means you can spend a lot of time trying to drum up investors and creating rewards that ultimately don’t result in a single penny of investment.
4. Donation crowdfunding:
Investors simply donate to your business. No strings. You’ll need to update investors on progress, but any donations you get are yours to keep.
Because donations are usually by individuals attracted to your business idea, it’s similar to like tossing spare change into a hat. Don’t expect to raise huge sums through donations.
Donations are usually made by people who are supporting social enterprise activities or businesses that support local communities, rather than mainstream limited companies.
How Crowdfunding works and how to ace it
Now that you have an overview of the different types of crowdfunding, between which you can choose, you`ll probably ask yourself how exactly a successful crowdfunding campaign is working.
Let’s start with the online platform, which allows you to create a fundraising campaign. This is a pitch to investors that includes an overview of the business, business plan, management details and details of the money they want to raise. Depending on the type of crowdfunding platforms – such as equity crowdfunding or rewards-based crowdfunding – the campaign will put equity or rewards up for grabs in exchange for their investment.
Investors pledge money during the campaign. Some crowdfunding platforms operate an all-or-nothing approach: if the fundraising goal isn’t achieved then no money is invested in the business and investors walk away. Some platforms such as equity crowdfunding may go ahead and invest the amount pledged at the end of the campaign even if the target wasn’t hit. The crowdfunding platform takes a cut of the money pledged and passes the rest onto the startup.
To get the best from crowdfunding, you’ll need to consider the following:
You’ll need a compelling business case, a detailed business plan, sound financials and robust market insights.
The pitch matters. You need to capture the imagination of investors, demonstrate commercial potential and keep it human with presentations by the team. It really comes down to mastering the storytelling and for that, you will need a great video and also a detailed pitch deck to tell your story the right way.
Set rewards and goals:
Establish what investors will get – from equity to access to initial products – and what funding targets need to be met to trigger investments.
Engage the community:
Crowdfunding is about community. Be active on forums, talk to potential investors, post updates and use social media to tell people about your campaign to drum up support. It is also important to have a sizable marketing budget to promote your offering.
Get “safe money” on the campaign:
Investors like backing a winner. Get friends and family to make a few ‘investments’ in your business on the platform so it looks as if people are keen to chip in. You should have at least 25% of your funding goal already committed before going live. A few pounds in the campaign fund can spark further interest.
Choose the right Crowdfunding Platform:
How successful your crowdfunding campaign is, will largely depend on the platform you present on. It’s important to find a good fit. This is not only true for whether you are taking donations or offering equity, but also for connecting with the right funders. For example, some platforms ban certain types of campaigns, like real estate. Others have sprung up to specifically serve niches like the property market. Dig into the data, you’ll find some platforms have very low
success rates. There can be fees for running a campaign, in addition to payment processing fees (and lag times on receiving money), so do your research and find the platform with the best costs, connections to the best investors for your venture, and which will help you get the optimal visibility.
Evaluation of Crowdfunding as investment option
So why should you start a crowd campaign just now?
There are many reasons to crowdfund beyond simply gaining more money.
For brand new ventures crowdfunding is a fantastic way to prove your concept and gain social proof for later fundraising efforts. It can create a sense of urgency for investors and attract larger angel groups and VCs to later rounds.
Crowdfunding campaigns are fantastic PR tools. They help gain visibility and generate buzz. Many platforms also greatly simplify the technical and paperwork side of fundraising.
One of the most underestimated benefits is securing early users, advocates and ambassadors who have a real financial interest in sharing and empowering your success.
All in all Crowdfunding opens early stage investment for innovative companies with diverse teams and a social mission, while also empowering the masses to not only actively fund the companies they believe in, but also benefit from that growth.
If you need support with setting up your crowdfunding campaign or anything else related to scaling up your startup, like setting up a business case, building your pitchdeck or getting in contact to investors, feel free to apply to our dedicated support via the following link:
We are looking forward to working with you!