Crowdfunding is changing the way organisations, startups and small businesses raise money.
Where once investors and their capital acted as gatekeepers for business growth, today crowdfunding offers aspiring entrepreneurs the ability to raise funds from fellow citizens. And, far from being a niche trend, crowdfunding has helped raise the working capital necessary to get lots of well-known businesses off the ground.
But how do you run a successful small business crowdfunding campaign, and what is expected of you afterwards? Discover our top tips and advice below…
What is crowdfunding?
Crowdfunding is designed to help launch new businesses and startups without the financial backing of an investor. Where typically entrepreneurs have had to try and get financial backing from investors, crowdfunding is designed so that ordinary people can contribute towards a business or cause.
Usually taking place through online platforms, a crowdfunded project is funded by individuals who each contribute a typically small amount towards a project. These crowdfunding startup investments can be effectively charitable, with investors looking for little if any future return. Alternatively, they can be given in return for equity in a business, or for a future share of business profits.
How do you start a crowdfunding campaign?
Crowdfunding isn’t quite as simple as just starting a campaign page and hoping for the best. The most successful startup crowdfunding campaigns, such as those for Brewdog, Occulus and goHenry, have also put together extensive marketing, awareness and PR campaigns to help promote their businesses to potential funders. As with a lot of things internet-based, these campaigns can start and finish in a matter of days, if not hours.
What are the best crowdfunding sites and platforms for a small business?
In the UK, there are a few high-profile crowdfunding platforms. Depending on the kind of business you run, you could try to crowdfund it on any of the following platforms:
Crowdfunding dos and don’ts
If you want to raise funds for your business through a crowdfunding campaign, here are some key dos and don’ts for your appeal.
Do select the right crowdfunding platform
Trying to raise funds for your tech start-up on a charity platform will not get you far. You need to take some essential steps in order to properly understand your potential backers, before running a crowdfunding campaign on a platform where you know you will be able to find them. If you’re an independent creator, you would be best placed on Kickstarter; for tech entrepreneurs, Indiegogo is a good bet, while for personal or charitable causes, GoFundMe or Causes would be best.
Although small business crowdfunding differs from traditional investing rounds, there are some essential rules of thumb that you should follow. Specifically: being transparent when it comes to your potential funders.
Be explicitly clear on your fundraising goals, what your money will go towards, your timeline for future growth and what investors will get back from their contribution. You can’t know the future, so it’s okay if your plans eventually change. But given that crowdfunding makes you accountable to a wide range of potential investors, you’ll need to be transparent and clear on what their investment is going towards.
Good marketing is at the heart of almost every successful business and there’s no exception when it comes to crowdfunding. Before you decide you want to crowdfund, you will need to look at what you can do to grow your base, raise awareness of your brand and start attracting some potential backers. By investing some time and resources ito marketing your business you’ll raise its profile and build some interest ready for when the crowdfunding campaign starts.
Don’t be too ambitious
There are thousands of new crowdfunded small businesses and tech startups every year and only a few of them can be successful. Sixty percent of US crowdfunds fail and although this is a large amount, there’s every chance your business could be in the 30 percent. But this does mean you shouldn’t be too ambitious for your crowdfund. Be realistic about the amount you could raise to avoid putting investors off.
Don’t throw all your eggs in one basket
Even a successful crowdfunding campaign that meets all your funding targets might not be enough to raise the finance you need to get your business to where you want it to be. While crowdfunding can be a good way for lots of businesses to raise some much-needed cash, you shouldn’t put all your hopes on crowdfunding alone. Consider what other fundraising options there are and whether you need to cast a wide net.
Don’t underestimate the challenge
Crowdfunding doesn’t mean that you will avoid many of the traditional responsibilities that a fundraiser faces. You can be held accountable and responsible for the future direction of your fund and exactly what the money goes towards. Make sure you’re prepared and ready for the challenges ahead.
Starting any kind of business brings with it a certain amount of risk. While this isn’t necessarily a bad thing, it does mean that you need to be prepared financially to ride out the highs and lows of starting a business.
What should you do after your crowdfund?
A successful crowdfunding campaign is only the first step towards starting a business – it’s not enough in itself to get your business up and running. You’ll need to carry your momentum forward. While it might take you a little while to get your business running smoothly, one of the first things you should do is re-invest some time and effort back into your funders.
Build a community around your backers; whether that means offering your early investors exclusive updates, rewards or incentives, make sure that you don’t just take the money and run.
It’s also important to stay focused on the longer-term trajectory. As mentioned above, crowdfunding alone might not be enough to achieve your future aims. Stay focused on your business, your growth plans and how you can raise further funds in the future.
Starting a business always brings some risk with it. That’s why having the right financial advice before you start crowdfunding is so important.
An independent financial adviser (IFA) can help you get your personal finances in order, so whatever bumps in the road your business throws up, you will still have peace of mind when it comes to your own circumstances.
How does crowdfunding work?
There are three different types of crowdfunding for business, where you could see some benefit from investing your money.
- Equity or investment-based crowdfunding
Here you invest money in a business in return for equity, i.e. a share in the business. Investors typically receive equity in proportion to the size of their investment. Exactly how this works will be up to the business owner – you’ll need to check that the potential return justifies the risk you’re taking with your money.
- Rewards-based crowdfunding
Instead of equity, you as investor may receive a reward(s) linked to the project you support. For example, if the business is looking to produce healthier pet food, they might be offering free supplies of the food to those who backed them initially. Symbolic rewards often prove popular too, such as products named after funders – vanity alone is reason enough for some people to invest!
- Loan-based crowdfunding
Also known as peer-to-peer (P2P) funding, you can lend money to businesses indirectly via P2P platforms. Your interest rates are usually more generous than you’d receive from a bank, and it’s generally less risky than loaning the money directly.
To safeguard investors, crowdfunding platforms usually hold onto the money (in a separate dedicated bank account) until the funding target is reached. This means that investors should get their money back if the venture has to be called off due to insufficient funds. It’s by no means a foolproof safeguard, however, as the crowdfunding platform can’t guarantee that the money will be used for the purposes stated. Bear this in mind before parting with your cash.
What are the advantages of crowdfunding for an investor?
Depending on the type of crowdfunding, you could potentially earn returns on your investment via equity (growth in share value) or interest (if using P2P lending), or you might simply receive other perks or benefits. At best, you could generate higher returns than you might via other financial platforms; at worst, you might not see any of your money ever again.
However, maybe earning a return is less of a priority for you than the simple thrill of backing a promising project. For example, fans of a book might flock to a project aiming to bring that book to the big screen, and offer their money with little hope of any financial return simply because they really want to see this film. Then, if the film does get made, there is still the prospect (however small) that they might make some money from it anyway.
Tax benefits of equity crowdfunding
Investing in equity crowdfunding can also bring tax benefits. Through the Enterprise Investment Scheme and the Seed Enterprise Investment Scheme, you can claim tax relief on a percentage of your investment amount, thus reducing your tax bill. However, you do need to meet certain criteria, such as keeping your investment for a set amount of time.
What are the disadvantages of crowdfunding?
As with any investment, there is a financial risk involved. For crowdfunding, the biggest risk is losing your money should the business or venture fail. Crowdfunding comes at the top end of the risk spectrum, where both gains and losses can be highest.
Crowdfunding projects typically involve new, unproven businesses, so in many ways they are a gamble and a leap into the unknown. For this reason, crowdfunding thrives more on people’s optimism, goodwill and passions than it does on investment strategy. People who invest in crowdfunding generally choose their projects more because they agree with the ethos and the goal, than because they expect to make money. That said, there is still money to be made if you think like Warren Buffet.
Remember that your money will not be protected by the Financial Services Compensation Scheme, so if the business or project does flop, you’ll lose your money and not get any compensation. In addition to losing money, other risks include:
- Trouble selling shares
With small businesses, the shares are normally unlisted, which means they’re not as easy to sell as shares in larger businesses on the stock market.
- The crowdfunding platform could go bust
This has happened to some P2P lending platforms in the UK, like Lendy. If the crowdfunding platform you put money into goes bust before the business receives it, you could lose your investment. However, most crowdfunding sites – excluding donation and rewards-based sites – are regulated by the Financial Conduct Authority (FCA). This means they’re obligated to keep your money in a ring-fenced bank account outside their own, offering you some protection against this.
How can I invest in crowdfunding?
There are over 250 live crowdfunding platforms in the UK, including Crowdcube, Seedrs and SyndicateRoom – three that have long facilitated lots of deals in the UK. There’s also Indiegogo, Funding Circle and Kickstarter. Each platform offers something different: Seedrs focuses on start-ups, while Kickstarter is popular for music and arts projects.
If investing in crowdfunding appeals to you, here are the steps to follow:
- Decide which type of crowdfunding you want to invest in: equity-based, loan-based or rewards-based (or donation-based for charities and good causes).
- Decide what you want to invest in: a business or product. Use the search function on crowdfunding platforms to find promising projects.
- Read the project overview in detail. Then do your own extra homework to see if the venture has merit. Make sure you understand all the project timelines, returns and risks.
- Chat to your independent financial adviser (IFA) and decide if investing in crowdfunding aligns with your risk appetite and investment goals. Strive to have it be part of a balanced investment portfolio, to help manage risk.
- If the idea still appeals, put money into the project, track its progress and keep your fingers crossed.
What successful businesses have been crowdfunded?
As mentioned, Monzo is one of the greatest crowdfunding success stories in the UK. In 2016, Mondo (as it was then known) raised £1 million in just one minute and 36 seconds for its digital bank concept, according to Crowdcube. Two years later, in 2018, this grew to £20 million raised in two days, from 36,000 investors. That year, its shares rose 25 times in value, and in 2019 investors were eyeing a three-year return of 6,300%.
Another Crowdcube success story is Camden Town Brewery, which raised £2.75 million from 2,173 investors in 2015. Just a few months later, it was acquired by Anheuser-Busch InBev for a rumoured £85 million.
Looking at UK crowdfunding trends in 2019, fintech businesses like Monzo stole the show, followed by artificial intelligence companies.
Should I invest in a crowdfunding business?
Anything can be crowdfunded, from movies to hotels and 3D printers. Like alternative investments, it is risky business, which involves a lot of homework, market insight and intuition on your part. You’ll need to find the projects, research them and track their development yourself. But if you’re willing to take the risk and put in the hard work, it can be a rewarding route. You’ll have the satisfaction of supporting something you believe in – and hopefully watching it grow. If you ever fancied being one of the Dragons on Dragons’ Den, crowdfunding might be an easier place to start.
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