In part four of our funding series, we take a look at the different types of crowdfunding and how appealing to multiple smaller investors unlocks new funding opportunities.
Unlike the other means of funding which rely on large amounts of money being supplied by a small number of investors, crowdfunding does the reverse by enabling large numbers of people to invest a small amount.
Crowdfunding platforms provide the opportunity for all kinds of ventures at various stages of their journey to pitch to ‘the crowd’ for funding. In order to go live on a crowdfunding platform there might be a due diligence process, a fee to launch the pitch and a success fee should you secure the funding.
Pros of crowdfunding
- Smaller investments means more potential investors
- Easy to combine with a social media campaign
- Promotes business at the same time
- Centralized communications between company and investors/donators
- Can create a community
- Crowdfunding platforms manage the investment
Cons of crowdfunding
- A lot of work required promoting the business
- Possible public failure
- Time must be dedicated to communicating with potential funders
- Pressure to generate target within given time frame
- Costs to prepare the pitch
The crowd invests in the venture in exchange for shares. Individual investments can range from €5 to €100,000s. This differs from traditional equity funding in that the cost is distributed over a broader spread of investors which allows startups to bypass angel investors or bank loans. There are a number of regulations in place to protect investors throughout this process which can restrict the raised limit. Regulations vary from country to country depending on the regulating body.
Unlike accelerator programmes, the startup company does not require a huge amount of preparation so detailed sales statistics or a refined proposal may not be necessary to receive this investment. Therefore, it is better suited to less matured companies, still in the early stages of growth. However, popular sites such as Crowdcube and Seedrs still assess applications for credibility to reduce the likelihood of unsuccessful projects.
Crowdfunding platforms often have success-based fees to discourage insincere ventures and take a proportion of the investment for their services (5 to 10%) if the goal is achieved. Equity crowdfunding is most suited to Business to Consumer (B2C) operations, i.e. businesses that sell products direct to the consumer.
Sometimes called Peer to Peer (P2P) lending or crowdlending, loan crowdfunding allows companies to take out numerous small-scale loans from a crowd of individuals at an agreed interest rate. Like equity funding, the facilitating platform will charge a certain percentage once the target is met. Some crowdfunding platforms may allow individuals to bid for the project which can offer the startup better interest rates.
The credit seeker advertises their company/proposal on the crowdlending platform which then negotiates a loan agreement and amount between the borrower and lenders. They are also responsible for carrying out credit checks on the company borrowing money to ensure they are likely to make a return.
Perhaps the most well-known type of crowdfunding, donors contribute small amounts of money to a business, person or cause for a reward. This may be the promise of some merchandise in the future, updates on how the project is going or simply for the satisfaction of supporting a cause they agree with. Other rewards may be more substantial. For example, a startup producing designer clothes may offer a free T-shirt to donors who contribute €20 or more. Platforms such as Indigogo and GoFundMe being used in coalition with social media have enabled fund seekers to access many more donors than was previously possible.
This type of funding is best for raising relatively small amounts and works well when the start-up produces B2C material goods such as technology or jewellery.
The crowdfunding platform will take a cut from 5 to 13%.
Crowdfunding is social
All forms of crowdfunding require the fund seekers to publicise their business as this is how awareness is generated to attract investors/donors. This could also involve sharing ideas with potential competition so caution is necessary, especially for new companies with unpatented ideas or no trademark.
- Develop business plan, pitch deck and pitch video
- Prepare campaign promotion strategy in partnership with crowd platform
- Launch and promote the crowd campaign
- Hit 100% funding target
- Complete admin to receive funding
|Forbes||Forbes A comprehensive, breakdown of equity|
crowdfunding and how it works
|British Business Bank|| Helpful video, useful information on the|
regulation of equity crowdfunding and ‘next
steps’ section if you are considering equity
|P2P Lending||P2P Lending The details, risks and advantages of crowdlending (presented visually)|
|Wikipedia||Wikipedia’s peer-to-peer lending page|
|NerdWallet||Find more information on reward crowdfunding here alongside what it takes to make it successful|
ABOUT THE AUTHOR
Alex has over 15 years experience in founding and running businesses, the most recent company having raised over £50m in funding for businesses based across the globe. He has a thorough knowledge of business funding options and can draw on many successful consultancy engagements to bring impetus to venturing. Alex has now set his focus to working with entrepreneurial teams looking to make a positive impact on the climate crisis and the broader UN Sustainable Development Goals.