The crowdfunding market has ballooned in recent years as entrepreneurs take advantage of new avenues to raise venture capital and investors cast their net wider for new opportunities. But what exactly is equity crowdfunding and how can your business benefit?
What is equity crowdfunding?
Equity crowdfunding, sometimes known as crowd investing, is a relatively new fundraising channel aimed at (predominantly) small and growing businesses. Its success is tied to the development of online social networks and cloud computing, which allow groups of people to feel comfortable about engaging in financial transactions with others online.
Crowdfunding websites, such as Seedrs, Crowdcube and Kickstarter, act as intermediaries between people with money and businesses seeking investment. Companies qualifying to pitch on these websites attempt to attract a target investment from the collective interest of ‘the crowd’.
What makes equity crowdfunding different is that businesses pitch for small amounts of money from a large group of individuals Whereas with business angels or private equity you'd typically pitch for substantial amounts of money from a smaller and more selective group of individuals.
Investors might only want to risk £10 on a single venture for a tiny slither of equity, hoping that the business’ future success will transform this small stake into something more significant. Pick the next Facebook, Bitcoin, Amazon, Uber or Netflix and they’ll be laughing all the way to the bank.
Investors like crowdfunding because businesses are vetted by a third-party, there is very little red tape, they get added assurance because a crowd agrees with their bet, and businesses are boosted by a new audience of, potentially, thousands of new customers whose loyalty is guaranteed.
Is equity crowdfunding a good way to raise money?
Whether you’re seeking investment from crowdfunding or any other channel, it’s important to do your research and consider the pitfalls and downsides as well as the benefits. That said, equity crowdfunding has some notable advantages.
By its very nature, crowdfunding is a useful marketing tool. Businesses hoping to earn investment create a professional video, detailed pitch, and an exciting story. Because of this, they can broadcast positive messages to a large audience and potentially develop a new group of customers, followers, or fans, whether they hit their funding target or not.
The process of crowdfunding is essentially a PR campaign, and crowdfunding websites have an interest in helping your business attract the biggest possible audience.
Depending on the platform you use, you might get a boost from exposure to the crowdfunder’s social media accounts, email marketing database, dedicated PR team and even display advertising as part of the package.
By drawing attention to your product or service, businesses can acquire not only investors but a new following of customers, who you know have spare cash to spend.
If you’re successful in your fundraising, then it’s likely you have built a large group of ambassadors with a vested interest in promoting your brand. In other words, as well as money, you get your own army of marketers.
No win no fee
Crowdfunding platforms take a small percentage of successful fundraises. In most cases, you only pay a fee if you meet your stated target. If you fall short, you might not be granted any cash, but you won’t be charged either.
As crowdfunding becomes more entrenched in the investment market, the amounts raised on platforms are increasing. While you might want to raise £100,000 now, in a few years you’ll be pleased to know that fundraisings of several million pounds are not uncommon.
What do crowdfunding investors look for?
As with all investors, the main priority is securing the best possible return. But people who back businesses on crowdfunding sites also look for tax relief in the form of EIS or SEIS, as well as a foreseeable exit and a strong team.
But because crowdfunding allows for small investments, many are also open to fun or quirky investments as well as those with good stories or ethical ambitions. They are risk averse, but less so than banks or venture capital firms.
How do you crowdfund your business?
Before you embark on a crowdfunding campaign, do some research. Ensure that this really is the right route to go down. Check whether businesses like yours have achieved their funding targets before and ask yourself what their strengths and weaknesses were.
Would a different cash source be preferable? One downside is that a successful campaign gives you dozens, hundreds or even thousands of new shareholders. All those individuals and institutions will want regular information and maybe even a say in how your business is run.
Pick your platform
Every crowdfunding platform is subtly different. While many offer investors the chance to take equity in a business, others let you dangle goodies and rewards as an incentive to back your organisation. Some welcome individuals and others are great for charity fundraising.
Even among the equity crowdfunding platforms, fees, policies, admin, and audiences will vary. So do your homework before diving in.
Create your page
It goes without saying that a professionally made page will garner more interest than one that has been thrown together. Cast around for popular pages that have exceeded their funding target, particularly those in a similar market to your own, and consider what they did well.
Key elements of a good page include:
- A snappy, well-written description of the product and its reason for existing.
- Evidence of demand and a strong track record.
- A competent team with qualified individuals in the right places.
- Professional images of your product or service.
- An eye-catching heading that draws people in from search pages.
But the most important aspect of your pitch is the video which accompanies it. Some platforms emphasise video more than others, but all the best ones give you the chance to tell your business story through film.
Your video doesn’t have to be a blockbuster, but it must meet a decent production standard, so most businesses spend some money to get their videos just right. Also consider your script, which above all must be clear and honest, and be prepared to justify any claims you make in it.
Set your target
This is probably the trickiest aspect of creating a crowdfunding page. Just like setting a product price, the figure must be high enough to generate the money you need, but not so high that it feels overvalued.
A neat trick that many successful crowdfunders use is to secure a proportion of your intended fundraising before your page goes live. They do this by approaching friends, family, colleagues, customers, and business partners.
This helps you figure out how much money to target and how much equity to give away in the process. If your friend won’t meet your valuation, then a stranger definitely won’t.
This also means that your fundraising has gone a long way to meeting its target the moment it goes live. Investors will identify that your product is in demand, instead of being confronted with ‘0% of target’ when they browse onto your page.
While the crowdfunders will put their marketing resources to work for you, you’re expected to work hard to draw attention to your page as well. Consider which assets might come in useful, for example, a social media following, email database or content marketing (writing articles for websites to publish, linking back to your funding page).
Many companies sign PR agencies on short contracts to boost their visibility during a campaign. This helps both by attracting new audiences to your fundraising and by providing interested parties with further reading about your business.
If you meet your target, congratulations, but now you must deliver on expectations. Ensure that you keep in contact with investors as you build the business and involve them in the journey.
In return, they will bring loyalty, advice and a guaranteed market for future products and services.