Crowdfunding for small businesses owners
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How would you like to raise £1 million in 96 seconds? This was the breath-taking result when fintech start-up Monzo crashed equity crowdfunding platform Crowdcube in 2016. And we've seen no sign of things slowing down since.
In less than a decade, crowdfunding has gone from being a novel way to find financial backing for a pipe dream to first-choice source of funding for hordes of entrepreneurs, non-profits and growth-bound businesses.
Is crowdfunding the way to go for your business? Which type could work best for you? What are the pros and cons? How do you choose the best platform? We explore these and many other questions in this concise guide to crowdfunding for business.
What is crowdfunding?
Crowdfunding is a way for people who need money for a business, social or personal venture to connect with thousands or even millions of people willing to contribute financially.
Crowdfunding bypasses traditional sources of finance, such as banks and venture capitalists. Instead, by seeking contributions openly through an online platform, it is the 'crowd' of individuals, groups and investors who fund the venture.
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Types of crowdfunding
Although seen as a new form of finance, the crowdfunding principle dates back to the 1700s, when it was used to help the poor in Dublin. In modern times, the financial power of the crowd has been most evident in charity fundraising.
Now, thanks to the internet, crowdfunding is earned its place as a serious source of alternative funding for business, entrepreneurship and social change. There are four main types of crowdfunding.
Equity crowdfunding
Equity crowdfunding provides capital for start-ups and new ventures in return for a stake in the business.
Reward crowdfunding
Reward crowdfunding offers perks in return for investment in the business idea or creative venture.
Donation crowdfunding
Donation crowdfunding channels money from people who support a cause or want to fund a social, ecological or humanitarian project.
Debt crowdfunding
Debt crowdfunding offers an alternative to mainstream lending for individuals and business. (Also called peer-to-peer lending.)
How does crowdfunding work?
In the past, entrepreneurs and business owners sat down with bankers and financiers. You put forward your business plan and the people who held the purse strings called the shots. They decided if your idea was worth the risk of lending you all the money you needed versus the return they would get if the venture went to plan.
Crowdfunding turned this on its head. In short, you pitch your idea through a dedicated crowdfunding platform on the internet. The platform brings your idea to the attention of potential funders, who could be anyone from individuals to institutional investors.
If people like your idea enough to support it financially, they pledge to back it with their own cash. The amount can be as little as £5 or £50,000 or more. You could have a few hundred backers or half a million.
Every contributor is part of the 'crowd' that's getting behind you to help you raise enough money to reach your target. And the platform automates much of the process for funders and fundraisers.
What makes crowdfunding for business so powerful is that you can quickly gauge how much interest there is in your venture before committing the resources to making it happen. And if the interest is strong, chances are, demand will be too.
Crowdfunding advantages and disadvantages
Crowdfunding might seem like manna from heaven if you're a business looking to raise cash for a new idea or to fuel growth. But is it all good news?There's no doubt the availability of capital injected by complete strangers through a dedicated online platform has revolutionised business finance. And the benefits are many.
But it's important to be aware of the pitfalls too and to understand that not every project is right for crowdfunding, especially if you have other sources of funding open to you. Many business, for example, explore business loans as means of expanding their venture. As one of Europes leading alternative lenders, you can check your eligibility directly with us in minutes, and – if approved – receive funds in hours, not weeks.
Here, we sum up the pros and cons of crowdfunding for business.
Crowdfunding advantages
- No formal presentations or meetings. All you need is a winning idea and a compelling pitch.
- Low risk. If the world loves your idea a lot less than you do, count your blessings. It's a cheap way to test the water.
- You find out fast if your idea will fly. Validating an idea was never easier. Investor feedback can also help you fine-tune your thinking or design – or save you from taking a wrong turn.
- You call the shots on equity and rewards. Give away as much as you choose, shape your offer for maximum impact and take-up.
- You get your idea in front of a wide audience. If investors want your project to work, they'll promote it hard to their network.
- You create engagement from day one. Many investors are customers in waiting. Brand loyalty and relationship-building start here.
- Funds can come flooding in. Aside from the networking power of private investors through social media, venture capitalists monitor crowdfunding platforms for ideas with big potential.
- People often prove banks wrong. If you've hit a dead end with traditional lending, crowdfunding is a good acid test – and if finance comes good, it usually comes cheaper.
Crowdfunding disadvantages
- Your chosen platform may say no. Yes, even after all your hard work, your application could get rejected. Step one is make sure you follow the platform's rules.
- You'll have plenty to do. Behind every successful launch is a ton of work and planning to build interest and momentum before the project goes live.
- You'll be competing for attention. Your pitch will be one of hundreds all chasing the same money. Standing out is imperative.
- If you go all-or-nothing, you could end up with nothing. Depending on your platform, you can't count on getting your hands on pledged funds if you don't hit your target.
- Failure begets failure. Backers love winners. If your idea falls short of your target, chances are, people will think twice about your next venture too.
- You might give away the farm. Letting your idea out of the bag, especially without protection of patent or copyright, or while you're still in prototype, opens you up to competition.
- You might get your sums wrong. Miscalculate with equity or rewards and you may live to regret how much of your business you've given away.
- The platform takes a fee. Yep, only failed ventures escape (donation crowdfunding excepted). Factor their cut into your figures – usually between 5% and 7.5% of funds raised plus other charges.
Best crowdfunding sites
A concise guide to the top crowdfunding platforms for business
Kickstarter
Kickstarter is one of the best-known reward crowdfunding sites. Backers have pledged $4.4 billion in support of Kickstarter projects since 2009. The platform has produced some massive hits, including the famous Pebble smartwatch.
With Kickstarter, you set a funding goal. It's worth setting this fairly low, as if you fail to reach your target, none of the cash pledged during your campaign will be made available. This kind of platform model is known as 'all or nothing'. On the plus side, you only pay fees if your campaign is a success.
Technology projects have mixed results on Kickstarter – perhaps because of the sheer number of campaigns running. The tech project success rate is just 20%. Yet tech is also one of the few categories to see fundings of more than $1 million, along with games and design.
Kickstarter campaign time is 30 to 60 days – the average for their 15 most-funded projects of 2019 is 40 days.
Consider your rewards plan carefully. Having too many rewards can be confusing. Although many big winners have had 10 or more, the biggest star of 2019, Peak Design's Travel Tripod, had only two.
Top tip: Include a $1 reward so you can collect as many email addresses as possible, with a view to converting your backers into customers.
Indiegogo
Indiegogo is another huge reward crowdfunding platform and is often seen as a rival to Kickstarter – Indiegogo even has a page on their website highlighting the differences.
Targeted directly at entrepreneurs, including non-profit organisations, Indiegogo projects fall into three categories: tech and innovation, creative works, and community.
Fees apply whether or not your funding hits your target. This is because the Indiegogo platform follows the flexible finance model – which means, whatever money is pledged, you'll have access to it, even if the total is short of your goal.
One big plus for Indiegogo is that if your project catches people's imagination, it can take off like a rocket. This is because Indiegogo sends out a daily newsletter to their fans featuring current and breaking campaigns. The father and son team behind Flow Hive, a revolutionary beehive design, raised $2.1 million in a single day, passing their $70,000 target in under an hour.
Indiegogo's partner platform GoFundMe is a leading donation crowdfunding site, offering no-fee charity fundraising for individuals, groups and organisations.
Top tip: Craft your profile so it creates real impact, but make sure you include relevant keywords and a clear call to action in your snippet to stand out against other campaigns in your category.
Seedrs
Europe’s largest equity crowdfunding platform, Seedrs takes its name from the platform's specialisation in raising seed capital for innovative start-ups and other growth-focused businesses.
Investors can get on board a project for only £10. That said, many Seedrs backers are astute high-net-worth individuals and institutional fund managers.
In 2018, 28 Seedrs campaigns raised over £1 million. These included fast-growing international money transfer platform TransferGo, which raised €11.3m, and plastic roads pioneer MacRebur, which raised £3.2m.
The runaway success of so many Seedrs start-ups has led the platform to launch a secondary market, where investors can buy shares in successful new businesses from existing shareholders.
One of the big attractions of Seedrs is their nominee structure. In short, this eliminates much of the administrative challenge of managing large numbers of investors. It also makes it easier for the business to raise additional funding further down the line.
Crowdcube
Crowdcube is another big equity crowdfunding platform focusing on start-ups and fast-growing businesses. Like Seedrs, Crowdcube has raised millions of pounds in investment capital and offers funders buy-in from only £10.The platform's investors have helped fund the growth some of today's most exciting new ventures, including craft brewer BrewDog and fintech disruptor Revolut.
Crowdcube offers a lot of support services to help you get your campaign set up for success. These include pre-launch guidance, crafting a winning pitch, setting realistic funding targets and creating a communications strategy. Once your campaign has hit its targets, you're invited to join Crowdcube’s Funded Club, which gives access to exclusive benefits from several partners.As well as the usual equity crowdfunding offering of a share in the venture, Crowdcube fundraisers can go down the lending route and offer mini-bonds, with a typical return for investors of 6-8% per year.
LendingClub
The giant in debt crowdfunding platforms, LendingClub has raised more than $50 billion for personal and business ventures in the United States.As a small business, you could apply to borrow up to $500,000 with a fixed term of between one and five years and no prepayment penalties.
To qualify, you must have been trading for over a year, have an annual turnover of $50,000 or more, have good business credit, and own at least 20% of the business.
Fundsurfer
Fundsurfer are a lesser-known platform, but provide a strong offering for those looking to launch their crowdfunding campaign. Fundsurfer offer a variety of crowdfunding options, from reward crowdfunding to the rather unique 'Bitcoin Donations' model, which allows campaigners to raise money for their crowdfunding projects with Bitcoin donations. With a broad global network of prominent investors, entrepreneurs and funding partners, Fundsurfer provide an innovative approach to funding business growth.
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How to promote crowdfunding campaigns
Crowdfunding pulls no punches. If your pitch doesn't hit the right note, you're in for a bumpy ride. At the last count, only 36% of Kickstarter campaigns reached their targets. But don't let that put you off.
With the right approach, you can stack the odds in your favour and come out the other side with the backing you need to change the future – yours and the future of everyone else your idea touches.
So, to help you on your way, here are our top tips for how to promote a crowdfunding campaign:
Start with a planTake your time, do your homework, read up on crowdfunding successes – and failures – and explore your options. Know before you go ahead that you've done everything possible to make your campaign a winner. Check and double-check your calculations so you offer investors value without underselling yourself.
Time it rightCrowdfunding platforms aren't going away any time soon. So, ask yourself if now is the right time for you to raise capital. Are you fully prepared? Could your timing be better? Are you in good shape to manage the interest your campaign will generate? Are you ready to go if you get the funding you ask for?
Set out a timelineThe pitch is just the start. What happens next? Are you geared up to respond to investor questions and feedback? Can you manage the fulfilment of the promises you've made? Be clear about your action plan beyond the campaign – and have a contingency in case you don't get enough cash.
Choose the right platformFirst, decide what's in it for your backers. Equity or rewards or a mix of both? Then, research the relevant types of crowdfunding platforms and take special note of their rules, regulations and fee structure. Look at the projects that have achieved success, look at those that haven't. Some platforms are better suited to certain industries or types of ventures. Will the people who will be most excited about your project be users of this platform?
Tell your storyWhy does the world need your idea right now? What difference will it make? What problem will it solve or what opportunity does it open up? What's your vision? You have one shot at winning hearts and minds. If people can relate to why you're so passionate about making this thing a reality, you can build an emotional connection that turns on the money taps.
Be professional about marketingSerious businesses get serious backing. You're not looking for sponsors for your next marathon. So, unless you're a marketing pro, get help from people who are.
Your crowdfunding platform is where the action is, but think about how you can drive interest from outside – through social media, podcasts, live demos, online ads, PR, news channels, events, partnerships, influencers and more. You can even enlist the services of specialist publicity platforms, such as Crowdreach, Gadget Flow or Funded Today.
Listen to feedbackIt's not easy to hear your baby isn't as cute as you think. But if the people with their wallets open have something valid to say, take it on board. Finesse your design, tweak your plan. These are the refinements that can transform near-misses into goldmines.
Make supporters feel valuedEyeballs are following your progress all the way. Investment isn't just financial, it's emotional. Bear this in mind when you draw up your rewards structure. Ramp up the good vibes with some extra special offers and exclusives.
Thank people for backing your dream, let them know when they can expect to receive their rewards or their shares, be open and transparent about any challenges that come up. You won their trust when their pledged their cash. Now keep it.
Who uses crowdfunding?
Crowdfunding is proving to be a realistic and attractive source of alternative funding for almost any enterprise across all industries. Fintech, gaming, innovation, software, real estate, food and drink, arts, non-profit… Crowdfunding is fuelling an explosion of ideas and disruption.
We talked to three businesses to hear about why they used crowdfunding and how well it worked for them.
1: Eve Lindsay, Communications Manager, Northern Monk
Why did you crowdfund?After three years of rapid growth and even bigger plans for the next three, we needed to raise funds for expansion. As a people-focused business, crowdfunding appealed as a fitting way to invite our eager band of fans, key customers, families and friends to share in our success and future.Our goal was to triple our production operations, adding 8 x 10,000 litre fermentation vessels, a new 8,000-cans-an-hour canning line and development of our wild beer and barrel aging programme. Beyond this, we also wanted to open tap rooms in Manchester and London.
Did you achieve your goals?We definitely did – the response to the crowdfunding campaign absolutely blew us away. Going into it, we were nervous about hitting our initial £500k target. This was surpassed within two hours of the campaign going live, and we hit £1.5m in just thirteen days, rounding out one of the most successful brewery crowdfunding initiatives in history.
The money allowed us to complete our planned expansion and open Northern Monk Refectory MCR, our second UK tap room, located in the heart of Manchester’s Northern Quarter. We’re still looking for the perfect London location.
How did you promote your crowdfunding campaign?We created a dedicated promotion on the theme ‘Northern Rising’. We brewed a limited edition beer of the same name, and generated awareness through bespoke video content, social media posts, email marketing and a press release.
Which crowdfunding platform did you use?Crowdcube. Our pitch is still online here. But to see it all, including our tiered rewards, you'll need to be registered with Crowdcube.
2: Frazer Fearnhead, founder and CEO at The House Crowd
Why did you crowdfund?Expansion. First, to fund the launch of our new brand, Money Mog – a specialist P2P platform that enables millennials to invest in property from as little as £50.
Second, to finance further development of our product range – with property-backed Innovative Finance ISAs and SIPPs that earn up to 10% a year tax-free.
Did you achieve your goals?Considering, at the time of writing, it’s only been live for one day and we're 38% funded, I’d say we're cautiously optimistic!
How did you promote your crowdfunding campaign?First, with email marketing to our existing investors. Then, although social marketing and digital advertising are important for raising awareness, investors want to meet the people behind the business. So we we’re running webinars and ‘Meet the founder’ days.
I’m also a big believer in PR, if done right. Just announcing you're raising money isn't enough – you need an interesting story and reason. That's why we’ve focused on Money Mog and what it can do for millennials, an audience chronically under-serviced in the P2P world.
It also helps that we're an established name in personal finance - people can search online and be reassured we have a solid investment and repayment history to back up our claims.
Which crowdfunding platform did you use?Seedrs.
3: Emma Brightwell, Marketing Executive, Cranes Drinks
Why did you crowdfund?We've done it twice. The first time, in 2016, to aid our growth and fund a professional rebrand of the company and product lines. Then two years later, to provide working capital to support the most exciting leg in the brand’s journey yet, with the national launch of Cranes Cider in Asda.
Did you achieve your goals?Both campaigns were well overfunded, raising a total of £420,000. Our trial in Saint Ives Morrisons broke records and turned us into a bestselling local supplier. Cranes Ciders are now rolling out through Morrisons East Anglia region and selected East of England Co-op stores.
How did you promote your crowdfunding campaign?Magazine articles, social media and blog content.
Which crowdfunding platform did you use?Seedrs.
Do I have to pay taxes on crowdfunding?
In the UK, if you're raising funds through crowdfunding for business purposes, any cash you receive is treated as income, offset against any allowable expenses.
Things get a little more complicated once you pass the VAT threshold, especially if funds come in from various EU countries. HMRC introduced the UK VAT Mini One Stop Shop (VAT MOSS) to make it easier for certain types of business to manage this potential headache. More about VAT MOSS
If you're raising your cash through equity crowdfunding, you could benefit from a tax break. The government offers a number of venture capital schemes, including the Seed Enterprise Investment Scheme (SEIS) and the Enterprise Investment Scheme (EIS). You'll need to put together a proposal for HMRC to review before you go ahead with your campaign. More about SEIS and EIS
To fully understand the implications of any tax liability you might face when using crowdfunding for business finance, you may find it worthwhile speaking to your tax advisor.
Is crowdfunding right for me?
It's a question only you can answer, but we hope this article has given you plenty of insights and information to help you come to the right decision.
Crowdfunding certainly presents an exciting prospect for anyone looking to finance a new business venture or fund expansion. But it's worth remembering it's only one way to raise the cash you need. To talk about some of the alternatives, get in touch.
More business funding alternatives
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