Crowdfunding is often seen as an easy route to raising money, but a major factor often overlooked is that it only works for certain types of businesses.
This article explores what those businesses that suit crowdfunding typically look like, and for companies that don’t fit the mould, suggests some steps you can take to make your venture more attractive to crowdfunding investors.
I’ll also reveal some of the practical steps a startup or growth company can take to prepare itself for the challenges of crowdfunding.
3 Different types of crowdfunding
In case you’re new to it, there are three types of crowdfunding:
- Equity, and
Debt crowdfunding, such as bonds or peer-to-peer loans, are much like applying for credit from a bank, except that people are backing your business plan, team and quality of business model more than your outright creditworthiness (although you can’t be insolvent).
You’ll need at least an OK credit rating and a minimum of two years’ trading. Nowadays, they’re almost as difficult to get as bank finance – you just get better rates by cutting out the middleman.
I won’t go into too much detail in the rest of this article, because really there’s not much more to it. So, from here on in, I’ll concentrate on rewards and equity campaigns.
Rewards crowdfunding takes place on platforms like Kickstarter and Indiegogo, and they involve you offering exclusive or discounted goods or services to early adopters or your existing network.
This is great for companies who are manufacturing high-margin products, or for people looking to raise money for arts projects, books or films.
The running costs of a rewards campaign are typically akin to a traditional marketing campaign or sales initiative, so this route is only right for you if you can afford to offer significant cost reductions and still make money.
If you make software or apps then I’d more often than not advise you to avoid this route, unless you have a particularly crowd-friendly idea, purely because it’s harder to make a backer feel special when you’re selling software.
Equity crowdfunding involves selling shares in your company on platforms like Seedrs and Crowdcube.
There isn’t an expectation to pay investors back with interest or dividends, just that you’ll achieve a significant exit within a few years that everyone will profit from. When I say significant, I mean potentially 10x or 20x return on investment, so this is only right for companies that have a high potential of scale.
It works for almost all industries, although it’s typically more impactful for consumer companies with a good existing customer base, and B2B companies that sell services that end consumers easily understand.
What type of companies crowdfund well?
If you can explain your proposition clearly in seven seconds to a complete layman, then you’re off to a good start.
If it takes time to explain the value you bring, both visually and with compelling short copy, then you’re going to lose a load of passing traffic and hinder your chances of success.
This is actually something most companies can fix, by bringing in outside help to clarify your company or product’s value proposition and develop a strong and striking visual identity.
If you’re looking at a rewards campaign, be warned that a lot of backers have had their fingers burnt by campaigns failing to deliver their promises.
You only need to look at some of the outright scams that need to break the laws of physics to work, like the Skarp laser shaving razor. These failures have made rewards crowdfunders more sceptical, so the more developed your product is, and the more experience your team has in your sector, the more likely it is that people will back your project.
Try to avoid using CGI in your video, and show a working prototype if you have one. Also, have spares that you can send to the press. They’ll only write about you if they can try your new innovation out.
If you like the idea of equity crowdfunding, as I mentioned before, you do need to be able to demonstrate that you can scale. If your financial model is only showing 30% growth in the next ten years, then you’re not right for equity crowdfunding.
You can fix this problem by getting a good forecasting accountant or business advisor who can suggest new revenue streams or find a way to achieve faster growth.
Companies that are eligible for advanced assurance for SEIS fit the bill exceptionally well in terms of equity crowdfunding, and to a lesser degree, EIS.
If you don’t know about these tax relief schemes, then learn about them because they’re the driving force behind much of the success of equity crowdfunding in the UK. They can provide investors with up to 50% of their investment back as a relief against their income tax bill.
Finding lead investment or backers
Most successful campaigners typically have a good proportion of their initial target lined-up before launch. It acts as a good control gate to see if your business is likely to be successful.
If you struggle to find at least 40-50% from your existing network, people who already believe in you, it probably won’t get much easier during your live campaign.
If you’re doing a rewards campaign for a product, find some boutique retailers who are willing to buy a bulk order. If you’re running an equity campaign, find some friends and family investors, or use Angel Investment Network or UKBAA to try and find angels to provide a cornerstone to your investment round.
Unless you’re completing your Series A, I wouldn’t waste your time trying to get VCs to invest at this stage because it’s unlikely they’ll want to come in on an early crowdfunding raise.
Prepare your pitch materials
I run a crowdfunding accelerator for Virgin StartUp, called Crowdboost. During this crowdfunding readiness programme, we spend six weeks preparing pitch materials, and only one week talking about running the campaign. This should give you a sense of perspective over how important it is to prepare a good pitch.
At the very least, you will need:
- A pitch video
- The pitch page, with words and images
- A marketing plan with various assets
- A press release with distribution list, and
- For equity campaigns, a financial forecast, business plan and one-page executive summary.
All of these materials must be professionally produced and incredibly compelling in their nature. They should also be succinct and to the point. For example, a pitch video should never exceed two and a half minutes.
Timing is everything
In both rewards and equity crowdfunding campaigns, timing is more often than not the difference between success and failure. Campaign too soon, and backers or investors won’t trust in your idea. Leave it too late and it eliminates the necessity to crowdfund in the first place.
There’s no hard and fast rule for a rewards campaign. All I can suggest is that you bootstrap the product development as much as you can, so the only thing you’re raising funds for is the order with the factory.
With equity campaigns, it all comes down to the valuation you can demand. If you launch your campaign too early in your company’s life, you could end up giving away too much equity. Remember, it’s easier to validate a valuation with actual sales figures than it is using forecasts alone.
Valuations being too high (or sometimes too low) are probably the biggest cause of failed equity crowdfunding campaigns. So taking that back a step, not hitting the timing sweet spot will lead to you coming up with an untenable valuation, which in-turn hugely decreases your chances of success.
Motivate your team
Crowdfunding is hard work. Often the difference between success and failure is self-belief. If you feel in your bones that you’re going to succeed, and if you fight until the very last day, then it’s more likely that the crowd will believe you too.
Keep your team motivated. Celebrate small milestones, and always have something planned (i.e. a publicity stunt, an event, a large pledge) to keep you and your team motivated and the momentum of your pre-campaign and campaign going.
Ultimately, make sure everyone working on your crowdfunding campaign stands to gain in some way if the campaign is successful.
About the author
This guide has been written exclusively for ByteStart by John Auckland, a crowdfunding specialist and founder of TribeFirst, a global crowdfunding communications agency that has helped raise in excess of £4m for over 20 companies on platforms such as Crowdcube, Seedrs, Indiegogo and Kickstarter.
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