Crowdfunding for small and start-up businesses – the basics

Raising business finance is difficult at the best of times, but in today’s age of austerity, banks, business angels, and governments are tightening their belts, cutting off the supply of cash. This is leaving start-ups and growing businesses thirsty for money, and as a result, venture capital is being democratised.

The usual suspects and gatekeepers of wealth are being by-passed, giving ’Joe Public’ the opportunity to invest and support great British businesses and entrepreneurs with a new found finance philosophy that turns conventional wisdom on its head.

The growth of crowdfunding

The web-based notion of ‘crowdfunding’ is a phenomenon that has grown considerably in recent years as a method of raising cash for entrepreneurs. This momentum only looks like growing further in future years as entrepreneurs turn their backs on traditional fund-raising models and look to the future for their funding needs.

There are now a multitude of crowdfunding sites that allow people to contribute small amounts of money in support of an idea or project in the creative and technology sectors, in return for rewards. The most recent development is equity-based crowdfunding to finance businesses in any sector where investors get shares for their support.

Equity crowdfunding – Armchair Dragons invest in Britain

Crowdfunding is democracy working at its naked best with small businesses using it to connect with ordinary people. The public decides what funds and what does not and so through a process of natural selection the ‘wisdom of the crowd’ collectively makes a decision on which business successfully reaches its funding target.

With equity-based crowdfunding from the likes of Crowdcube, people get a stake in the enterprises they choose to support.

The investors don’t need to be wealthy individuals, but instead can be members of the public with as little as £10 to spare to invest in something that they think will do well, or that they are personally interested in supporting.

Investors secure all of the benefits of being business shareholders and will share in the future success of the business.

Reward-based crowdfunding

Crowdfunding first hit the headlines with reward-based websites such as Crowdfunder.co.uk and Kickstarter.com who provided people with personalised rewards in return for their contributions.

This model had a huge impact to thousands of talented people with an idea, but without the financial backing to make that idea become a reality.

Projects are usually creative or technology-based and can come from artists, entrepreneurs, filmmakers, software developers, musicians or inventors.

Peer-to-peer debt finance

Peer-to-peer social lending is also transforming the debt finance market, providing an online marketplace for people to lend to established UK businesses that need to borrow money.

People can lend small amounts and get healthy returns on their investments. Funding Circle is the market leader, offering competitive options for established businesses seeking loan finance.

Tips to help businesses raise money through crowdfunding 

There is no dark art to raising money successfully through crowdfunding, but there are some basic guidelines you should follow to increase your chances of securing funding:

1. Be investable

You will need a well-written business plan and financial forecasts detailing why an investor should invest in your business. Without this information, investors would not even consider investing a serious amount of money in you.

2. Offer value for money

Your company valuation and investment target needs to be realistic.  For example, if you’re a pre-revenue start-up don’t expect to be able to raise £1 million and value your business at £20 million!

3. Create a good quality pitch

First impressions do count so make sure that your pitch is clear, engaging and enticing to potential investors.  Always put yourself in the position of an investor – what would they like to hear?

For example, have you had investment from friends and family previously? If so this will give an investor confidence that you’re going to put everything into the business to make it a success and not run off with his or her money.

4. Tell people about your investment opportunity

Be passionate about your pitch and take every opportunity to tell people about what you are doing and what you want to achieve. Promote your pitch to friends and family and encourage them to spread the word on your behalf. Social networking websites can be an effective method to spread the word about your pitch.

Also, tap into groups and communities that might be interested in what you are doing. Think about your existing stakeholders; would your customers like to invest? How about your suppliers, existing shareholders, or partners?

Consider how you can target opinion leaders and influencers as these people will be crucial in spreading your message to people you don’t know.

The future

Crowdfunding is an important new option for businesses looking to raise finance and is likely to become an ever more popular route for securing funding.

With many businesses still struggling to find funding through the usual sources of finance, crowdfunding’s ability to tap into a pool of millions of potential investors is a welcome development. It could even offer a vital boost to Britain’s economic recovery.

Further information

This article was written for ByteStart by Luke Lang, co-founder of the British equity-based crowdfunding platform Crowdcube.