The task of securing investment is notoriously difficult for any public, private or social enterprise. Few people who submit business plans to banks, angel investors, venture capitalists or similar sources of funding are successful in raising the money they seek.
By Luke Lang, co-founder of the British equity-based crowdfunding platform Crowdcube
Although there are now a multitude of crowdfunding sites that allow people to contribute small amounts of money in support of a creative idea or project, in return for rewards, the most recent development is equity-based crowdfunding to finance businesses in any sector.
The web-based notion of ‘crowdfunding’ is set to become a highly successful method of raising cash for entrepreneurs. There are three trailblazing UK businesses that have taken the notion of crowdfunding and developed it to shake up traditional industries and solve a funding gap that has been around for time-immemorial but has never been as pronounced as it is today.
Crowdcube| Equity-based funding
Crowdcube is the first crowdfunding website in the UK to enable investors to receive shares in the small businesses that register on the site to raise finance. Instead of competing for limited business angel or venture capital funding, or hard-to-get, expensive bank finance, small businesses use Crowdcube as a platform to connect with ordinary people who provide investment in exchange for equity.
Since its launch in early 2011 Crowdcube has raised over £2.1 million pounds for UK businesses. As well as helping great ideas come to fruition that might otherwise never see the light of day, equity-based crowdfunding gives people a stake in the enterprises they choose to support.
They 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.
Funding Circle | Peer-to-peer debt finance
Launched in August 2010, Funding Circle has pioneered peer-to-peer social lending for business in the UK. Its online marketplace allows people to lend to established UK businesses who need to borrow money. People can lend as little as £20 per business and can get good returns from their investment when compared to high street banks. Businesses can borrow sums of money up to £250,000 much faster than traditional lending.
Businesses looking to borrow money submit an online application form, which should only take 20 to 30 minutes. Businesses are given a ‘risk band’, which is visible to lenders to help them judge which opportunities to invest in. Businesses need at least two years trading history and must be in a strong financial position with a healthy credit rating to be considered for a loan.
Crowdfunder & Kickstarter| Reward-based funding
A number of crowdfunding sites such as Crowdfunder.co.uk and Kickstarter.com provide people with personalised rewards in return for their contributions. Such platforms can make a massive difference for thousands of talented people who are bursting with great ideas but struggle to get funding to make these creative ideas a reality. People can promote their idea to attract people to fund and follow their endeavours in exchange for personalised rewards.
Projects could be anything from a local artist looking to fund an art exhibition, an entrepreneur who needs seed funding to start a new creative business venture, an independent filmmaker who wants to make a documentary, or an inventor who has designed the next big gadget.
Tips for crowdfunding success
The secrets of successfully raising funding through the crowd will differ depending on which route you choose. However, there are some commonalities that entrepreneurs will need to ensure they cover.
1 - You must have an investable business, with a well written plan and financial forecasts detailing why an investor should invest in your business. Without this information you simply will not get past the first vetting stage and therefore your crowdfunding journey will stop before it’s even started.
2 - You need to set an investment target that is achievable and represents good value for an investor’s money. For example, if you’re an entrepreneur seeking to raise equity finance be realistic; if you’re a pre-revenue start-up don’t value your business at £10 million!
3 - Once you have created a good quality pitch that tells your story in a compelling manor you will need to promote it. Be passionate about your pitch and take every opportunity to tell people about what you are doing and what you want to achieve. Start promoting it to friends and family and encourage them to spread the word on your behalf. Use social networking websites to extend your reach further and encourage people to retweet or share comments and updates to their network of friends.
4 - Tap into groups and communities who might have an interest in what you are doing. If you have a customer base or suppliers, make sure that you promote your pitch to them. Target opinion leaders and influencers as these people will be crucial in spreading your message to people you don’t know.
The future of finance is changing
The investment market has long-needed democratising and crowdfunding does this by making it easier for anybody to invest. It will give enterprises a better chance of securing funding and engaging with stakeholders as well as a vital boost to Britain’s economic recovery.
