Focus on Crowdfunding: what questions should you ask yourself before going down this route? Food for thoughts…
Not another Crowdfunding blog, I hear you say! Actually no: I want to share with you some practical points and insights I captured while speaking to couple of entrepreneurs recently.
It is true, crowdfunding (with crowdfunding being the practice of funding a project or venture by raising monetary contributions from a large number of people, typically via the internet) or peer-to-peer funding is rapidly coming of age.
The examples and the numbers speak for themselves:
- “A British firm which makes roll-up shoes has raised £205,000 on a crowdfunding website in just a few days, 27pc higher than the £150,000 initially targeted and with a week to go until fundraising ends.”( 3/10/14, www.telegraph.co.uk)
- “Kent winemaker Chapel Down has raised £3.95m after completing a crowdfunding scheme it launched less than a month ago. More than 1,400 investors bought shares in the company, which plans to use the money to lease 400 acres of new vineyards in the county.”(3/10/14, www.kentonline.co.uk)
- “Samir Desai’s Funding Circle platform lent £54 million to small businesses in the second quarter of 2014. …Santander directs small business borrowers which it cannot help to Funding Circle” (8.10.14, Evening Standard)
The above are just couple of examples of a growing trend for start-ups or businesses to look at crowdfunding as a possible alternative response to bank’s unwillingness to lend to small businesses.
So as a new entrepreneur, when considering crowdfunding as a possible alternative source of funding for your start-up, what questions should you ask yourself?
Since crowdfunding is becoming more and more popular, let’s look at some of the key questions, which were highlighted to me by the entrepreneurs I met, and that you could consider before looking at crowdfunding for your start-up. In no particular order:
- When should you look to outsource your funding? Timing can be an important factor, as releasing equity too early can be damaging in the long term. So have you tried the most common route of asking your friends and family first?
- How much do you need to raise? Is it to launch your business or to support an existing business or a new expansion? What is the minimum amount required by the platform?
- How much equity are you prepared to give out? Or are you thinking of crowdfunding in exchange for samples or royalties?
- If it is equity crowdfunding what type of share are you looking to release? (Type A with voting rights, or Type B?)
- What legal help the platform is offering you and is it included in the fees? (share certificates needs to be issued and they are a legal document)
- What is the minimum amount investors are required to bring in? Some platforms ask for £10, some £1000 minimum. This minimum amount will off course have an impact on the number of possible investors investing in your campaign.
- Does the platform give you the opportunity to go over your initial target, should your campaign be really successful?
- What sorts of accreditations or qualifications do the people working in the platform hold? Are they FSA approved? Certainly worthwhile to check this point.
- Should you go for a well-established site with possibly higher fees and more traffic or a smaller one? To answer this question you could consider the following: do you have already a base of followers that you could involve via your social media campaigns and therefore you could select a less well-know or more niche crowdfunding site. Or, do you need the “reputation brand” of a well-known platform with already a large traffic base?
The answers to the above questions are very personal, and based on your unique situation. Like anything there are lots of options to choose from, different packages, some platforms are also specialising on a specific industry sector. You will need to decide which one will give you the best outcome or service for what you need.
To give you an idea: the most well-know and established sites are Crowdcube.com & Seedrs.com, but other sites are emerging all the time: for example Fireflock (actually a host company on the NEF programme) or Crowd Shed and many more. Someone in the field told me there are about 80 platforms in the UK alone! (take a look at the 10 best platforms: http://www.kindredhq.com/top-10-crowdfunding-sites-uk/)
This new way of funding start-ups is really generating traction and becoming a rising industry. To support this, on 23rd May 2014 the European Equity Crowdfunding Association –EECA* (http://www.equitycrowdfund.eu/) was born.
To conclude, as an entrepreneur crowdfunding may have a place in your funding strategy, but it is up to you to assess the pros’ and cons of it. Despite the mind-blowing numbers we can read about in the press, you need to be aware that not everyone is successful and actually “more than half of all crowdfunding campaigns fail to reach their funding goal”*.
So, do your research, speak to approved financial advisers, read blogs, talk to entrepreneurs who have already used crowdfunding and read the small print in the contracts!
Véronique Rapetti, Learning Director, New Entrepreneurs Foundation
*EECA: Equity crowdfunding platforms from ten European Union countries (Austria, Belgium,Bulgaria, Estonia, Finland, France, Ireland, Italy, Spain and UK) represented by 31 members
Disclaimer: with this blog, I and the NEF are not giving you a financial advice or recommendations. You should always do your own research and speak to FSA approved and professional financial advisers.