One of the massive success stories of the last five years has been crowdfunding. If you have an idea for a new product, you can ask your potential customers to help you realise your dream.
Having access to the money needed to start a new business has always, for some entrepreneurs, been a challenge. When financial help from family and friends isn't available, the central banks have always been the next port of call. However, as lending criteria have tightened, accessing this channel has increasingly been difficult, particularly for small start-up businesses.
Crowdfunding has established itself as a legitimate alternative source of finance. According to Mordor Intelligence, the crowdfunding market is expected to expand 16% by 2026. Asking potential buyers of a product to support its development has become highly popular, with thousands of new businesses gaining the funds they need to bring innovative products to market. Manchester Veg, for example, raised over £16,000 in just 42 days.
The reward type of crowdfunding is by far the most popular. In exchange for a fixed amount of money, the supporter will usually get the product for a substantial discount, often with other incentives such as personalised products also included. This is a great way to sell pre-orders and gain an insight into the popularity of the developed product.
Also, the community that a new product can build around its crowdfunding page is often the new business's most precious asset. Today consumers want to be part of a group with like-minded people who can see the value of a new product and want to participate in its road to market. The most successful crowdfunding campaigns have been able to tap into this social aspect of the crowd to drive pledges.
A crowded future
Joe Sillett is co-founder of The Funky Appliance Company. Joe is passionate about using crowdfunding, having spearheaded four highly successful crowdfunding campaigns on Seedrs, raising a total of £750,000 to expand his product range, as well as a private round on Seedrs in June this year, which raised 127% over their £120k target.
Is crowdfunding now a legitimate way for small businesses to raise the funds they need?
“Crowdfunding is a very efficient way of raising capital and winning an army of supporters for your business. As an SME co-owner, I have carried out five successful crowdfunding campaigns using the equity crowdfunding platform Seedrs. For me, it’s been a fantastic way to launch the business and gain supporters.
“We completed our first campaign in March 2017, and the total has raised just under £1 million over four years which has enabled us to expand the product range, and we now have 402 investors in over 25 countries. With crowdfunding, you get a better valuation from selling shares to an army of supporters rather than having one investor with too much control and buying power.
“Each one of those supporters can help you in your business journey. Two of our lead investors were invited onto our management team and both of them have been superb in their support of the business. The two other members of our management team are also investors in the business.”
What are the pitfalls to watch out for when mounting a crowdfunding campaign?
"Is crowdfunding a good way of raising capital? 100% yes. Is it easy? Absolutely not. It requires a great deal of work, both in the preparation and then the execution of a campaign. In addition, crowdfunding is incredibly time intensive – you need to be available round the clock if you want your campaign to succeed.
“You must be highly responsive to every query that comes via the crowdfunding platform and totally on top of running your actual business. It’s important that you make yourself available all day, every day for every question that comes in. Time is of the essence when responding to prospective investors. This shows them you’re on the top of your game and that you’re dedicated. If you think you can sit back and the money will roll in, you will be very disappointed!”
Does mounting a crowdfunding campaign need significant investment to produce a compelling video etc?
"Hiring a crowdfunding agency will enable you to reap the benefits of their knowledge. There are some great crowdfunding agencies out there to choose from, and you need people who have extensive experience that can help you prepare your pitch. Yes, there's a fee attached, but these people have executed hundreds of campaigns, so know what works and what doesn't. It's also worth investing in a professionally filmed video, which can cost upwards of £3,000.
“This video is your chance to professionally get across your brand, your unique selling points, your point of difference, your ambition, your vision for the future, your personality, and a chance to explain to investors why your business will succeed and map your points of success which will drive the business forward. If circumstances or funds don’t allow you can do a self-filmed one.
“Have a list of five or six main bullet points just to the right of your camera, which you can temporarily look at, and once you have seen the headline for each bullet point, this is the trigger for you to speak directly to the camera and naturally without having to refer to any more notes. Do a couple of practice runs first so that you know that you can let the content naturally flow when the record button is pressed.”
Are there some products not suitable for crowdfunding campaigns?
“The range of businesses which use crowdfunding to raise capital is incredible. I think over the years I have seen every type of business on either of the two main UK crowdfunding platforms. If you have a product or service which you believe in and you think has the potential to do very well, investors will often spot the opportunity as well.”
What's your essential advice to anyone considering using crowdfunding for the first time?
"Know your business and business plan inside out, as well as your target market. It sounds obvious but doesn't underestimate the importance of being meticulous about everything you put together in your pitchbook and answering questions quickly and accurately. In addition, you will need to work out and plan in advance, exactly what terms you are prepared to offer; that is, what percentage of the business you are ready to sell in return for the capital.
“My top tip is to hire a great accountant. Ask your accountant to challenge every single line and rationale in your numbers, whether it’s a three-year plan or a five-year plan. You must be able to know and explain those numbers to anyone at any time. Make sure the rationale for those numbers is watertight in your mind for when you present that to prospective investors.”
Are all the leading crowdfunding platforms similar? Or do they have differences that must be paid attention to when choosing which platform to use?
“We used Seedrs and they are very good at what they do. Crowdcube is Seedrs’ main competitor, and they also have very good businesses who list on their platform. We chose Seedrs over Crowdcube because of the nominee structure they employ, meaning that Seedrs look after the investors shares in your business and do all the paperwork for you and manage the electronic sharing of that information with investors. This saves a company an enormous amount of time and money.”
Using crowdfunding to raise the capital needed to bring a new product to market requires a detailed and well-executed business and marketing plan. The enterprises that reap the benefits of not just having the working capital they need, but a community of customers waiting for the product. Ultimately, crowdfunding is one option to raise the money you need. However, when approached with creativity, this finance channel could deliver much more than just financial support.