Crowdfunding – could it work for your business?

Crowdfunding is becoming an increasingly popular method for small businesses and social ventures to raise much needed funds.  The map below gives you some idea of the scale of growth in Crowdfunding over recent years.  Interestingly, the same source indicates that 46% of all UK Crowdfunding platforms were launched in 2011 alone, so with the growth in such sites I wanted to write about the ups and downs of Crowdfunding from a small business perspective.
Worldwide map of Crowdfunding platforms

What exactly is Crowdfunding?
The idea behind crowdfunding is a relatively simple one. You have a business idea or want to grow your business but need money to make this happen. Visit your chosen crowdfunding platform, create your pitch, set your financial target, and promote your project to anyone online or offline who you think might want to invest in it, for example family, friends, clients, suppliers, twitter followers, linkedin (you get the idea). You offer rewards (traditional Crowdfunding) or a share of equity/revenue (commercial Crowdfunding) in return for the investment. When you reach your target, you get your money and get delivering on all those promises.

Sounds simple enough! So once your project has been listed you sit back and let the money roll in?
Alas, nothing could be further from the truth. In fact if you haven’t already been building your profile and marketing to your target audience before you post you’re going to have to work flat out to raise the funds you need. The onus is very much on YOU to promote your project and get the investors in.  At the time of writing this blog 31 projects, that’s 67% of those listed currently on the commercial Crowdfunding site Crowdcube® have 10% funding or less (many at 0%). Looking at some of the successes on the site it’s not difficult to spot the more established companies securing their investment fairly quickly (Kammerling’s £180k; The Rushmore Group Ltd £1m).  I’m not saying they didn’t have to work to secure their investment but a more established brand is likely to have a head-start.

How much does it cost to post a project?
At the current time the majority of sites don’t charge to list your project, but do  take a fee when projects reach their investment target. The average seems to be around 5% of the target achieved.

What do I have to offer in return?
Different sites have different rules so be clear about this before deciding whether to part with equity or offer rewards. Rewards (or ‘perks’ as they are called on some sites) could be anything relevant to your project such as free tickets to a show to an acknowledgement on a website or free/discounted products depending on how much is pledged.  Crowdcube® require you to release equity in return for pledges so you’ll need to make sure you have the right company structure for this and think carefully about how much equity you’re prepared to offer.  Most sites have an area where you can interact with investors and let them know how plans are progressing.

The art of pitching
Creating a memorable pitch (usually in video format) is a crucial part of the Crowdfunding process and it’s probably true to say many small businesses don’t have spare video footage hanging around that can be used. Even if you did, you need to know how to make your video appealing to potential investors and get your message across in a very short space of time.

You have to remember that whilst the Crowdfunding websites are providing a platform for you, that is all they are doing. It is YOU who has to put the work in to promote it, market it and reach your intended audience. You’ll be competing against plenty of other businesses so creating a compelling pitch, sometimes in less than a minute, can be a real challenge.  It’s worthwhile looking at the different sites and watching the videos of those projects who have secured 100% funding to get some ideas for your pitch. It may even be worth having a chat with one or two of them to find out just how much work they put in ‘behind the scenes’ to reach their target.

Dribble Delights – an example of a small business Crowdfunding
I caught up recently with Cheryl Ryder owner of Dribble Delights who currently has her project posted on Bloom VC a site which allows you to ‘make a promise’ to investors in return for their money. I asked her about her Crowdfunding experience so far.

Cheryl’s idea for a range of dairy-free foods for babies and toddlers stemmed from her own experiences as a Mum of a now 3 children, all of whom are dairy-intolerant. She became exasperated at the lack of choice on the shelves when it came to party food and treats in particular.  She entered the company into The Pitch 2011 competition with just an idea and became one of five finalists in the Scottish heat. This spurred her on to take the idea forward but as is often the case, funds were needed to turn it into a reality. Enter Crowdfunding.

“It seemed like a good idea” said Cheryl “we had nothing to lose and everything to gain by trying to raise funds this way”. Although Dribble Delights have not yet reached their target funding (they have 30 days left but have so far secured just 3% of their target £7300), Cheryl is keen to point out what a positive experience it has been for them and the value of using the Crowdfunding platform to get their message out there.

If anyone enters Crowdfunding simply to get money then they’re fools” said Cheryl. “It’s a bonus if you get your money but the exposure and opportunity it presents is priceless. We’ve had amazing coverage and recognising  we’re operating in a very niche market, but being able to reach that, ask questions and effectively test out what we’re doing has been incredibly helpful”.

Cheryl isn’t put off even if they don’t raise their funds in the next month, but feels that the most successful projects are those who have been working on building their market well in advance of posting their project and already have a following.

Making your ideas public
I asked Cheryl whether she had any concerns about drawing attention to her business idea before it was off the ground in case somebody came along and copied it. As her company was already very much in the public domain having been a finalist in The Pitch 2011 it wasn’t really an issue, but for others it could be so you have to balance whether the exposure with potential financial return balances out or outweighs the possible risk of someone with deeper pockets taking your idea and turning it into reality before you have chance to.

Here’s my summary of the ups and downs of Crowdfunding for small business:

Some good reasons to choose Crowdfunding:

  • More straightforward (and less expensive) to raise finance than through Business Angels/VC
  • An alternative to bank finance which is difficult for small business to secure
  • Free PR for your business – gets your message out there
  • Positive endorsement from potential clients
  • Builds future buyers database

Some things to think about:

  • Waiting time to know if you’ve raised sufficient funds to go ahead
  • Lack of good contacts, networks and mentoring that normally comes with external investment
  • Risk of failure to gain investment
  • Multiple investors to communicate with
  • Risk of idea being copied

It’s up to you to decide whether its right for your business but it should certainly be given serious consideration.

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