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