Managed via online platforms, crowdfunding is an alternative form of finance that allows you to pitch out your business in search of willing investors. By attracting a crowd of people, each with a small stake, you’ll benefit from business expertise as well as valuable finance.
Crowdfunding in a nutshell
An increasingly popular form of finance, crowdfunding is great for small start-ups looking to get off the ground. And, if you believe your product will catch people’s imagination, you’re already half-way there.
But you’ll still need to do your research. There are lots of crowdfunding sites out there and the rules will differ from one to the next. The general plan is that you pitch your business idea, on your chosen site, and set a fundraising goal for the total amount you’re looking to raise. You’ll need to set a deadline too, because if the total required is not raised, the funding won’t go ahead.
Potential lenders and investors are regularly reviewing crowdfunding pitches, and if one catches their eye, they will make you an offer of contribution.
It’s more than just a marketing exercise
Crowdfunding is about more than just promoting your pitch. You need to do the work to generate the interest in the first place, but then it’s down to business. Most interested investors will want to carry out their own due diligence to satisfy their risk criteria. You should embark on any crowdfunding drive with a sound business plan, demonstrating a robust and achievable strategy.
The two main types
- Equity crowdfunding – people invest in exchange for an equity share in the business, with the risk that their share value may fluctuate as the business grows
- Debt crowdfunding – a simple loan transaction where investors receive a positive return on their money in the form of planned repayments over an agreed period
And a third type of crowdfunding sees people donate money simply because they believe in the cause. Investors do not expect to see a return on their donation, instead they may be recognised by a more intangible reward such as an acknowledgment, regular news updates, discounts or free gifts.
A successful crowdfunding pitch
- Research well and choose a site that’s right for your requirements
- Understand your target audience and write your pitch accordingly
- Be clear on whether you’re seeking equity or debt finance
- Explain exactly how the money will be spent
- Be creative and use images and videos as part of your pitch
- Have a first-class, winning business plan at the ready
- Keep the momentum going with regular news updates as part of the investment cycle; even include some investor special offers
Getting the funding going
Don’t rely on the crowdfunding site to find all of your investors for you. Make the most of family and friends and publicise your pitch across all of your social networks. Get the ball rolling by asking a family member to invest first, investors are likely to follow suit, but no-one wants to be first in. Obtaining additional investors towards the end will prove a lot easier than at the beginning.
Many small businesses attract the initial interest from the crowd, and then use grantmakers to stretch the potential even further. Offering grants to innovative projects means small businesses can top up their finances and achieve their goals.
The true value of matching the right grantmaker with the right business is visible as they grow.
Debt crowdfunding: Pros
- Investors have no say over how the money is spent
- Interest rates are generally lower than high street finance
- You can benefit from tax deductions in the same way you can with a loan
Debt crowdfunding: Cons
- Your suitability for investment will be subject to strict credit checks
- Investors will expect a return over a fixed period
- The debt could make it harder for your business to grow with less to reinvest
We needed additional funds to finance our growth plans and Pegasus suggested Crowdfunding and completed the application process for us. At 6pm on a Thursday evening it went live on their auction website and by 7:30 the same evening, we were 100% funded having raised £50,000. Thank you Pegasus.”