An introduction to crowdfunding

One of the biggest challenges facing ambitious small businesses is financing growth plans, and with traditional bank lending in its fifth year of decline (FT), more enterprises are turning to alternative sources of finance.

Crowdfunding presents an exciting opportunity for budding entrepreneurs and business owners to obtain funding to help them turn their amazing ideas into brilliant businesses.

What is crowdfunding?

Crowdfunding is an innovative way businesses, organisations and individuals can secure vital investment for a project or venture. Generally it involves raising many small amounts of money from a large number of people, typically via the internet.

The crowdfunding market is currently worth about £360m in the UK (FCA), and with uber-cool brands like Aberdeenshire based BrewDog raising over £4m through crowdfunding, there is a huge market for a diverse range of businesses, projects and investors to tap into.

I spoke to small business finance expert Allan Chalmers of Chalmers Commercial Finance to find out what the crowdfunding opportunity means to budding entrepreneurs and small businesses. Allan said:

“By pooling small contributions of money from groups of people who share common interests and believe in your cause, everyone has the power to achieve their goals.”

“With a growing number of crowdfunding platforms in the UK including Crowdfunder, Bloom, Bnk to the Future, Crowdcube, Seedrs, Funding Circle to name just a few, crowdfunding is quickly becoming an accessible source of alternative and complementary finance for a growing number of businesses.”

Paula Skinner, Partner at the young dynamic law firm Harper Macleod LLP explained that “the principles behind crowdfunding aren’t new, however the spread of internet access and social technologies have led to explosive growth, extending the reach of crowdfunding campaigns – particularly for new businesses that may not require huge sums to get up and running.”

Types of crowdfunding

There are four main types of crowdfunding:

1. Donation – the ‘crowd’ contributes funds to finance a project for nothing in return.
2. Reward – in return for a contribution, a funder redeems a reward.
3. Equity – in return for an investment, the investor is offered shares in the company.
4. Peer to peer – a loan that is brokered between a borrower and a crowd of lenders. Peer to peer is the fastest growing form of crowdfunding.

With so many options available, businesses should ensure that they explore all avenues to determine what will work best for them, and it makes good sense to seek professional financial and legal advice from the outset.

Crowdfunding campaigns

A successful crowdfunding campaign should be innovative and exciting to attract investors. This can take time and effort from the business and the platform, so it’s worth putting together a great campaign to give the project the best chance of success.

You can’t simply put your business plan on a website and sit back and wait for funds to roll in … but let’s face it, the prospect of developing an exciting campaign to tell your story and sell your idea including a video and rewards, and promoting it via social media is a lot of fun!

From a marketing perspective crowdfunding offers a fantastic opportunity to test ideas, build a potential customer base with emotive connections to the business or product before launch, and generate some great PR.

A successful crowdfunding campaign means that the market loves the idea because they have invested in it, and that’s a great indicator of future success. BrewDog is a fantastic example of a global success story, and I reckon their AGM and Equity Punk Brew Day will be an absolute blast!

I recently watched with interest as Berry Scrumptious launched a crowdfunding campaign through Bloom to raise £4,500 to build a lemonade summerhouse on wheels for their new range of drinks. The campaign achieved 109% funding and the buzz on social media was brilliant, so the project has the funding to launch and people are already talking about it.

How do you succeed with a crowdfunding campaign?

So how do you succeed with a crowdfunding campaign? I always look to the experts for advice and guidance.

People who have achieved success and have gone through the process themselves can offer valuable advice. Alex Klein and Yonatan Raz-Fridman are co-founders of Kano which became the UK’s most crowdfunded idea ever last November, and achieved backing by Apple co-founder Steve Wozniak. They provide some great advice in this article – “How to succeed with your crowdfunding campaign”.

Over to the experts!