What is crowdfunding and how does it work?

Crowdfunding is the practice of funding a project or venture by raising money from a large number of people through an online crowdfunding campaign. It is essentially the opposite of the usual approach to business finance. Traditionally, to raise capital for your new business or to launch a new product, you would need a business plan, market research and prototypes which would be shown to a limited pool of individuals or institutions. Crowdfunding platforms provide entrepreneurs with a single platform on which they can build, showcase and share their project with a much wider audience of potential investors.

There are six main steps to creating a crowdfunding campaign which are as follows:

  1. Decide on your project – Your crowdfunding campaign should be specific and time-limited, with a clear outcome. The project could be creating a new product, launching a new service or holding an event.
  2. Set your budget and a realistic funding target – It is important to be clear about the amount of money you need and what it is going to be used for. Remember, you can also ask people to donate time and skills towards your project as well as asking for funds. Your budget needs to include any commission you will need to pay to the crowdfunding site as well as any rewards.
  3. Prepare your pitch – Your pitch needs to explain what your project is, what you need the money for and what difference you will make. It is important that your pitch is clear, concise and attracts attention.
  4. Choose a platform – Finding a dedicated crowdfunding platform will help you to manage the financial contributions you’ll receive. There are many crowdfunding platforms out there but two of our favourites are Crowdcube and Seedrs, which we will discuss later.
  5. Start your campaign – Your crowdfunding campaign shouldn’t come as a surprise so make sure to let your supporters know before you launch what to expect and when. Once you have launched your online campaign, invite your community through email and social media and encourage people to share your campaign when they donate.
  6. Keep in touch – Keep your supporters updated about the progress of the campaign and how close you are to your target. Make sure to thank each individual when they do contribute and let them know what difference their donation will make.

There are many benefits to crowdfunding, including the following:

  • Presentation – The process of creating your crowdfunding campaign can be invaluable as it allows you to look at your business as a whole, reviewing its history, offerings, traction, value proposition and addressable market and then fine tune it into a polished, easily digestible package.
  • Reach – Using a crowdfunding platform such as Crowdcube and Seedrs, gives you access to thousands of accredited investors who can see, interact with, and share your crowdfunding campaign.
  • PR & Marketing – Crowdfunding allows your campaign to be shared and promoted through social media, email newsletters, and other online marketing tactics. This helps to steer traffic to your website and other company resources.
  • Efficiency – Crowdfunding eliminates the need to pursue each of your potential investors individually because you can build a single, comprehensive profile to which you can funnel all your prospects. Everything can be presented online in an accessible format instead of printing documents, compiling binders and manually updating everything every time something changes. Online crowdfunding therefore centralises and streamlines your fundraising efforts, leaving you with more time to run your business instead of fundraising.
  • Validation of Concept – As potential investors start to express interest and ask questions, it will quickly become apparent if there’s something missing from your concept that would make them more likely to buy in. Presenting your concept to the masses through crowdfunding therefore provides an excellent opportunity to validate and refine your campaign.

There are a variety of types of crowdfunding. Which method of crowdfunding you choose will depend on the type of product or service you offer and your future goals in terms of growth.

Donation-Based Crowdfunding:

Any crowdfunding campaign in which there is no financial return to the investors or contributors is classes as a donation-based crowdfunding campaign. Common donation-based crowdfunding initiatives include fundraising for disaster relief, charities, non-profits, and medical bills.

Rewards-Based Crowdfunding:

Rewards-based crowdfunding includes giving a reward to those individuals that contribute to your campaign, usually in the form of the product or service your company is offering. This can encourage people to donate to your project and therefore help your company to reach its target faster without incurring much extra expense or selling ownership stake.

Equity-Based Crowdfunding:

Equity-based crowdfunding allows individuals who donate to become part-owners of your company by trading capital for equity shares. The contributors can then receive a financial return on their investment and ultimately receive a share of the profits in the form of a dividend or distribution.

Your crowdfunding campaign can either be a ‘keep-all’ campaign or an ‘all or nothing’ campaign. An ‘all or nothing’ campaign is where if you don’t reach your target you don’t get any of the funds raised as opposed to keeping all the funds even if you miss your target. Most crowdfunding sites offer an ‘all or nothing’ rule in which you’ll need to hit your fundraising target for the money to be released to your project, so it is important to be realistic about what you can achieve from your campaign.

As mentioned earlier in the article, two of our favourite crowdfunding platforms are Crowdcube and Seedrs.

Crowdcube:

Crowdcube is an online equity-based crowdfunding platform which allows people with as little as £10 to invest in private businesses. So far, Crowdcube has helped over 700 entrepreneurs fund their business’ growth, more than any other equity crowdfunding platform. As well as raising funds for your project, Crowdcube helps you to build and engage your network. This helps to increase revenue, improve customer advocacy and brand loyalty.

Crowdcube has two types of models in which individuals can invest:

  1. Joint-venture profit share model (Equity-based model) – By investing in this model, individuals can own a share in the business they have invested in and will therefore benefit from any profits that the business makes.
  2. Fixed income model (Bonds) – In this model individuals can give a loan to a company and receive a fixed amount of interest each year in return.

Crowdcube provide real-time campaign data and visibility of the key metrics behind the raise including daily performance on the pitch, how it compares to other raises and what channels are having the biggest impact on the raise.

Seedrs:

Seedrs is one of the world’s largest equity crowdfunding platforms available with a mission to enable all types of investors to invest in businesses they believe in and share in their success. They enable all types of growth-focused businesses to raise capital and a community in the process.

There are three kinds of campaigns run on the Seedrs platform:

  1. Equity Campaigns – Through these campaigns, investors can become shareholders in the businesses and therefore partly own the business.
  2. Fund Campaigns – These campaigns allow investors to invest in multiple business projects and become a shareholder of each start-up. This allows investors to diversify their investment.
  3. Convertible Campaigns – These campaigns are most commonly used by businesses that are hoping for larger funding rounds. Investments made in these campaigns can be converted into equity campaigns in the future.

Seedrs holds each campaign to a high standard and ensures that every statement is fair, clear, and not misleading. Every investor that invests through Seedrs receives extensive protections and rights with Seedrs’ professional-grade shareholder agreements. The Seedrs team handles all the legal documentation, tax relief paperwork, administration and payments.

Tax Relief

Be sure not to forget tax relief when raising through crowdfunding. Many investors are looking to invest through either the Seed Enterprise Investment Scheme or the Enterprise Investment Scheme. Many crowdfunding sites indicate whether a startup has already applied and been approved for SEIS/EIS Advance Assurance.

In conclusion, crowdfunding is a great alternative to traditional ways of raising funds for your business. There are many benefits of fundraising through a crowdfunding platform that can help you take your business to the next level. Make sure to put a lot of thought into the type of campaign you wish to start and always be clear and honest with your potential investors.

Get in touch if you need any help with your crowdfunding campaign.



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