What happens to crowdfunding entrepreneurs if they can’t rely on friends and family?

Crowdfunding
iStock/AndreyPopov
Luke Davis
CEO
IW Capital
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Despite the alternative finance sector’s relative infancy, the industry has already boasted an impressive collection of business alumni.

In the past few years, equity crowdfunding has emerged as one of the greatest non-traditional support structures for growing companies, with Nesta revealing that the sector grew by 295% on the previous year’s figures – an incredible leap from £84m to £332m worth of investment in 2015.

During that period, the equity-based crowdfunding model accounted for 15.6% of all seed and venture-stage equity investment, reflecting an alternative sector that has become the norm for many entrepreneurs in the UK. However, as with any market growing at such a remarkable rate, there are still areas that we as an industry need to take into consideration in order to promote its longevity and ensure that more businesses are fully maximising the opportunities on offer through equity crowdfunding.

There needs to be more support in the early stages of crowdfunding

Alternative finance has successfully unlocked the world of SME investment for a generation of astute investors. This arena – once reserved exclusively for banks, hedge funds, VCs and angels – has encouraged a far more democratic approach to investment and enabled the public to support ventures that they are passionate about. We should never undo what the industry has achieved so far. However, there are challenges that must be embraced if the world of alternative finance, and in particular equity crowdfunding, is to reach its potential. Namely, entrepreneurs and small businesses must receive more support when attracting the initial momentum needed to make their funding round a success.

Earlier this year, CrowdRating.co.uk released data from 678 campaigns listed on the top 12 crowdfunding platforms. The results of the analysis revealed that 55% of crowdfunding campaigns succeed – so, with almost 50:50 odds of reaching a target, we have to address what may be giving some campaigns the upper hand to ensure the playing field remains level for the entrepreneurs.

Of course, the calibre of the business model will always have an important bearing on a campaign’s chances, but with nearly half of equity crowdfunding raises failing, this is not a fair reflection of the quality of companies that reach out to the crowd.

One pound invested on one day of the pitch generates an additional 51p in the subsequent day, and an additional 76p over five days. 

The key to crowdfunding success often lies in the early stages of a raise and the company’s ability to drum up initial investor interest. A report titled Equity Crowdfunding: A New Model for Financing Entrepreneurship?, developed by professors Saul Estrin and Susanna Khavul at the London School of Economics, reaffirms this, stating:

“One pound invested on one day of the pitch generates an additional 51 pence in the subsequent day, and an additional 76 pence over five days.”

This emphasises the importance of early momentum to serve as a catalyst for greater investment from the crowd. Data from leading equity crowdfunding platform Seedrs also supports this notion, as it observed that once a campaign hits the 30% mark, its success rate rockets to 90%.

Leveraging entrepreneurs’ personal networks

For entrepreneurs, the first port of call for that all important first 30% of a raise is often to speak to their friends and family. If they can secure some investment from their personal contacts prior to or in the early days of a raise that instinctively looks like a more attractive offer from to the wider collection of crowdfunding investors. But, if the entrepreneur doesn’t have an existing network to tap into, where can they turn and is their campaign at risk of not fulfilling its potential?

We recently commissioned research to determine whether entrepreneurial Britain could indeed rely on their friends and family to support their business intentions. We sampled 2,000 UK adults and found that if they were to start or grow a business 15% would seek support from friends and family – the third most popular funding option in our survey, after personal savings (35%) and banks and institutions (28%).

A huge proportion of would-be entrepreneurs do not have an network that can provide them with the initial financial boost.

However, there was a troubling disconnect between their objectives and their relatives’ abilities to back them; nearly two-thirds of business-minded adults (64%) said those close to them did not have the financial means to support them. What’s more, nearly half (45%) said they wouldn’t even know where to turn for the finances they need to start or grow their venture. The findings reveal that a huge proportion of would-be entrepreneurs simply do not have an existing network that can provide them with the initial financial boost that is often so valuable when launching a crowdfunding campaign.

For this sizeable collection of entrepreneurs who are not fortunate enough to access an affluent group of friends or relatives, a proactive approach is paramount. Business owners or those hoping to start a company should embrace as many networking opportunities as they possibly can to stir up greater awareness of their product and growth intentions. When the time comes to seek initial investment, you will then have established solid connections with like-minded business owners or investors who could be your first point of contact to raise that crucial 30%.

Alternatively, exploring platforms that utilise co-investment from a sophisticated investor could be a means of filling the void for those without existing networks of their own. That group of seasoned investors would work alongside the crowd and a fair valuation would be determined for all parties. Securing interest from a group of investors well-versed in SME investment could be the spark needed to incite curiosity amongst the crowd.

An investor will of course consider the minutia of a crowdfunding campaign before making a commitment and the first 30% is just one of many factors to take into account. However, when listing on a crowdfunding platform, that progress bar acts like your shop window and an attractive display could be the difference between a prospective backer exploring your raise in more detail or moving on to a campaign with greater levels of traction.

Support It is up to us as a sector to continue raising awareness and increase the number of funding opportunities available to entrepreneurs who do not have the ‘bank of mum and dad’ to fall back on.

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