27th Mar 2013
Crowdfunding is an increasingly popular way to raise business finance. Luke Lang, co-founder of Crowdcube, explains what you need to do to be successful. This article is part of the BusinessZone.co.uk Finance Masterclass.
Innovative ideas and busy entrepreneurs looking for funding are in abundance despite the recession and equity crowdfunding websites provide one way to bypass hard to access traditional sources of finance. They enable entrepreneurs to showcase their investment opportunity online and pitch to a nation of 'armchair Dragons'.
But ensuring that a crowdfunding pitch stands out is crucial for success. Here's how to do it.
1. Write a compelling business case
It's imperative for investors to understand the key facts about your idea, who it's aimed at and your team. A recent study into the attitude, motivations and behaviour of investors in small businesses highlighted 'perceived market potential', 'prior experience of the entrepreneur' and 'the idea underpinning the business’ as the top three most important factors in the investment decision process. More than two-thirds of investors said ‘being personally moved by the idea’ was a key factor when evaluating a venture for potential investment. These elements should form part of a well-written business plan and financial forecasts that add-up.
Keep your pitch clear and simple and avoid using jargon so that potential investors can easily understand what and who they are investing in. Investors wait for opportunities that move them, so inject some enthusiasm and life into your pitch summary. Don’t forget to explain what your company does and where the idea came from; who you do it for and how it will benefit them.
2. Spread the word
Getting off to a good start will make a difference. If you can get past 33% funded then you stand a good chance of hitting your investment target so getting friends and family ready to invest on day one will help to create early momentum.
The process of raising investment should start as soon as possible; don’t wait until the day your pitch goes live but start warming up potential investors straight away. Tell your friends, family, customers, suppliers and other potential investors and keep them updated with progress.
The importance of early momentum and investment progress cannot be under estimated; a pitch will attract more interest if it’s featured more prominently in the search results of a crowdfunding website. It will give investors more confidence in your business and trigger curiosity about why others are investing. Such a halo effect can have a dramatic effect. Half of the investment in pitches funded on Crowdcube is added in the last few days or hours. Such acceleration towards a funding target is commonplace and can put an entrepreneur in the enviable position of being oversubscribed.
3. Offer EIS/SEIS tax incentives
The UK has some of the most generous tax incentives in the world to help small, higher-risk businesses raise the finance they need. Registering your company with the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) gives investors tax breaks of up to 50% and is a crucial ingredient for attracting backers. The rewards for qualifying companies and investors are too attractive to ignore. To qualify for EIS you can have up to 250 employees and gross assets of up to £15m. This will enable you to raise up to £5m of investment a year and provide investors with 30% tax relief.
SEIS rules, where investors benefit from 50% tax relief, are narrower; you must have started trading less than two years before shares are issued and have fewer than 25 employees and assets of less than £200,000 pre-investment. Most types of business are eligible, but there are a few exceptions such as financial services, property development and agriculture.
SEIS will also offer backers of an SEIS eligible start-up a one-off capital gains tax 'holiday' if they reinvest gains made during the 2012-13 financial year through SEIS. This means that the total relief for investors could be as high as 78%.
4. Keep people updated
You need to embrace the philosophy that underpins all good crowdfunding; be proactive, well-prepared and eager to engage with investors. Keeping investors and pitch followers abreast of developments by publishing regular updates is a useful method of converting interest into investment. Don’t limit yourself to online either; get out there and talk to people face-to-face, there’s nothing like it for getting investment.
5. Be realistic
Set yourself an achievable target (under £150,000 unless you have some significant investors lined up) and don't be tempted to overvalue your business; it’ll only turn investors off.
Investors want to know why you need their money, and exactly what and how will you spend it. Getting the initial momentum is the hardest part and you may need to rely on your own network to get the ball rolling before the broader crowd will notice you.
For more expert advice on business finance, click here for the BusinessZone Finance Masterclass.