Clive Lewis, head of enterprise at ICAEW, gives his advice on three types of crowdfunding and outlines the stages of a successful crowdfunding campaign.
Online finance platforms, which allow anyone with a bank account to ‘form a crowd’ to provide money directly to one or more businesses, make up a small but rapidly growing share of the UK business finance market.
There are four basic types of internet finance: donation, reward, equity and debt (often called peer-to-peer lending).
The first crowdfunding site was created in the USA in 2001, with the phenomena starting later in the UK. The debt finance version started three years ago and has really taken off.
Whichever type of online finance you choose, the basic model is the same; they are seeking to match businesses looking for finance with individuals and businesses looking for a reward or return. However, the motivation of the crowd changes in each one.
In this article we concentrate on the following three types of crowdfunding, donation, reward and equity.
This is where the crowd is being asked to contribute to a charitable or social cause. This could be on any scale, from a local cause such as saving a local library, to an international issue.
This offers the crowd a new product or service not generally available. It is often used by businesses who need finance to develop prototypes or early stage services and to test their appeal and serviceability. Sites such as Kickstarter started in the USA and have raised billions of dollars from millions of crowd funders.
Selling shares in a business comes with considerable financial regulation. It is advisable to understand the process before committing to this route of crowdfunding.
Businesses seeking equity must complete a questionnaire specifying how much finance is required and the equity on offer. The disclosures are reviewed by the platform to ensure they are fair, clear and not misleading. The platform then approves the listing.
Investors can invest from £5 up to the full amount required, but regulations usually place a cap based on a percentage of the investor’s net assets. If the business receives offers up to the full amount within a specified period, the offer goes to closing. If not, any investors who offered money get their money re-credited to their account.
In closing, legal due diligence is conducted, the business signs documentation and the online platform subscribes for shares on behalf of investors. The platform charges a fee for obtaining finance to the business out of the proceeds of the share issue.
Post-investment, the online platform holds shares as nominees for investors. The online platform passes back to the investors any dividends or monies received if the business floats on a market or sells out.
The three stages of a successful crowdfunding campaign
- Before starting the campaign
If you are considering crowdfunding, you need to decide which model will work best for your business.
Equity funding is covered by a range of safeguards for investors and needs legal and often accounting advice. The donation approach requires a compelling need or good cause. The reward model needs consideration regarding the various levels of reward offered.
Having decided which model to go for, you need to consider the content, including the script and any photos or videos. The script needs to grab the attention of the crowd as you’ll be one of several campaigns on the crowdfunding website. So look at other campaigns and see what works. Photos may help people connect with the campaign. Most campaigns include a video but it is difficult striking a balance between the length of comments and proving information through other means, e.g. script, slides, etc.
Having settled on the content, you need to consider how you will keep the crowd informed through all your channels; your campaign site, your blog and social media. You will need to keep them updated at least once a week. And your message needs to be consistent.
You must also consider the wider media campaign. It will pay to court journalists in advance of the start of your campaign, particularly trade or local press. If you have a product, send it to selected journalists in advance of the start. Reviews can create a great deal of interest.
You usually have a fixed period to attract interest. Some crowdfunders plan the campaign around key milestones. As you will be fighting for media attention it is best to avoid times when there are trade shows or events which might compete with your campaign.
Finally, you must calculate how much you need to raise from the crowdfunding campaign. As well as knowing how much money you are seeking, you also need to work out the cost of the campaign and the crowdfunding website charges. Some use a service such as PayPal to process the money offered, so remember to build in those costs too. You also need to consider the costs of delivering any rewards (the product or service you offer). Balancing unforeseen costs against the risk of failing to achieve the target can be difficult.
During the campaign
Crowdfunding sites are transparent. If you ask for £30,000 in four weeks, and after week three you only have £5,000, it will deter people from offering money as the campaign is clearly likely to fail. So if you have interested friends, relatives or business associates, ask them to contribute early on to give an impression of momentum. Also, time the start of your social media campaign to give the early campaign a boost.
After the campaign
If you successfully raised the specified amount in your campaign you have to deliver on your promises. This can be of interest to the media and will help you build your network of contacts. You should also have a Plan B, or at least have considered your options. If it doesn’t go to plan, depending on what you believe the reasons for failure are, you might try another crowdfunding platform, wait for a more opportune time to try crowdfunding again, or try an alternative form of finance.
Happy and successful crowdfunding!
The Peer-to-Peer Finance Association (P2PFA) is the trade body for peer-to-peer lenders
The UK Crowdfunding Association (UKCFA) is the organisation representing 14 equity crowdfunding businesses
The ICAEW Corporate Finance Faculty has produced a useful Business Finance Guide.
If you need help with your business plan, or simply want to talk over the financial information and forecasts, a free initial discussion with an ICAEW Business Advice Service (BAS) firm is a good place to start. Click here for more information.
© ICAEW 2014. ICAEW will not be liable for any reliance you place on the information in this material. You should seek independent advice.