Crowdfunding is a concept that has really taken off in recent years. In 2015, for example, the UK online alternative finance sector grew by 84%. It provided finance to up and coming businesses and projects to the tune of £3.2 billion. Crowdfunding is largely seen as a more accessible alternative to institutional investors. It allows consumers to support their favourite projects and it gives early stage companies and inventors the opportunity to get finance where more traditional loans or investment may simply not have been available. So, how does it work?
The different types of crowdfunding
Not everyone does crowdfunding in the same way. There are a number of different options for crowdfunding a business or idea and they tap into different levels of experience and different needs. For example:
Equity crowdfunding – investors in the business take a share of that business in return for the money that they put into it. This kind of crowdfunding tends to suit businesses with high growth potential. The risk to investors is the value of the share they have in the business – if the venture is successful then the value goes up, if it’s not then the value goes down.
Debt crowdfunding – this is also described as ‘peer to peer’ lending. Debt crowdfunding is more like taking a loan than traditional crowdfunding. Money is advanced to the business by a group of investors who receive their cash back, with interest.
Donation/reward crowdfunding – for very early stage businesses or those with tentative ideas the donation/reward crowdfunding model tends to work best. This is the model that requires the strongest focus on story, as people will invest if they believe in the cause or want to support the brand. In return, they might get a ‘reward’ such as free gifts, tickets or products.
Examples of successful UK crowdfunding projects
Verto Homes raised £1.3 million in 2016 with its property driven crowdfunding campaign (property is far and away the most success crowdfunding sector). The Crowdcube project builds sustainable homes that produce and store clean energy from the sun.
Brewery Innis & Gunn raised £2.4 million on Crowdcube to “push the boundaries, tear up the rule book, and change the beer industry to create a world where everyone has access to better, more exciting beer.”
There have been numerous other highly successful products and businesses that have found a place in the world via crowdfunding platforms. In fact, if you’re looking for the most innovative next generation of design and manufacture then browsing Kickstarter or RocketHub is a necessary part of the research process. There, you might discover inventions such as 3Doodler, the world’s first 3D printing pen that creates your design in real life as you draw it. Or Cards Against Humanity – a Kickstarter project that became a global success and ended up embedded in international popular culture.
The best ways to use crowdfunding platforms
It does seem like a great idea to get people to give you cash for your idea or business. You think you’ve come up with something incredible and you’re convinced that everyone else will see this too. What many people don’t realise is that the whole process is very time consuming and you could potentially be left with nothing to show for it at the end.
Decide whether to use a threshold – some platforms, such as Kickstarter, insist that you set a threshold for your campaign. If you don’t meet this threshold with what you raise then you get nothing. Other sites like Indiegogo allow funders to receive whatever is raised. The advantage of a threshold is the motivational impact it has on your potential investors.
Make sure you have a story – the best crowdfunding campaigns have a real story to tell. It’s the story that investors will engage with the most, even on an equity funding site. Why are you doing what you do, what difference will it make and how did you get here?
Have budget for a video – if there’s one feature of crowdfunding that cannot be comprised on it’s the crowdfunding pitch video. Few campaigns succeed without a video and producing a strong video can make or break your campaign.
Pitch your crowdfunding idea at an audience – the mistake many people make is to believe that you can just put crowdfunding out there and someone will pick up the idea and run with it. However, the reality is that you need to pitch it at the right audience just like any other piece of content or campaign.
Use it for marketing and research as well as raising cash – a great crowdfunding campaign is a strong marketing tool and a simple way to test your ideas and concepts. Even if you don’t succeed at raising cash you might still end up with valuable business intelligence.
Alex Hartley is a keen advocate of improving personal finance skills. She's worked at Solution Loans since 2014 and written hundreds of articles about how people can manage their money better. Her interest in personal finance goes way back to...Read more about Alex Hartley