The Principles of Crowdfunding

Crowdfunding, you may have heard about it? It is a term you might come across a lot online, in the media, and in daily life in general. But what is it exactly? And what can it do for you? Well…read on and you might just have your path to future success illuminated.

Crowdfunding, in its most basic form is raising small amounts of money from a large amount of people, each contributing towards a goal. That goal can be anything from a band’s national tour to your unique idea for a new style of teapot. If your idea is a good one, then it has the potential to be crowdfunded. If you don’t believe that, as the companies that bought us the Pebble smartwatch or the Oculus Rift VR headset.

So now we have an idea of what crowdfunding is, we can make a start on getting ready to accept the steady flow of cash from contributors, investors and others who believe in our idea or product…right?

 

If only life was that simple…

 

Successful crowdfunding strategies rely on many factors, some of the more important ones are below:

 

  • Marketing, great marketing is essential; people don’t part with their money easily
  • A strong social media campaign which builds interest
  • Building the interest mentioned above before you start to ask for money
  • Tell your story and make it personal, introduce yourself and your team
  • Be open and communicate, as much as possible, with a well designed website and helpful media
  • Finally and most importantly, choose the right type of crowdfunding for you
  • The right type of crowdfunding, more than anything else can make or break a campaign, with that in mind it is worth arming yourself with the knowledge to choose the right type for you:

 

Rewards-Based Crowdfunding

Reward based crowdfunding is a popular option and has given rise to some of the major websites that specialise in crowdfunding, such as Kickstarter. Typically backers donate small amounts in exchange for a reward. The reward can be anything, from the item that is actually produced, to a chance to sample the planned services on offer. However it is worth remembering that, if you are planning to start a rewards-based campaign, with a product as a reward, then you may well have to be far enough into your project to be able to provide these rewards to backers, but with a global value of $5.5 billion* both rewards-based and donation-based crowdfunding is worth serious consideration for any business.

 

Equity-Based Crowdfunding

Equity crowdfunding is all about business, with investors giving typically, much larger amounts of money in exchange for a small share of the equity of the organisation itself. With that in mind, equity crowdfunding is much more about launching or expanding a company, as opposed to getting a product or service off the ground. It can be effective, and represents a healthy share of the crowdfunding market ($2.5 billion worldwide*) but it can also be complex, and specialist advice is recommended for anyone considering it as a source of finance. However, get everything right and amazing things are possible, as Camden Town Brewery discovered after a successful campaign saw them become one of London’s biggest breweries, with a tenfold growth in three years, from £900k to a staggering £9million.

 

Donation-based Crowdfunding

Donation-based is often seen as a riskier campaign than rewards-based crowdfunding as it relies solely on the goodwill and belief of those making the donations, the reward being the gratitude of those who benefit and the creators of the campaign itself, if your campaign is more about altruism than big business, then donation based crowdfunding can be incredibly effective, with campaigns often taking on a life of their own, propelled by media publicity, or wider world events.

 

Debt-Based Crowdfunding

No donations here and no rewards or equity, the principle is quite simple; lenders lend you the money, and then expect to be paid back the amount that has been lent, with interest. The system works much like a bank loan would, except that instead of lending one large amount, you’re lending lots of small amounts from a large pool of investors. The good news with debt-based crowdfunding, is there is little in the way of marketing to do, the thing to bear in mind is, as with all loans; you’ll be paying back more than you borrow.

 

Revenue Sharing Platforms

Revenue sharing can take many different forms, and can get complex. Generally it is used to promote growth and partnerships, increase sales or share the burden of costs. With the steady rise of online commerce, revenue sharing plays a big part in advertising, with profits shared between the companies who host the advertisement itself and those who make the product or provide the service. It is a sharing platform with massive potential, as long as you are clear on exactly how the revenue is collated, collected and distributed, examples for platforms that adopt this model are Abundance, which is a platform designated to source investments to renewable energy projects. Since founded in 2013, it has successfully raised more than £45 million to fund 24 projects with an estimated IRR between 6-9%. Also, Bolstr, which allow investors to extends loans to small and medium businesses. Since 2013 and as of 2015, it has funded 19 businesses by $1.1 million by 1000 accreditned investors at an APR between 8-25%.

 

Looking Forward

 

It goes without saying that crowdfunding, in its various guises, is a practice that is on the rise in a big way worldwide, with an estimated fundraising volume back in 2015 of a staggering $34 billion, from only $2.7billion in 2012*. It is clearly a practice that has gone from the fringes of small business to the very heart of big business.

The future may well see online giants such as Amazon and EBay getting in on the act with things like gift registries and ‘partial purchasing’, by many different people, of single, expensive items. Equity crowdfunding is also set to rise exponentially, with the steady rise of small businesses and their constant struggle to attract bank loans. It might only be a matter of time before the crowdfunding giants such as Indiegogo and Kickstarter get in on the equity act; ensuring future business growth is a much more attainable goal.

 

Tariq Linjawi

Founder/ Head of Investment Advisory

UCG