Crowdfunding for your start up business – Making the most of the idea

Raising finance remains one of the biggest challenges when you set up a business.

Banks have always viewed a start up business as high risk, and as they continue to wrestle with how to deal with the lasting effects of the economic downturn and the associated mountain of regulation, their reluctance to invest in new ventures remains high.

This has paved the way in recent years for a new concept that is fast becoming the investment method of choice for entrepreneurs – crowdfunding.

What remains to be seen is whether this is just a passing trend or a concept that is here to stay. With the Internet and social media having facilitated easy access to wide audiences at the click of a button, the latter seems at this point to be more likely.

What is crowdfunding?

Crowdfunding is a method through which businesses raise money from the general public, typically via the Internet, to finance a business or project.

The initial days of crowdfunding saw charities or disaster relief funds asking the public to contribute towards their cause. But in recent years crowdfunding has grown exponentially with entrepreneurs increasingly turning to it as the means to help raise money for their start up business.

Crowdcube, the current market leader, has seen a huge increase in investment through its platform in recent months whilst worldwide estimates of the crowdfunding industry are now calculated to be approximately $5 billion.

Why is crowdfunding becoming so popular?

The concept is catching on with both investors and investees alike. For the members of the public that contribute personal funds, it is an exciting prospect to be involved in a venture that they believe in. In addition it enables investors to potentially take advantage of the tax relief opportunities offered by arrangements such as the Enterprise Investment Scheme (EIS) and Seed Enterprise Investment Scheme (SEIS) in the UK, which are specifically designed to help small, start up businesses raise money.

For the investee or entrepreneur it is a welcome alternative to approaching a bank for an overdraft or a loan, and having to manoeuvre their way through the tedious terms and legal implications.

And of course the availability of Crowdfunding platforms has helped to fuel interest in this means of funding as with everyone connected to each other online, it’s increasingly easy to reach out to people and get your message across.

How does it work?

At its most basic crowdfunding involves entrepreneurs pitching their business idea on a crowdfunding website and attempting to attract ‘a crowd’ to contribute money to the company.

There are two main types of crowdfunding:

  1. Equity based crowdfunding: currently the most common form of crowdfunding in this instance the investor receives shares and therefore an equity share in exchange for the money they pledge.
  2. Reward based crowdfunding: in this model the start up business pre-sells a product or service to launch the company without giving up equity or building up any debt.

How much does it cost?

Pitching on crowdfunding websites is usually free and the business pitching the idea will have to pay 5% of the target funds raised if successful. If you don’t meet your target you don’t pay a penny although obviously that comes with the disappointment of not raising the money you wanted.

What are the benefits of crowdfunding as a method of raising money?

One of the biggest advantages of crowdfunding is in the network it builds for a start up business. The investors become brand ambassadors for your venture and by promoting the business through their own individual network, it can mean ever increasing awareness of your business in its critical early stages. Can there be a better way of reaching out to the masses than through investors who are as passionate about the success of your business as you are?

Tips for crowdfunding success

  • Be aware of the the levels of commitment the crowdfunding process involves – you will need to actively engage with people, passionately pitch your idea, anticipate your potential investors’ queries and address their doubts.
  • Have a proper plan and strategy in place – think about how you are going to create the proverbial buzz and identify your potential investors.
  • Line up some investors in advance – remember you want to build ‘a crowd’ and people are more likely to contribute to a kitty which already has some money in it.
  • Be open and transparent when dealing with your potential investors – your idea will be subjected to scrutiny and analysed before it is accepted. But it is also in your best interests to see this as a positive process as it will test the viability of your business idea.

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