Crowdfunding a start up options explained for businesses and investors

Crowdfunding a start up requires research, whether you are doing it for your own business or looking from the point of view of an investor. Charlotte Simmons from hiyacar explains.

 Crowdfunding a start up

Crowdfunding a start up brings to mind the statement ‘Nothing worth having comes easy’, never truer than in the case of launching a start-up. Getting a new business off the ground will often require capital. Something which a lot of people don’t know how to go about getting.

There are lots of ways in which businesses can look to get funding for a start-up.

But before even researching any funding opportunities, there must be a business plan in place, giving the business owner (and whoever looks at it) a clear understanding of how the business will operate – thus increasing their chances of securing funding. A business plan should incorporate a clear description of the business, tailored market analysis of competitors as well as the market as a whole, the company’s structure, with clearly defined roles of everyone involved and realistic financial projections across a timeline of around three to five years.

If this is all in place the business owner or entrepreneur is ready to start looking at funding. crowdfunding has gained incredible popularity in the last decade or so as a great way to start a business, gaining brand awareness and customer interaction before a start-up has even launched. Whether the plan is to solely fund a start-up using crowdfunding or simply use it to cement further investment elsewhere, there are four different ways of crowdfunding, all of which will depend on what type of business is seeking the funding.

These are:

  • Reward based crowdfunding;
  • Equity based crowdfunding;
  • Debt based crowdfunding, and
  • Donation based crowdfunding.

Reward

Reward-based crowdfunding is perfect for new projects yet to get off the ground. How it works is people pledge money in return for a reward – this can be anything; the more money pledged, the higher-value reward expected. This type of crowdfunding doesn’t solely depend on convincing investors to part with their money and the business owner remains sole owner of their start-up business. It’s all about having a good idea people want to support – i.e. the future customer. If a start-up doesn’t meet its crowdfunding goal, it can go one of two ways; it’s a great way of showing potential investors that there was interest (maybe you overestimated the goal), or investors might be somewhat reserved to invest in a start-up that publicly failed. This is considered the ‘safest’ option for pledgers, also, as they don’t lose out if the start-up does fail to reach its target.

Equity

Namely for businesses already launched but looking to grow, equity-based crowdfunding is essentially more than one person purchasing equity in the business. As an example, the start-up owner may decide to sell off a percentage of their business in return for funding. Investors would then decide how much, if any, of the percentage they want. For example, if they offered up 20% of the business in return for £100,000, they’d get investors bidding for stakes, for example one investor could stake 10% for £50,000. This type of crowdfunding is dependent solely on the future of the business, as opposed to having to fulfil all rewards from pledges accrued with rewards-based crowdfunding. It’s wise for the business owner to seek legal advice when introducing stake holders and ensure there are contracts so they don’t lose what was their idea in the first place. This will help to prevent any future potential disagreements.

Debt-based

Debt-based crowdfunding is a peer-to-peer lending service. It works much in the way of having a traditional loan; the owner will be evaluated on their credit score ahead of receiving any funding but they would be borrowing from a number of different investors or schemes as opposed to one bank, for example. The owner would then work with the investors to agree an appropriate term and interest rate. Funding Circle is one of the most popular peer-to-peer lending services for businesses in the UK. Businesses will be credit-assessed, as with any other loan, and they will accrue interest on it. This form of funding is typically suited to more established businesses that are in need of a quick cash injection for something but know they can return the money in a timely manner.

Donation-based

Typically, donation-based crowdfunding really only works for projects or businesses that have a very strong social cause – such as charities, non-profit organisations or those working toward giving back to the community in some way, ie the money isn’t for the business owner or for their own personal monetary gain. Donation-based crowdfunding can mostly be compared to reward-based crowdfunding – working much in the same way, only without the individual reward.

There are a number of crowdfunding websites which can be used to raise capital. Kickstarter, Indiegogo, GoFundMe, and CrowdFunder as just a few examples, all of which work in a similar way. It’s important the business owner decides on the type of crowdfunding they are looking to pursue first and go from there, as some of the aforementioned sites will be more investor based. With the right choice made and the business proposition promoted and marketed correctly, it’s possible to raise a lot of money. One example of huge success in Crowdfunding is by the Oculus Rift company – now owned by Facebook. It launched a campaign on Kickstarter with a goal of $250k and ended up raising $2.4m. We used equity-based crowdfunding in the early days, too. With an initial target of £300,000, the campaign overfunded by 215%.

Marketing is often the make or break of any crowdfunding campaign. Businesses should consider the use of social media platforms alongside crowdfunding efforts. Using sites such as Facebook, Twitter and Instagram to reach the end user is a great way of creating awareness, as well as the use of LinkedIn as a way to get buy-in from potential professionals and investors. The business seeking funding should employ every platform they can alongside their crowdfunding campaign – working in tandem – to raise as much awareness as they possibly can and to reach a much wider audience in order to educate investors about the start-up and how they can get involved.

Charlotte Simmons is community growth and content manager at hiyacar.

Further reading: Crowdfunding – looking beyond equity investment

 

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