Crowdfunding is a way of raising money from a wide range of different people.
You can find out about crowdfunding and whether it might be right for your business here.
There are four different types of crowdfunding categories: donation crowdfunding; rewards-based crowdfunding; peer-to-peer crowdfunding and equity crowdfunding. They basically work in the same way, where they differ is in how you return a benefit to your supporters.
This is the simplest way to raise small amounts of money. People donate money to you to help your business and don’t ask for anything in return except to be updated on your progress. Usually best suited to local initiatives and social enterprises. Have a look at GoFundMe.
With rewards-based crowdfunding you set up a range of different rewards, such as a first sample of your product, a t-shirt, meeting with the founder, etc. in return for different levels of pledges (i.e. money). You don’t release any equity or shares in your business and you use all the money you raise to fund your business. It’s quick, cheap and effective and helps you build a great customer community… but it does take time before, during and after to run a great campaign and communicate well with supporters, even when you are raising small amounts of money. Examples include RBS Back Her Business (which is on the Crowdfunder platform), Indiegogo and Kickstarter.
This type of crowdfunding is sometimes called ‘debt crowdfunding’. People pool their money via a platform and the platform then lends that money to businesses. As the company becomes successful, the money that has been loaned is paid back to investors with interest. It’s a bit like getting an unsecured loan from a bank (i.e. you don’t have to give any security such as your house or business premises to cover the risk in case you are unable to pay back the loan). However, it is still debt (and whilst women are certainly not ‘risk-averse’, we can sometimes be ‘debt averse’) and it can cause additional pressure for you as a business-owner to keep up with payments. Have a look at platforms such as LendingCrowd and FundingCircle.
With equity crowdfunding you release equity (shares) in your business to a group of investors in return for money. It’s a bit like raising money from business angels or venture capital firms. For example, you value your business at £1,000,000 and want to raise £250,000, so you make available on the crowdfunding platform 25% of the equity in your business to other people. You can raise the money you need from 250 people investing £1,000, 25 people investing £10,000… or any combination of amounts. There is usually a minimum amount to invest (it could get tricky communicating well with a large volume of shareholders whilst you are starting up!) and you really need a professional and thoroughly diligenced business plan and fundraising campaign.
This route is best for raising large amounts of money and you can really benefit from the ongoing involvement and support of experienced investors… but remember that once you have raised this money your supporters are shareholders in your business for the long run. You need to communicate with them well, share a lot of information about your business and will be subjected to ongoing scrutiny about your company’s performance. Have a look at these platforms Seedrs and CrowdCube.
Start Up Loans has some good more detailed information about different crowdfunding options. Really take time to explore the different options and platforms available – which one you choose may depend on what stage your business is at and how much money you need to raise. Look at what other companies similar to you have done to get ideas and insights and remember at the heart of crowdfunding is the crowd – the community – and you will succeed best when you win them over with your authenticity, trust and passion.