How can my start-up raise money through crowdfunding?

Crowdfunding or, more strictly, equity crowdfunding is a way for companies to raise capital by selling their shares via an FCA-regulated platform. Private investors who like the company or idea can invest as little as £10.

How many crowdfunding platforms are there in Britain?

There are two main platforms based in the UK – Seedrs and Crowdcube and a variety of other platforms which offer different versions of the same thing.

In addition to the UK platforms, there are two US-based rewards platforms that accept UK projects – Kickstarter and Indiegogo. These do not deal in equity. The main advantage to using these platforms is that they offer a larger pool of potential investors to start-ups that might appeal to a global audience. Kickstarter is the more established of the two in the UK, having allowed UK businesses to pitch projects since 2012 and which had reached over £1m in British only funding by 2016.

Crowdfunding platforms around the world

Below are details of crowdfunding platforms both in the UK and other parts of the world.

How big is crowdfunding in the UK?

Equity crowdfunding in the UK started in 2011 and has grown to levels where it is now described by some commentators as being in the mainstream. I think this is an exaggeration but here is some data to give you an idea:

• The platforms themselves put the total raised from 2011 to 2018 at between £800m and £1bn.
• Figures published by CrowdfundingHub estimated a total of c.£230m in equity crowdfunding for the year 2019.
• Etienne Paresys from Equity Crowd Expert Ltd., estimated that 433 crowdfunding campaigns raised £332m in 2020.

Which is the best crowdfunding platform, CrowdCube or Seedrs?

Horses for courses. Crowdcube are larger than Seedrs and have been going longer. But Seedrs offer a different package based on a nominee structure and have more thorough due diligence – although, in my view, even this is not good enough. If your company is looking at maximum coverage then Crowdcube might be an option but if you do not want to be dealing with hundreds of individual shareholders, then Seedrs could be your choice. Syndicate Room no longer deals directly with the public and is only used for later and larger rounds involving VCs and Angels.

How much will a crowdfunding campaign cost me?

You can spend as much as you like but one of the key ideas for businesses raising money this way is that it is cheap. The platforms will only charge you on a successful campaign – anything from 4 per cent to 8 per cent of the total being raised. Creating the campaign is the only real upfront cost – the video and pitch deck and this will come in at around £5,000. And of course, the time it takes you when you are not 100 per cent concentrating on running the business. You might take on a specialist consultant to help the campaign succeed but most of that cost is backend, once the campaign has succeeded.

How do crowdfunding platforms make money?

The platforms make their money by charging a commission on the money raised in a successful campaign. If the campaign fails to get over its target, then no money changes hands and the investments are null and void. Seedrs also take a retainer fee and an uplift, post-campaign, should the company go on to exit.

‘A campaign that fails to get over 30per cent of its funding early on, finds it very hard to complete’

How can I prepare for crowdfunding?

Businesses need to be very clear about why they are raising the money – investors want to know what their cash will be spent on and how this will propel the company forward to what could be a successful exit and a ROI for them. So, you need a well-written and thought-out plan, a clear indication where the money will be spent and when, plus sensible projections.

Once this is ready you apply to the platform of your choice.

It is worth noting that their online application forms are pretty hopeless, so you should send one in but also follow it up with a fuller application via email.

Businesses must also be aware of the 30 per cent rule. Research clearly shows that a campaign that fails to get over 30 per cent of its funding early on, finds it very hard to complete. The platforms now insist that you have between 30per cent and 50 per cent preloaded before they will launch your campaign to their audience. Normally the campaign will launch in private mode when your contacts can invest – bringing you up to 30 per cent and over.

As a general rule, equity crowdfunding should be used to connect you with your customer base for support and you shouldn’t rely on the platforms to supply investors.

What do I need to include in my crowdfunding pitch?

You’ll need a business plan and pitch deck that are tailored for the type of funding, plus a three-minute video.

The pitch needs to tell a compelling story that has a believable outcome. It is no use using a pitch deck that you presented to your local angel network. Equity crowdfunding requires a different kind of approach to hook the crowd. That is why many businesses use ECF (equity crowdfunding) consultants.

How long should a crowdfunding campaign last?

Most platforms will give you between 30 and 60 days live. But it can take up to two months to prepare the pitch and put it through the platform’s due diligence checks. We recommend allowing three months in total as a minimum. If your campaign is almost complete and your time runs out, platforms will generally give an extension. They are, after all, as keen as you are to get you over the line.

Who uses crowdfunding?

Any limited company can use equity crowdfunding. But it is best suited to new businesses (less than seven years old) due to the rules on S/EIS tax reliefs for investors. And it is only suitable for a business that has some idea of how it is going to exit to give investors a ROI.

How many crowdfunding campaigns have been successful?

We don’t have an exact figure for this and much of the data out there is tainted with fake results. We have a database of over 1,200 funded companies. Fair to say the numbers are increasing year on year and that this form of funding is now becoming widely known. Unfortunately, much of that notoriety is for the wrong reasons.

Why do some crowdfunding campaigns fail?

At any one time on the larger platforms there might be 20 to 30 live campaigns. Roughly 60 per cent of these will fail. Reasons for failure can vary but the most common are:

• Poor presentation and plan
• Non-scalable idea/poor idea
• Failure to complete 20 per cent to 30 per cent of their own funding before launching
• Overvaluation
• Picking the wrong platform for your business

Is crowdfunding a pyramid scheme?

No.

Is crowdfunding regulated in the UK?

Yes. Equity crowdfunding is regulated in the UK by the Financial Conduct Authority (FCA). The risks of investing in ECF are very high and the shares you buy will be illiquid unless the company is sold or IPOs. A few have arranged private share sales, but their number is very limited. There is currently no reliable secondary market. Any loss you may suffer is not covered by the government’s compensation scheme, so you will rely on the tax breaks when you invested and claiming loss relief.

What do investors get from crowdfunding?

Equity crowdfunding gives investors a chance to be involved in young businesses. They will invest based on a chance of some return on investment at some later stage but can also invest small amounts based entirely on the rewards being offered. Small investors will often see their money returned via the tax breaks and the perks. And good companies will try to involve all investors in the growth of the company – so the experience can be rewarding in itself.

If I’m an investor, where can I go to for advice?

You can visit The Crowd Investors Network. This will give investors all the information and tools they need to make well informed decisions. It has a database of all the businesses funded this way since 2011 and a forum where investors can discuss all things to do with sector without fear of being censored. It also has advice for start-ups and young companies who wish to use equity crowdfunding to raise capital.

Rob Murray Brown is publisher of ECF.Buzz, the Crowd Investors Network, an online resource for all things crowdfunding

Further reading

How to launch a successful crowdfunding platform