Crowdfunding your start-up: Learn the basics from Crowdcube
One of the UK's fastest growing alternative finance options, find out how crowdfunding works in this explainer guide from Crowdcube
As a start-up or small business, you may already be familiar with the difficulty of securing the finance you need to scale.
For many start-ups and new businesses, offers from the banks can seem to be few and far between, and trying to get in front of a group of angel investors can be tough, as well as time-consuming.
If you’re looking to raise finance for your business, there are a few options you can explore including secured or unsecured debt, private equity, venture capital investment, peer-to-peer (P2P) lending and crowdfunding.
Some of these options will suit your business more than others and decisions will be based on the level of risk you’re willing to take, whether your business has any assets, the size of your business and how much capital you need.
An introduction to crowdfunding
In this article, we’re going to look into crowdfunding in a bit more detail and some of the different models available. Some of the more popular crowdfunding models include reward-based, donation-based, micro-lending, P2P, peer-to-business and equity.
What you might not initially realise is that crowdfunding can offer multiple benefits for your start-up or small business other than just the monetary gain.
Having access to a large crowd who are engaged and interested in your business idea is great for measuring the demand for your product/service. Appearing on a large platform also gives you the opportunity to raise interest and awareness about your business which may not have been as easily achievable in isolation.
This increased awareness of your business can have a direct and positive impact such as driving traffic to your website, social media or store etc. Additionally, having conversations with potential investors can also help highlight or even discover hidden strengths or potential weaknesses with your business plan, which you can then go on to address.
A wide variety of businesses across various sectors and stages can raise through crowdfunding.
The difference between reward-based crowdfunding and equity-based crowdfunding
Rewards-based crowdfunding will most frequently list products, services, projects or simply a business idea, allowing the crowed to pledge an amount of money for a reward. Structures are tiered to reward the largest backers to receive the highest value or most unique reward.
The amount companies raise on reward-based crowdfunding platforms, like Crowdfunder and Kickstarter, can be anything from £500 up to £1m.The most popular bracket for Kickstarter rounds is between £1,000 – £10,000.
Equity crowdfunding works slightly differently.
Generally a business has some traction and is looking to raise anything from £50,000 to around £4m (€5m under the current EU Prospectus rules) or more under a Prospectus. This has been demonstrated by Crowdcube’s equity crowdfunding raise of just under £8m in 2016, which was co-funded by Balderton Capital, a venture capital firm that invested £1m alongside the crowd into this funding round.
Equity crowdfunding as an industry, over its six-year lifetime, has raised about £600m in the UK, with close to half of that having been raised by Crowdcube. Equity crowdfunding facilitates investment into start-ups, early stage businesses and growth companies in return for a pro-rata equity stake in the business.
Equity crowdfunding in focus
The type of businesses available for investment through equity crowdfunding is increasingly diverse, giving investors the opportunity to hand-pick the businesses they want to back.
Investments can be made from as little as £10 with no maximum in place, which typically culminates in pro-rata ownership of the company via ordinary or B investment shares.
Primarily investments are made with the end goal of making a return within, on average, a five-10 year timescale, via a liquidity event such as a trade sale, in some cases a share buyback or secondary market or in rare cases an IPO.
The potential returns are significantly higher on the equity side of crowdfunding but so are the risks – given the fact that a reasonable proportion of start-ups fail.
A final, rather important, consideration on the equity side of crowdfunding is the government tax incentives. Early stage businesses in a large number of sectors are able to apply for tax relief such as SEIS and EIS, which enables eligible investors either a 30% or 50% tax relief on their investment with the aim of de-risking investments into start-up and early stage businesses.
You may have also seen the likes of BrewDog, River Cottage and Grind raise money through bonds on Crowdcube. This is where a company launches a funding round starting from at least £250,000.
By the crowd purchasing debt in your company, in this case through a bond, investors become a creditor to the company and get rewarded with regular interest payments and the full amount invested is received at the end of the bond term.
BrewDog raised £10m through a bond in December 2016, offering 8% interest to the investors. Over 2,700 people backed BrewDog in three weeks and should see interest payments for the next four years; the length of the bond term.
Why crowdfunding could be the finance option for your business
Looking at the crowdfunding scene in the UK, a variety of sectors and stages of businesses are raising capital through mainly equity crowdfunding and some bonds.
When we analyse investment statistics across the sectors, finance and biotechnology have seen the highest amount of investor returns, and institutional co-investment partners are currently shaping the future of equity crowdfunding. This has been seen in recent raises such as Vita Mojo and Money Dashboard; which both raised over £1m on Crowdcube.
This association between corporate venturing and crowdfunding makes a lot of sense. On one hand, the crowd validates the consumer proposition for these behemoths that may fail to appreciate true customer demand.
On the other, the corporate backing validates the valuation, market potential and viability for non-sector specific crowd investors.
A majority of the UK’s top tier VCs and several well-known corporate venturing arms have invested through crowdfunding platforms.
As a result of early and growth stage businesses receiving this co-funded investment, we’re now seeing a marked shift of equity crowdfunding as ‘alternative finance’ to quite simply an investment marketplace model.
If you’re looking to turn your idea into a reality or grow your business to the next stage, whether it’s through crowdfunding, co-funded rounds or you want to find out more options, there are a variety of finance routes you can take. You can find out more here in Startups.co.uk’s raising finance channel.
Think your business is ready to crowdfund? Start your crowdfunding pitch by completing this form and we’ll see if we can help.