Which crowdfunding platform should I use to fund my business?
Startups investigates the difference between reward and equity-based platforms
Crowdfunding, the practice of raising money from many different backers (or ‘the crowd'), is still a relatively new concept. Indeed, even the best-known platform, US-based Kickstarter, only launched in 2009 – so you'd be forgiven for being unsure as to which platform is right for your business.
Certain characteristics exist almost across the board, such as the opportunity to upload a video introduction to your pitch, and the all-or-nothing model (whereby if you don't hit your fundraising target, you don't receive a penny). However, the key difference between the UK's main crowdfunding contenders is whether they ask you to offer rewards or equity to your backers.
Reward vs. equity
It is important to evaluate the pros and cons of each model. The reward-based approach is most common as it has fewer legal constraints. This means that if your project proves especially popular, you may be able to raise more than your funding target. This model is well suited to creative start-ups and can provide an opportunity to pre-sell your product and raise money for its manufacture.
However, as many of these platforms use PayPal (or similar payment providers) you need to allow for an additional 2-3.5% charge on every transaction and adjust your target accordingly, to take these costs – plus the commission of your chosen platform – into account. Equity-based platforms generally operate by bank transfer, so are relieved of these additional charges.
Generally speaking, equity platforms are well suited to start-ups requiring larger amounts of finance. But, you will have to decide how much equity you're prepared to give away in return for your investment – based on a realistic valuation of your business. (Of the more than £4m successfully raised through Crowdcube by the autumn of 2012, the average amount of equity released was 16%, and the average amount raised was £146,552).
As crowdfunding involves lots of backers offering small amounts, each individual investor will generally only own less than 1% of your business. However, because your investors will receive equity in your business, they will be much more concerned with the growth potential of your idea and the potential returns.
To meet your target on an equity-based platform you need to not only capture the imagination of the crowd, but demonstrate that your idea makes good business sense. However, thanks to the government's Seed Enterprise Investment Scheme (SEIS) you can also offer potential backers tax relief for investing in your start-up through crowdfunding via platforms such as Crowdcube and Seedrs.
To find out more about the different platforms available, check out our A-Z directory of the most prominent players in the market at the moment.