The idea may be relatively new, but the number of platforms available for investors continues to grow, says Christian Hook
With stories filling the news of raising money for campaigns ranging from community arts projects to investing in start-up companies, crowdfunding is on an ever-increasing wave in the UK and beyond.
But what exactly is crowdfunding?
Imagine being in contact with thousands of people who each want to invest small amounts in your business. That’s the basis of crowdfunding.
The idea is relatively new, but the number of crowdfunding platforms for investors continues to grow – and the sums raised continue to grow too.
Quite simply, it’s good for business and good for investors – and when you add in tax relief from the Enterprise Investment Scheme for qualifying equity investments, then the prospects for a venture get even better.
As the UK Crowdfunding Association points out: “It has been described as ‘democratic finance’, allowing businesses and projects of all forms and sizes access to money while bypassing traditional banking institutions.”
Contrary to popular belief, crowdfunding is not just linked to start-up companies. For example, Chapel Down, an English sparkling wine and beer producer, met the criteria to trade on the ISDX Growth Market and raised some £3.9 million this summer – no doubt helped by a linked discount offer – something which BrewDog, a Scottish craft beer company, has pioneered in its own innovative crowdfunding offerings to date.
It may have kicked off in the USA (with Kickstarter and others) but the UK is an acknowledged leader in crowdfunding and the UK government is keen to see it grow.
The regulators in Europe and the UK have ensured this innovative fundraising area is open to businesses and individuals in so far as lending and equity-based investment are concerned. Crowdfunding investment opportunities are available to more retail investors, complete with appropriate safeguards in place to check that investors are able to understand and bear the risks involved.
So what do you need to know?
For the entrepreneur looking for funding: Anyone can start a crowdfunding campaign but when it comes to equity crowdfunding (and, to a certain extent, loan crowdfunding too) there are restrictions to whom such opportunities can be promoted.
Preparation is everything – with so many projects out there and so many platforms (more than 500 globally, and almost 100 within the UK) a well-crafted, considered campaign will stand out. Figures from crowdfunding platform Indiegogo show that campaigns which use videos raise 115 per cent more money than campaigns which don’t.
Get mobilised with some initial backers such as friends and family. Where the crowd sees a campaign that others are funding, they are more likely to contribute themselves and many platforms are likely to promote campaigns which have a buzz and have already money committed.
Communicate – managing expectations is vital. Keeping backers up to date with the progress of a campaign and engaging with investors can make all the difference in whether the project is successful. It’s important to make sure backers feel involved in the venture they have a stake in.
For investors: The pitch sounds good and looks good – but do the homework on the investment. Good investors spend time thinking about the risks. The investment will have been vetted by the platform but the ultimate investment decision sits with the investor.
Minimising risk means spreading your money across different investment sectors as this can reduce risk when economies go up or down.
Investment is a firm commitment and while investors might get a loan back within the prescribed period, it may take considerably longer to get an equity investment back, which could depend on numerous external factors.
Whether it is investing in equity or lending, the capital is at risk. No surprises there then!
Until recently, financing a business, project or venture involved approaching a few sources for large sums of money – but the internet now allows thousands to be approached for smaller sums. Crowdfunding is here to stay – so make the most of the wave.