Every week our team talks to companies who have decided to raise money from the crowd. Yet the number of those who actually go on to launch an equity crowdfund is significantly less. Given the companies in question still have their primary goal of raising funds, why is there such a drop-off rate and what can they (and their advisers) do to mitigate this?
Crowdfunding is still given a hard time by people entrenched in traditional funding methods, but it’s a serious business now and anyone treating it frivolously won’t get very far.
Professional advisers must ensure the companies in question are well aware of what lies ahead, and go into the process with their eyes open (as we would for any form of investment). If crowdfunding is not right for a business at that moment, they shouldn’t pursue it.
The biggest pitfalls are fairly predictable. People see the likes of BrewDog raising millions and think it will be easy money, but when they discover what an equity crowdfund entails they think again. Without exception, every client we have worked with who has successfully raised funds from the crowd has put in an enormous amount of time, commitment and energy.
Then there is the crowd itself. No platform is there to do all the work and the successful campaigns are those where the founder has utilised their network to bring investors to the raise – effectively they have their own mini-crowd in place before they start.
However, as the crowdfunding market continues to mature and get more sophisticated there are a number of ways to increase the chances of success. The most important of these is building the right team.
Crowdfunding is like everything else in life – the chance of doing it successfully increases if you are surrounded by the right people. The team for pulling off something which has the potential to deliver so many benefits to a business requires many people, but there are five key members a company must start thinking about from the start.
1. The Platform
There are a number of platforms to choose from and they are not the same, so review the merits of each one carefully. The platform is central to the entire campaign so picking the right one is critical. In the spirit of full disclosure, Harper Macleod has teamed up with Crowdcube – which has had more than £500 million pledged and has seen more than 700 successful raises on its platform – to offer added value services to businesses looking to crowdfund.
2. In-house team
After a platform has been selected, consider the skillset within your company’s team and their capacity. Crowdfunding successfully needs experts in a host of areas such as marketing, financial and legal. Even if there are in-house experts who could potentially carry out the various required functions, do they have crowdfunding experience and the time to devote to the crowdfund? If not, reach out to the crowdfund ecosystem and get help. Even if there is an in-house team with the time and skill, could the raise be done better by getting external help?
3. Crowdfunding consultants
Crowdfunding consultants vary in the services they perform, and range from helping educate a founder on the practicalities of running a crowdfund to dealing with all elements of the crowdfund. The extent of the company’s resources and capacity will impact on what type of consultant will work best.
A company needs to be fully finance ready. It may be that the company has got the skills in-house to develop a funding strategy, build a pitch deck and so on, however if not the company should bring in experts to assist with these areas. As is the case with all advisers, when picking financial advisers be sure they have the experience to deal with a crowdfund raise.
When a company raises money from the crowd there are numerous legal factors to consider throughout the process. Before launching a crowdfund the company needs to gets its house in order and get crowdfund ready. Thereafter, it needs to think about how the various shareholders will work together for the benefit of the company in the short and long term. This is particularly the case as crowdfunds are getting more complex.
Balancing the different drivers of all interested parties requires careful thought and market insight.
Jo Nisbet is a partner in Harper Macleod’s corporate team