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Getting the crowd on your side: a SBH guide to crowdfunding

Yesterday, we took a cheeky look at how to start a business using your own funds as part of our series on small business funding. But many of you looking to raise money for your business ventures may find you need to look further afield than your own bank account. If you’re after outside funding, why not consider crowdfunding?

What exactly is it?

Put simply, crowdfunding is a way of financing your business by getting a relatively large group of people to each make relatively small investments in your business. It’s become kind of a big deal in recent years thanks to the advent of online crowdfunding websites (nifty little list provided below!). These websites host  pitches from entrepreneurs for anyone to view and invest in.

Is it right for me? The pros and cons of crowdfunding

Crowd funding can be a great way of getting that much-needed cash into your new business venture. But it doesn’t come without its drawbacks, so make sure you’re aware of what’s involved.

Pros
  • For entrepreneurs who can’t get VC or angel investment, crowdfunding can be a great way of raising capital (so long as they have a good idea!).
  • Raising funds for your business can be a pretty tedious and time-consuming process. Although crowdfunding requires a lot of effort, the time and cost can be lower than other forms of external funding.
  • Successfully gaining crowdfunding goes a long way in validating your business idea – the more people who believe in your idea, the better!
  • Crowdfunding creates a large base of people ready to endorse – or even buy – your product or service once it’s created.
  • Entrepreneurs seeking crowdfunding are often forced to get uber-savvy with their marketing activities, using social media, video and email marketing to get the word out. This stands them in good stead for future marketing activities, creating ready-made networks and channels.
Cons
  • Crowdfunding is often completely all-or-nothing. If you fail to reach your fund-raising goal, most crowdfunding platforms won’t pay out.
  • If your product is a B2B one, crowdfunding is unlikely to be effective.
  • The process of facing investors one-on-one is an extremely valuable exercise in convincing people of your business model and getting feedback and criticism. This can be lost in crowdfunding.
  • Showcasing your amazing ideas on a crowdfunding website can put your intellectual property at risk.
What’s out there?

There are heaps of different crowdfunding platforms for different types of investment in different types of projects. For a comprehensive database of these, check out www.crowdingin.com.

Generally speaking, types of crowdfunding can be split into the following models:

  • Donation – sourcing donations from the crowd for your project. You’re not expected to pay these back (which means they’re much harder to secure!).
  • Reward –sourcing investment from the crowd in return for the promise of reward at a later date (such as if you’re a musician funding an album in advance – those giving money get an album at the end of it!).
  • Lending –borrowing money from a small group of lenders, who you will have to pay back with interest.
  • Equity – getting investment from the crowd in return for a small stake in your business or project.
First-hand experience

Righteous, the  healthy salad dressing business, is owned by Gem Misa and went in for two rounds of crowdfunding on Crowdcube; first for £75,000 (in February 2012) and then for £125,000 a year later.

“Both pitches were successful and I believe the secret to our success was in careful preparation. We ensured that we had a great product, proof that the product can be successful, a solid business plan and a great video to bring our vision for the business to life.

“We also worked hard on campaigning to tell more people about our project and get more investors on board (not just relying on the current investors on the crowdfunding site), so we lined up meetings with possible investors even before our pitches went live.

“My biggest piece of advice is to test your product or idea in the market to see how receptive people are to it.  Investors always rely on early indications of success of a product before they invest.”

For more tips about crowdfunding, read:

  • This blog post on how to crowdfund
  • These ten and a half tips on how to help reach your crowdfunding goal by Nesta
  • These tips from the Guardian from those who have successfully secured crowdfunding
Reading list
  • The Everything Guide to Crowdfunding: Learn how to use social media for small-business funding Understand crowd psychology Gain an online presence … your campaign to reach hidden funding sources, by Thomas Elliott Young
  • The Crowdfunding Bible: How To Raise Money For Any Startup, Video Game Or Project, by Scott Steinberg
  • The Crowdfunding Revolution: How to Raise Venture Capital Using Social Media, by Kevin Lawton & Dan Marom
  • Crowdfunding for Filmmakers: The Way to a Successful Film Campaign, by John T. Trigonis
  • The Secrets of Crowdfunding: A Step-by-Step Guide to Getting the Most From Your Kickstarter Campaign, by Sean Akers
  • Equity Crowdfunding: Transforming Customers into Loyal Owners, by Jonathan Frutkin
  • Crowdfunding Secrets: Tips, Tricks and Secrets To Funding Your Dreams, by John Lewis
  • Unlocking Kickstarter Secrets: Crowdfunding Tips and Tricks, by Mario Lurig
  • Crowdfunding in Action – Launching Your Dream Right, Right Now, by Clint Bowers & Frank Hall
  • CrowdFunding Explosion, by Richard Encarnacion
  • The Kickstarter Handbook: Real-Life Success Stories of Artists, Inventors, and Entrepreneurs, by Don Steinberg

Check out the rest of our small business funding series!