I have been asked a few times about my opinions on crowdfunding to raise finance for a business idea. Let me share my thoughts on this approach to fund raising with you, it won’t take long.
At times I have become part of the herd and using crowd funding I have given some of my cash to start-ups in exchange for some share in their business. Four times to be precise, and of those I would consider one of them as now having a good chance of delivering a decent return for my investment. One is almost dead and the final two are pretty much in intensive care. I have only followed on with additional funding for the company that I consider has the best chance of success, so actually my experience as an investor in crowdfunding has been a bit worse than when I have been more engaged and involved in the investments I have made. This should not come as a surprise; my crowdfunded investments are all far lower than those I have made when I have been engaged directly by founders.
I decided before writing this to speak to some founders who have used some of the crowdfunding platforms that are in common use around the world and their stories are consistent.
They tell me the major advantage they obtained from using a crowd funding approach is that it introduced them to investors they didn’t previously know, but many said this was a disadvantage too. Many of their new potential investors asked a lot of questions only the founders could answer. Whereas they had been used to fielding questions from people who were investing tens of thousands of pounds or dollars in their previous ventures, now they had lots of people investing less than four figure sums asking just as detailed a set of questions. Their workload to answer these enquiries increased massively compared to their previous funding attempts. It became clear that this was not “easy money” coming in from very passive investors.
What crowdfunding does is open up share ownership and the potential of high multiples of return to investors who in the past would never have found a way to have this opportunity. In that way it is very beneficial. The fact that somebody can invest ten pounds in a company does make much more cash available to start-ups. Nowadays many crowdfunding platforms will hold these small investors shares in a proxy manner such that the platform is the conduit to and from the company that is gaining the funds, but it didn’t used to be this way and companies found themselves with a very long list of very small shareholders. When you are just starting up managing this kind of shareholder profile can make high demands on your administration burden as well.
Remember, good companies that secure additional funding are those that communicate regularly with their shareholders and even if you do it via email you have to maintain that list. I am now seeing the threshold for entry for some of the crowdfunded listings increase. It is not uncommon for some crowdfunding attempts to include a minimum investment amount nowadays as a way of reducing the number of investors that must be managed.
Now, those may be a couple of the downsides of crowdfunding, but this reach does have some truly good benefits too, apart from introducing the company to new potential investors. Many have told me how the word of mouth generated, and the general buzz set by crowdfunding investors on social media was a real benefit. In fact, your investors are marketing your goods or services for you, and a few of the people I spoke to who were using crowdfunding to help grow their business saw significant uplifts in their enquiries and sales once their crowdfunding campaign had launched.
But rarely does marketing come at no cost and all the businesses talked about how crowdfunding is just the same as angel or early-stage funding. The same things must be done; the same rules apply. You cannot just put your business on a crowdfunding platform and expect people to come running to invest. The old saying is that if you make a better mouse trap people will flock to buy it from you. In my view they will, once you have told them that it exists and shown them that it is better, and that you will be there to service their new mouse trap when it needs it.
So, what else should you expect to have to do if you are planning on crowdfunding your business?
Well, the answer is just the same as if you were trying to raise funding before the internet existed. You must prepare, plan, and talk about it. This means having documents that explain what your business is, expanding on its benefits and differentiators from the competition. You need to get your financials in order and show how you are going to use the funds. You will almost certainly want to create some content to do this and probably create a video that investors can watch. You will certainly need to explain what your go to market strategy is and have a decent marketing plan in place. Remember you are competing for funds now amongst a much wider group of competitors, and a much broader audience of potential investors. You must stand out, just like you always did.
Interestingly it seemed to me that in talking to founders who had successfully met their targets for crowdfunding their business there was something else they had in common. The early, more significant investments, for higher sums of money (five figures and above) were normally obtained long before the crowdfunding campaign started by using the older method of talking to your contacts and network. These investors give credibility to your campaign because people are risk averse and want to invest in businesses that others have already committed to. It’s the herd mentality you want to benefit from. You want investors to be thinking “well those guys put a lot of money into this, it has to be a good opportunity”. So even when crowdfunding I would advise you to do the “hard yards” before your business hits the crowdfunding platform. Do the work to secure one or two of these committed early-stage investors to act as the bedrock to your campaign that others will then join with and build on.
The other thing to recognise is that crowdfunding because it is carried out on the internet, appears to be fast, but often it isn’t. It is not just all the work you need to do to get your campaign ready, which may take months. When your funding round closes it may take weeks or even months to cement all the legal activities that must happen before you can start using funds, so plan in advance.
So, would I use crowdfunding for any new business I build in the future?
The answer in my case is a resounding no. But I would consider using crowdfunding for an early-stage business where I wanted to grow, and my earliest investors were perhaps now unable to provide the funds for me since the business probably needs bigger investment than the earliest investors have available. So, in that spot between having a business and looking for venture capital, I think crowdfunding has its place, but I would shop around hard for the platform I used to place my business.
I would want their fees to be realistic and their help to be expert. I would want to know they had access to a ready audience of committed, knowledgeable investors and I would certainly use them to help me value the business and “dress it” for sale on their platform.
I would not crowdfund until I had a minimum viable product and a decent if not comprehensive social media presence and some sales under my belt. All these things add credibility to the pitch you are making on the crowdfunding website. I would certainly not want to crowdfund until I had secured those one or two major investors I spoke about, who were going to act as my bedrock in the campaign and who would commit as soon as the campaign became live.
I think these things give a crowdfunding campaign a better chance of success, but I would only use it if all other approaches I had tried had not been successful.
I am sure those of you reading this will be able to quote examples of start-ups that have been massively successful by using crowdfunding from the start. As in all things in life we must make choices and take risks, I know where my decision would lie.
