What on earth is crowdfunding?

It’s a term bandied about all too readily: need to raise funds for a start-up gin infused with CBD? Crowdfund. Fancy launching a pram that rocks itself (genius!)? Crowdfunding is your go-to cash cow. A little bit like the offside rule however, a lot of us sort of know what it is and sort of know how it works, but if pushed for a solid definition would fall at the first hurdle. Worry ye not, by the time you’ve read this blog, you’ll be a veritable encyclopaedia of all things crowdfunding and can finally set about finding the readies you need to get going on your latest business brainwave.

In essence, crowdfunding is an innovative way of sourcing money for new business ideas and projects using the power of the online community. It taps into the collective efforts of a big pool of individuals – mostly approached via social media and specific crowdfunding platforms such as Kickstarter and Indiegogo – and uses their contacts and networks to get the word out about budding new businesses. It’s a way of pitching exciting business ideas to ‘normal’ people, investors and other entrepreneurs, all of which can invest from as little as £10 to help get the idea of the ground.

The mainstream approach to raising capital to launch a new business or product traditionally means writing a thorough business plan, conducting lots of market research, making a prototype and then presenting that as a fully formed package to wealthy contacts, venture capitalists, angel investors, or banks in the hope that one person, or a small group of people at most, shares your vision and dips deep into their coffers to back you. Your options therefore are instantly limited to a few key players with you and your precious pitch at the wide end of the funnel and your investors at the narrow end; if you don’t aim the funnel at the right person at the right time, that’s not just your time wasted, but could lose you any savings you’ve ploughed in to your idea too.

Crowdfunding flips that funnel on its head putting you at the narrow end on your very own platform from which you can showcase and share as much about your business idea or product as you possibly can to a (fingers crossed) wide range of interested parties having saved time and money searching for potential investors and working out how on earth to get in front of them.

Just before you hit one of the platform links above in an enthusiastic bid to crowdfund for every lightbulb business idea you’ve ever had, raising funds isn’t quite as simple as whether to crowdfund or not to crowdfund. The industry itself has grown rapidly (pretty much in line with our undying devotion to being online) and in growing has had to be regulated (in part) along the way, and of course, there’s no such thing as free money. What investors get in return for their cold hard cash depends upon the crowdfunding model being used, of which there are a few, and which model you choose to adopt depends upon how quickly and in what direction you see your company growing, as well as what the product or service you’re proposing actually is.

Currently, there are four main crowdfunding models, two of which are non-investment models: donation-based crowdfunding and reward-based crowdfunding, and two of which are investment models: equity-based crowdfunding and debt-based crowdfunding (also referred to as ‘crowdlending’). As their names suggest, the donation-based and reward-based models offer no financial or equity return, unlike equity-based and debt-based crowdfunding which offer a financial return via part-ownership, equity shares or interest on an initial ‘loan’. The basic definitions of each model below should help to differentiate further.

  • Donation-based crowdfunding
    Goodwill initiatives, including fundraising for charities, disaster relief and medical treatment. No financial return or reward for the investors or contributors.
  • Reward-based crowdfunding
    Considered a subdivision of donation-based crowdfunding as there is no financial or equity return for the investors or contributors. Instead, campaigns typically involve individuals contributing to a business in exchange for a reward, which is usually a form of the product or service the company offers. Very popular as allows crowdfunders to incentivise those contributing without incurring costs or losing ownership of their idea.
  • Equity-based crowdfunding
    Unlike donation-based and reward-based, equity-based crowdfunding campaigns allow contributors to become part-owners of the company they’re investing in by the trading of capital for equity shares. As equity owners, investors receive a financial return on their investment and a share of the profits.
  • Debt-based crowdfunding
    Also known as ‘crowdlending’, debt-based crowdfunding means borrowing money from a crowd at an agreed interest rate to be paid back over an agreed period of time; it’s a loan, just not from a single individual or institution.

The benefits of crowdfunding are numerous. It’s efficient as it gives you all of the tools you need to streamline your fundraising efforts and build your idea into a comprehensive package that can then be presented to all of your potential investors in one go. Its reach is immense because using a crowdfunding platform gives you instant access to thousands of investors who can then interact with and share your idea with others. From the day you launch, you can use social media to share the proverbial out of your campaign and, when it picks up media coverage, you can direct readers back to your website, so the PR and marketing potential is huge. Plus, crowdfunding allows you to validate your concept; potential investors will inevitably ask questions, so you’ll be able to spot and fix any potential pitfalls making them more likely to buy into your idea.

One last thing: don’t think you need to come up with something hugely complicated or forward-thinking to secure crowdfunding. Across the pond, one day on Twitter, the then Mayor of Detroit, Dave Bing, politely rejected a constituent’s proposal for a Robocop statue to be erected to ‘kick the butt’ of the statue of Rocky in Philadelphia. What pops up in a matter of minutes? A Facebook group called ‘Build a statue of Robocop in Detroit’, which prompted a crowdfunding campaign that successfully raised $67,436 by way of 2,718 investors to help Robocop ‘serve the public trust, protect the innocent and uphold the awesome’, which he now does from the Michigan Science Center. Closer to home, remember the cereal-obsessed twins, Alan and Gary Keery, who set up a campaign to kick off investment for their cereal café – the Cereal Killer café – in Shoreditch? Most people laughed it off as ridiculous, but the only thing they’re scoffing now is cereal at the brothers’ café, which did raise money and did launch to much acclaim. They’ve now got a second site in Camden and charge a whopping £6.90 for a large bowl of cereal; who’s laughing now?

If you’re passionate about a business idea and have been wracking your brains about how to get it off the ground, give crowdfunding a go. Stranger things have happened.

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