Equity crowdfunding explained: 5 things for start-ups to consider
As ambitious entrepreneurs up and down the nation seek alternative ways to fund their business models, crowdfunding continues to gain traction as a popular road to healthy investment. With three mainstream platforms now operating in the UK – Syndicate Room, Seedrs and Crowdcube – ‘unlisted’ companies are able to raise capital by exchanging their shares via an FCA-regulated platform (with private investors able to back a business from as little as £10). While previously exclusive to venture capitalists and private ‘angel’ investors, crowdfunding also makes the act of investment more accessible, and thus the pool of potential investors far greater. For business owners crowdfunding for the first time, here’s five things to consider before diving in head-first.
1. Preparing for a campaign
When readying your first crowdfunding campaign, begin by asking what any investor would want to know: how will the money be spent? How will this convert to ROI further down the line? With clear direction from the outset, realistic projections can also be made so as to set expectations. Equipped with a well-thought-out plan, the next step is to carry out research on the current platforms available (and what they can do to propel your vision). Start-ups should also take note of the 30% rule; by activating your campaign (in private mode) preloaded between 20-30%, your project stands a better chance of sparking interest – and thus surviving the long-haul.
2. Perfecting your pitch
While the thought of planning a pitch may seem daunting and time-consuming, this really is your time to shine when it comes to attracting prospective investors. Though getting it right first time can prove tricky, try placing yourself in the shoes of your audience; does your campaign inspire with a human story at its heart? Pitches tend to comprise both a business plan and three-minute video, so take the time to rehearse your script in front of friends (or better still, a fellow colleague). Remember to tailor your pitch to a broader audience should you have targeted angel investors in the past, avoiding any form of exclusion.
3. Considering the cost
The total fee of a crowdfunding campaign is largely down to you. Up-front expenses, such as hiring a videographer or writer for your pitch, often form the main part of this sum; if successful in your funding, platforms tend to charge anything between 4-7% of the figure invested. Owners should also factor in time spent away from the everyday running of a business, and whether this could be better managed by delegating to other team members. After having been accepted, the majority of campaigns will be set live for a minimum of 30 days. When plotting this out, don’t underestimate the time it takes to sufficiently prepare your pitch.
4. Succeeding first time
Like with all forms of financial backing, the fear of failure can often stand between an entrepreneur and their next great idea. While crowdfunding does offer a more cost-effective route to investment, it’s important to realise that even the best ideas can sometimes fail – regardless of the sum you are hoping to raise. With another 20-30 campaigns likely to be live at the same time as your own, you’ll be competing against other start-ups – often hoping to attract the same investors. For this reason, you’ll need to ensure the following are met: a sound business plan and video pitch with realistic projections, a campaign that’s at least 20% funded, and the right platform-match for your project.
5. What’s in it for investors
Crowdfunding is a great way to attract and form longstanding relationships with all manner of investors during the early years of your venture, which in itself can be very rewarding. Similarly, investors who choose to back your idea will have the exciting chance to be part of a young business, and the opportunity to invest more manageable amounts in accordance with its maturity. Established investors who see true potential in your company may choose to give more based on future return on investment – another reason for entrepreneurs to think carefully when finalising their pitch. Whomever you choose to partner with, ensure that you remain on the same page throughout your journey.
Starting a business for the first time can prove both exciting and daunting for any entrepreneur, as can seeking the right advice. Adams Moore offer a wealth of expertise and guidance on all manner of key considerations – from your first year end accounts through to trading. Get to know us by reading our business start-up advice, or why not get in touch to discuss your dream plans further.