Should I raise money from Crowdfunding?
What is crowdfunding – what type of businesses should use this as a way of raising money – where do you start, who do you use and what’s it really like?
In recent years, a number of businesses have turned to crowdfunding platforms to raise capital both in the UK and overseas as one element of their overall growth strategy. In our latest blog on raising capital we’ll give you some hints and tips and what to look out for.
Is it for my business?
Well in theory it’s for any business, but if you’re B2C then it’s more of an attractive proposition as you already have an existing customer base who may want to be potential investors because at the end of the day, you need a crowd to do crowdfunding!
Who do I use?
There are a number of companies out there who specialise in crowdfunding. The best known in the UK are probably Seedrs and Crowdcube. If you’re more of a creative business you may want to look at Kickstarter.
The best way to think about the providers is that they are effectively marketing platforms for your deal. They will charge you a percentage of the sums raised and some of them charge additional fees for extra promotion and similar support services. Expect to pay circa 7.5% to the platform provider for their services.
Do I have to raise money myself?
Often YES. In some cases, before you can advertise your deal on a platform, you have to have already raised at least 50% of the target sum from friends and family or angel investors. To some degree this is human nature – who’s going to invest in a company which looks like nobody is interested in it. So if you haven’t got investors lined up for at least half your target raise amount, then the platforms may not want your business I’m afraid. This comes as a shock to many people so be warned and be sure to be lining up meetings with investors yourself in addition to the crowdfunding platforms.
How does the investment get made?
Generally the investors invest via a Special Purpose Vehicle set up by the platform so you only have a single entity on your Cap Table – and not “Mr and Mrs Jones from Grimsby who have invested a fiver”.
How do I work out the Valuation?
You may have an idea in your head, but ultimately it’s going to be your lead investors who will determine the value at which they will invest at. Once you’ve agreed that, then the rest of the crown will be offered the investment opportunity at the same valuation.
How much work is it?
Don’t underestimate this. Raising money through crowdfunding can suck up a lot of time and effort. The platforms often want to do some due diligence on you before they let you on, then there is the deck, a video in most cases and you have to respond to any questions and queries that come in from potential investors. Then there are things like the legal, tax relief stuff and everything else you’d expect from doing a deal.
Read the small print
In some cases, the platform company may ask for particular rights under the terms of the agreement. This is partly because they want to protect their investors, but also of course to protect their position as they control the Special Purpose Vehicle. So read the terms carefully and if there are things you’re not sure about, then take some professional advice.
How long does it take?
Bank on the process taking around six months from start to finish given all the different elements of the process. This isn’t a quick fix for your funding needs.
But should I do it?
For the right business, it’s a great way of raising capital. You can give your customers an opportunity to invest in your success and be part of your journey and it can be amazing PR. But it’s not a shortcut or an easy way to get cash into your business and shouldn’t be taken lightly as with any fundraising.