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How to raise money through crowd-funding
Turning fans into shareholders is an increasingly popular way to raise cash. Here’s how to do it.
Once a pipe dream feted by funding-starved start-ups, then a niche-source of finance for tiny businesses, crowd-funding today has come to be seen as a viable and useful way of raising funds and getting your business’s name out there. High-profile companies have used the method to raise cash, and it can also get you a legion of brand advocates. But how do you make a success of it?
It’s worth noting that there can be some confusion over the term crowd-funding. Debt crowd-funding is often referred to as peer-to-peer (P2P) lending and offers businesses and individuals the chance to borrow from a vast number of savers. Rewards-based crowd-funding helps businesses raise the money to bring a product to market, in return for the product itself. This guide is focussed on equity crowd-funding, where you give away a portion of ownership of your business in return for an injection of funds. This is probably the best option for serious businesses looking for a relatively large amount of growth finance.
In essence, equity crowd-funding gives you access to tens of thousands of armchair angel investors, who are usually looking to spread their risk by betting on multiple early-stage, and some mid-sized, companies. But you need to put in the effort to make sure they go for yours.
1. Choosing a platform
Some businesses choose to create all the infrastructure of their crowd-funding around themselves. Scotland’s most controversial beer maker BrewDog, for instance, has had great success with its Equity for Punks scheme. Chances are, though, you’ll be better off choosing to work with one of the equity crowd-funding platforms already out there. Do your homework and speak to a number of different providers to find out what each of them can do for you.
There’s a fair amount of legwork involved initially. Firstly, you need to be sure that you’re the right kind of business to go through the process. Equity investors are unlikely to give you their money if you’ve not got an exit strategy in place, or another way for them to cash out at a later date.
Luke Lang is a co-founder and chief marketing officer of Crowdcube, the world’s first crowd-funding platform says, ‘The entrepreneur and the team behind the business is always vital to its success. It’s important the individuals really understand how crowd-funding works, and really buy into the idea that this is an opportunity for them to have a platform to shine.’
Secondly, you will need to ensure you have solid evidence of your performance ready to prove any claims you make in your pitch. If you say you’ve got a patent pending, or that the market is worth a certain value, you’d better be ready to back that up.
3. The pitch
It should go without saying that this is a key element in convincing investors to part with their cash. As well as the usual solid financials and business plan that you would present to angels and VC investors, you’re normally expected to produce a video explaining what you’re offering to investors. The consensus seems to be that this needs to be very slick and well-made if you want to impress.
The Chapel Down winery CEO, Frazer Thompson, told MT that it’s worth really putting the time in to make sure your video is polished.
‘You have to understand that crowd-funding people are going to invest if they believe in what you’re doing,’ he says. ‘Sell that story as professionally as you can, don’t skimp on marketing. You are encouraged to do a video, but some are simply appalling. If you can’t get that right then I would seriously worry about the quality of the management.’
Roger Sumner-Rivers is the CEO of and founder of ParcelHero, a logistics company which failed to raise the R5.2-million it was looking for last year. He says not spending enough time on the video was a key factor in this.
‘We wanted to do it on a budget and we were in a hurry to get it out,’ he says. ‘We didn’t want to spend R90 000 to R100 000 on a video that we were only going to use once. That was our one big failing – it needs to be really clean and well thought out.’
Unlike traditional funding rounds, you won’t be forced to negotiate on equity. ‘The great thing about crowd-funding is you get to decide on the right valuation for your business,’ says Sumner-Rivers. ‘If you’re too greedy then you’re less likely to succeed, but at the same time at least you’ve got an opportunity to come up with a valuation that you feel comfortable with, and then it’s up to the people who invest to decide whether they accept that valuation.’
That doesn’t mean you should make a mockery of them though. ‘Valuation is one of those things that we sometimes draw a hard line across,’ says Lang. ‘You’ll get a plucky entrepreneur that’s starting up a business and they’re valuing it at a disproportionate amount to its worth, no matter how ludicrous you tell them that valuation is. That’s a situation where we might say no.’
When figuring out an appropriate valuation, consider the amount of cash you really need and how much equity you’re prepared to give away. Some businesses base their valuation on that used in earlier funding rounds, but the platforms should be able to help you come up with a sensible offering if you’re not sure.
5. Investor backing
Convincing investors to get on board is made a lot easier when you can already show you’ve got solid backing. If you’ve got angels who’ve expressed an interest in putting money in then encourage them to do so via your crowd-funding campaign – the higher amount of funding you demonstrate in the early stages, the easier it is to convince people that you’re a safe bet. Some of the platforms will waive the commission on pre-existing investors putting large sums in through their platform, so it’s worth asking about this.
6. Press and promotions
Once you’ve put the pitch together, it’s not a simple case of sitting back and waiting for the cash to flood in. Promoting your campaign should begin well before your pitch goes live on the site, to maximise investment and give yourself the best possible chance of reaching your funding target.
It’s worth going after media attention as well. Local press should be easy to crack and trade publications are also likely to be interested, and if your company has a particularly compelling story then you might even sneak into the business sections of national papers or sites.
When getting the word out about your crowd-funding round it’s important to be aware of the complex rules regarding financial promotions set out by the Financial Conduct Authority. It’s worth asking your crowd-funding platform or an independent advisor about the ins and outs of this.
7. Get ready for a lot of questions
While some might regard crowd-funding as simply taking a punt on an interesting company, many take the process very seriously. If you want to attract big bucks then you need to be ready to field a myriad of questions about your business plan, financials and exit horizon.