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Crowdfunding UK Small Business: Everything You Need to Know

How can my start-up business raise money through crowdfunding? Crowdfunding or, more strictly, equity crowdfunding is a way for companies to ra

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How can my start-up business raise money through crowdfunding?

Crowdfunding or, more strictly, equity crowdfunding is a way for companies to raise capital by selling their shares through an FCA-regulated platform. Private investors who like the company or idea can invest as little as £ 10.

How many crowdfunding platforms are there in Britain?

There are three main platforms based in the UK – Seedrs, Crowdcube and Syndicate Room and a variety of other platforms that offer different versions of the same thing. In total, there are no more than five currently active that are worth considering.

In addition to the UK platforms, there are two US-based platforms that accept UK projects – Kickstarter and Indiegogo. The biggest advantage of using these platforms is that they offer a larger pool of potential investors to start-ups that can resonate with a global audience. Kickstarter is the more established of the two in the UK, which has allowed UK businesses to present projects since 2012 and which has reached more than £ 1 million in UK funding by 2016.

Crowdfunding Platforms for UK Start-ups

Source: SmallBusiness.co.uk

How big is crowdfunding in the UK?

Equity crowdfunding in the UK started in 2011 and has grown to levels where it is now described by some commentators as in the mainstream. I think this is an exaggeration, but here are some data to give you an idea:

What is the best crowdfunding platform, CrowdCube or Seedrs?

Horses for courses. Crowdcube is bigger than Seedrs and has been going longer. But Seedrs offers another package based on a nominated structure and has more thorough due diligence – although, in my opinion, even that is not good enough. If your company is looking for maximum coverage, Crowdcube may be an option, but if you do not want to deal with hundreds of individual shareholders, Seedrs may be your choice. Syndicate Room needs a major investor and it tends to be for more serious investors / technology companies.

How much will a crowdfunding campaign cost me?

You can spend as much as you want, but one of the most important ideas for businesses that raise money this way is that it is cheap. The platforms will only charge you on a successful campaign – anything from 4 pcs to 8 pcs of the total collected. Creating the campaign is the only real upfront cost – the video and pitch deck and it will cost around £ 5,000. And of course, the time it takes you if you do not concentrate 100 pieces on running the business. You may be able to hire a specialist consultant to help the campaign succeed, but most of those costs are backend once the campaign has succeeded.

How do crowdfunding platforms make money?

The platforms make their money by charging a commission on the money raised in a successful campaign. If the campaign does not exceed its target, no money changes owner and the investments are void. Seedrs also takes a retention fee and a lifting, post-campaign, should the company continue to leave.

‘A campaign that does not receive more than 30% of its funding well in advance finds it very difficult to complete’

How can I prepare for crowdfunding?

Businesses need to be very clear about why they are raising the money – investors want to know what their cash will be spent on and how it will drive the company to what a successful retirement and an ROI can be for them. So, you need a well-written and thoughtful plan, a clear indication of where the money is going to be spent and when, plus meaningful projections.

Once ready, apply to the platform of your choice.

It is noteworthy that their online application forms are quite hopeless, so you should submit one, but also follow it up with a more complete application by email.

Businesses should also be aware of the 30pc rule. Research clearly shows that a campaign that does not receive more than 30% of its funding well in advance finds it very difficult to complete. The platforms now insist that you pre-load between 20pc and 30pc before they will launch your campaign to their audience. Normally the campaign will start in private mode when your contacts can invest – bringing you up to 30pc and more.

What should I include in my crowdfunding pitch?

Business plan and pitch deck tailored for the type of funding. A three-minute video. The pitch should tell a compelling story that has a believable outcome. It is of no use to use a pitch deck that you have offered to your local angel network. Equity crowdfunding requires a different kind of approach to hook the crowd. This is why many businesses use ECF consultants.

How long should a crowdfunding campaign take?

Most platforms will give you between 30 and 60 days live. But it can take up to two months to prepare the pitch and place it through the platform’s due diligence. We recommend allowing three months in total as a minimum. When your campaign is almost complete and you run out of time, platforms will usually give an extension. After all, they are as eager as you to get you over the line.

Who uses crowdfunding?

Any limited company can use equity funding. But it is best suited for new businesses (less than seven years old) due to the rules on S / EIS tax relief for investors. And it’s only suitable for a business that has an idea of ​​how it’s going to retire to give investors an ROI.

How many crowdfunding campaigns have been successful?

We do not have an exact figure for this and much of the data out there is tainted with false results. We have a database of more than 1,200 funded companies. Suffice it to say that the numbers are increasing year by year and that this form of funding is now becoming widely known. Unfortunately, much of that notoriety is for the wrong reasons.

Why do some crowdfunding campaigns fail?

At any one time on the larger platforms, there can be 20 to 30 live campaigns. About 60 pieces of this will fail. Reasons for failure can vary, but the most common are:

  • Poor presentation and plan
  • Non-scalable idea / poor idea
  • Failure to complete 20pc to 30pc of their own funding before launch
  • Overvaluation
  • Choose the wrong platform for your business

Is crowdfunding a pyramid scheme?

No.

Is crowdfunding regulated in the UK?

Yes. Equity crowdfunding is regulated in the UK by the Financial Conduct Authority (FCA). The risks of investing in ECF are very high and the shares you buy will be illiquid unless the company is sold or IPOs. A few have arranged private share sales, but their number is very limited. There is currently no reliable secondary market. Any loss you may suffer is not covered by the Government’s compensation scheme, so you will rely on the tax concessions when you have invested and claim loss relief.

What do investors get from crowdfunding?

Equity crowdfunding gives investors a chance to get involved with young businesses. They will invest based on a chance of some return on investment at a later stage, but may also invest small amounts based entirely on the rewards offered. Small investors will often find that their money is returned through the tax concessions and the fringe benefits. And good companies will try to involve all investors in the growth of the company – so the experience in itself can be rewarding.

If I’m an investor, where can I go for advice?

Well, as you ask, we are introducing a brand new platform – ECF.Buzz – The Crowd Investors Network. This will give investors all the information and tools they need to make well-informed decisions. It has a database of all the businesses that have been funded this way since 2011 and a forum where investors can discuss everything that has to do with sector without being afraid of being censored.

Rob Murray Brown is publisher of ECF.Buzz, the Crowd Investors Network, an online resource for all things crowdfunding.

Further reading

How to start a successful crowdfunding platform

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