Whilst recently reading articles about crowdfunding, I found that there appeared to be a smug expectancy that the reader should already know what crowdfunding is and how it works. Before joining my current company I had never heard of this term and when of late I was researching the definition, I was met with articles telling me that if I didn’t know what crowdfunding is then I must be living under a rock somewhere. This made me think; am I atypical in my understanding of the concept? Does everyone else know about this new way to fund fledgling businesses? But no, it appears that I am not alone (hoorah for my self-confidence), I asked a number of my friends if they knew what crowdfunding was and none of them had heard of it. My circle of friends are not intellectually challenged, they range from a solicitor and a teacher to a HR manager, marketing manager and a design director. All of them switched on and all of them usually up to date with the latest tech thing. This discovery has therefore prompted me to write a blog about this enigmatic concept of raising capital and explain in layman’s terms, how and what crowdfunding can do for us, the average person.
The solitary item that my friends did get right when they were making educated guesses of what they thought crowdfunding might be is that it is an online platform allowing individuals (or businesses) to request money from a pool or ‘crowd’ of people willing to invest relatively small amounts of money. After that is when it gets a little more complicated. First thing to note is that there are 2 main types of crowdfunding – reward-based and equity-based. Reward-crowdfunding allows start-ups to sell their product or service to potential investors before it is launched without incurring any debt. The biggest positive to this is that the start-up does not have to sacrifice a part of their company in exchange for the money. The investor receives merchandise instead. There are also 2 subtypes of reward-crowdfunding; Keep-it-All (KIA) where the start-up keeps all of the money pledged whether they reach their target or not; All-or-nothing (AoN) where the start-up only receives the money if the goal amount is met. Each crowdfunding platform will have differing offerings; anyone wishing to use a crowdfunding site should not rush their research as it is important that each start-up uses the best platform for their respective product or service. Equity-crowdfunding however is closer to more traditional methods of fundraising; the investor receives a share in the company in exchange for a pledge. This will mean that the investor will own a percentage of the company and the start-up will have to pay dividends (a percentage of the profit each year) to the investors. Investment crowdfunding (equity-based) is regulated by various national and international laws, therefore all start-ups should make sure they do LOTS of research before putting their project online. This is due to soliciting investments from the general public being illegal in many countries. The Financial Conduct Authority (FCA) are the regulatory institution for the UK, therefore it may be worth looking on their website for further information.
The question then is, why should start-ups consider using crowdfunding over traditional fundraising such as bank loans? Since the financial collapse in 2008, banks have been charging higher interest rates on their loans and restrictive banking credit makes it very difficult to qualify and be accepted for a loan. 4 in 10 SME (small and medium enterprises) business loan applications have been rejected in the last 2 years. At the moment, the big four banks account for 80% of monetary handling for SMEs. Unfortunately many start-ups don’t know where else to go for a loan and usually only approach their personal bank or one of the big 4 before admitting defeat if no funding is achieved. This is where crowdfunding comes in. Anyone with a business idea, no matter what their credit rating is, can apply for investment via a crowdfunding platform.
Robert Montgomerie a Search and Rescue Coordinator for the RAF in Scotland has invented a piece of gym equipment that he is hoping to raise cash for on one of the crowdfunding platforms out there. He admits that before starting his new venture, he had little to no knowledge of crowdfunding. After doing some research into funding for his project, he realised that crowdfunding was not to be ignored. Robert plans on using a reward-based method of crowdfunding, this means that he will ‘sell’ his product before it has been mass manufactured based on the prototype. Individuals will have the option to invest a certain amount in his business in exchange for receiving merchandise. Robert, who has already trademarked his product and is in the process of finalising his prototype and creating a video to show how the product works, believes that he would only need to have 80 pre-orders for his business to get off of the ground. In fact Robert plans to launch the product in the UK and have units sent out to customers before Christmas. He appears to have a strong business head and believes that going down this route will mean he won’t over or under fund the business needlessly. It will all be down to customer demand. Robert’s product is The BIAbox™ – a total body, 40 in 1 multi-exercise, workout solution. What I have seen of it so far looks highly professional and user friendly.
It has been suggested that an early precursor to the crowdfunding concept, may well be the notion of ‘collective fundraising’ which was used to fund periodicals in the 17th century. As of 2012, there were 450 crowdfunding platforms. There are huge differences between each platform therefore it is important that all start-ups do their own due diligence (research all the terms and conditions of the platform you are planning on using). It is also worth noting that your product will not be protected from someone copying it once you put your project on line, you will need to seek legal advice on copyright issues prior to putting your project on the web as Robert Montgomerie has done with his by trademarking his product. Many a project has been backed by some form of crowdfunding in recent years, including famous people fundraising for creative projects; Zach Braff an actor (Scrubs), writer and director funded a film from 46,520 investors. The film ‘Wish I was Here’ was premiered at Sundance Film Festival last year. The main benefits for a start-up on a crowdfunding platform are profile, marketing, audience engagement and feedback from investors. For me, it feels like a very exciting time to start-up your own business or to invest in someone with a vision that matches your own values. I say go ahead and make all of your dreams come true whether that be directly or indirectly.