The crowdfunding revolution

It’s early days (and no one should get carried away) but the signs of a gradual economic recovery are looking increasingly promising with every passing quarter; thanks in the main to growth in the number of small businesses.

But while entrepreneurs starting up or growing existing businesses have become the lifeblood of the economy, they face continual challenges to raise capital and manage cash flow.

Raising business finance is difficult at the best of times, but in today’s age of austerity, banks, business angels and governments are tightening their belts, limiting much-needed investment and leaving start-ups and growing businesses thirsty for money.

An answer perhaps. Equity crowdfunding websites are democratising investment and providing a much-needed way of by-passing traditional sources of finance. They enable entrepreneurs to showcase their businesses and the investment opportunity to a nation of ‘Armchair Dragons’ who can invest as much, or as little as they like. At a time when savers are feeling the pinch of all-time low interest rates, equity funding platforms let anyone invest money from as little as £10.

The benefits to the businesses raising finance goes beyond purely cash. It’s a way of gaining exposure, but also more importantly it becomes in the interests of every investor that your business succeeds – a smart way to build brand advocates who champion your business product or service.

Armchair Dragons invest in Britain

Equity crowdfunding is designed to make investing in start-up, early stage and growth businesses more accessible, straight-forward and rewarding. The online model has transformed angel investing and has proven to be the catalyst for the birth of a new breed of investor.

Permitting people to invest more modest sums of money online, 24 hours a day, 7 days a week. It has proven popular for new investors dipping their toe into equity investments for the first time and more seasoned angels wishing to spread their risk capital further and more easily – but remember whatever you invest you must be prepared to lose – it’s a sad reality that the vast majority of startups fail.

Tips for crowdfunding success

There is no dark art to raising money successfully through crowdfunding; common sense rules. Here are five things to consider:

1. Make your pitch compelling
Keep your pitch clear and simple – and avoid using jargon – so that potential investors can easily understand what and who they are investing in. Our research has shown that many investors wait for opportunities that move them emotionally, so inject some enthusiasm and life into your pitch summary.

Our survey also shows that ”perceived market potential”, “prior experience of the entrepreneur” and ”the idea underpinning the business” are the most important factors for investors when making a decision, so it is very important to communicate these aspects of your business effectively. With this in mind ensure that these elements form part of a well-written business plan with financial forecasts that add-up.

2. Start promoting yourself today
You need to start raising interest in the business as soon as possible; don’t wait until the day your pitch goes live, but start warming up potential investors today. Tell your friends, family, customers, suppliers and other potential investors, and then keep them updated with progress. Use social media to create a buzz and contact journalists who cover your area.

The importance of early momentum and investment progress is a really important factor for success; a pitch will attract more interest if it has already managed to secure a decent chunk of the target.

3. Sign up for tax incentives
The UK has some of the most generous tax incentives in the world to help small, higher-risk businesses raise the finance they need. Registering your company with the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS) gives investors substantial tax breaks – up to 50 per cent for SEIS and 30 per cent for EIS – and they are a crucial ingredient for attracting investors and successfully raising equity finance. The qualifying criteria vary under each scheme, but the rewards for eligible companies and investors are too attractive to ignore.

4. Keep everyone updated
Entrepreneurs need to embrace the principles that underpin all good crowdfunding: be proactive, well-prepared and eager to engage with investors. Keeping investors and pitch followers (sometimes over 100 people can follow a pitch that they want to track) abreast of developments by publishing regular updates can be a powerful way of converting interest into investment. Don’t limit yourself; get out and talk to people face-to-face, there’s nothing like it for getting investment.

5. Get real
Don’t be over-ambitious with your target and don’t put people off by overvaluing your business. Set yourself an achievable investment target, e.g. under £150,000 is realistic unless you have some significant investors lined up.

The future

There is an enormous buzz surrounding equity crowdfunding; according to Nesta crowdfunding raised $1.5 billion for businesses in 2011. Research firm Massolution forecasts that crowdfunding will continue to increase in 2013 growing to $5.1 billion.

Crowdfunding gives businesses a better chance of securing funding without paying huge interest rates, while engaging with stakeholders also gives them access to their expertise and their advocacy. Overall the model offers a vital boost to Britain’s economic recovery and introduces more people to the world of equity investing.