How does crowdfunding work and is it right for your business?
With the economic downturn causing banks to tighten their purse strings, you may need to find alternative sources of funding to get your start-up off the ground. Indeed, 65% of entrepreneurs planned to seek alternative finance in 2012, according to a survey by Huddlebuy.
With this in mind, in December 2011 MP Vince Cable launched a taskforceto open fresh funding channels for small UK businesses – putting particular emphasis on the opportunities of crowdfunding.
What is crowdfunding and how does it work?
Crowdfunding is an alternative method of raising finance for a business, project or idea, popularised by Kickstarter.com in the United States.
Unlike angel investment, in which one person typically takes a larger stake in a small business, with crowdfunding an entrepreneur can attract a ‘crowd’ of people – each of whom takes a small stake in a business idea, by contributing towards an online funding target.
It is believed that, in many cases, this model is more successful than attempting to source the full investment required from a single individual or organisation. Furthermore, while some investors may be hesitant to invest in an unproven idea, crowdfunding provides an alternative way to source seed capital from a number of backers.
How much does it cost?
The majority of crowdfunding platforms won’t charge you for publishing a pitch, however they typically take around 5% commission when you reach your target – so you need to factor this into your investment total. If you don’t meet your target, you don’t pay a penny.
To encourage people to invest in your start-up, most websites ask you to offer staggered rewards (such as exclusive access to your first product or a five-year discount on your services) according to how much people invest.
However, there are also a couple of platforms, such as Startups’ own crowdfunding site, powered by Crowdcube, which allow you to offer a small proportion of equity in your business, to create an added incentive for potential investors. This is particularly appropriate for start-ups looking to raise larger sums of finance.