Crowdfunding is revolutionising startup investment in the UK, but don't expect an easy ride
Crowdfunding is in vogue. In the UK alone, about £1.5bn is raised through it each year. It’s been used to raise equity for everything from drones to smartwatches and even giant Ferris wheels. But just because it’s hip don’t for a minute think it’s easy.
After completing our own crowdfunding round recently we looked back at our experiences and produced a playbook for ourselves and other London startups to maximise the chances of getting it right next time. It’s published next month but here are some of our main takeaways.
1. Decide if crowdfunding is actually right for you
Do you have investors you can count on? Do you have users or customers who are sufficiently excited that they might invest? Is your business already in motion, or is there already a buzz around the idea? If the answer is yes to these questions then crowdfunding could be the right option for you.
2. Crowdfunding platforms are not a quick win funding solution
Their primary role is to remove friction and facilitate fund raising, not to raise money for you - just like normal fund raising – that’s still your job. The key is to get investors on board early to help build momentum and validation, helping to convert other prospective investors into committed ones.
3. Getting your funding target right is crucial
Set the funding amount too high and you risk not making it. Too low and you lose credibility. Solve this problem by gauging the amount you can be almost certain to raise (bottom up) and the amount you need (top down). Go to previous and prospective investors, your wider network and even key customers and ask if they’re prepared to participate in this round and how much they intend to invest. Add up these amounts, applying a heavy pinch of salt to the figure you got from non-professional investors. That should give you your MITB (“money in the bag”) figure. We’d recommend your target is twice your MITB. Hopefully, this aligns with the money needed by your plan.
4. Perfect your pitch
Some people think crowdfunding is more backing concepts than companies. Wrong. You absolutely have to show you’re on top of the detail. What does your market look like? What are your plans and goals for the fundraising? Outline your business plan and match it with clear (viable) financial projections. And have your legal due diligence in place. And while you’re working on your pitch, go over others on the crowdfunding platform you’re using, request their business plans (everyone does it) and speak to a few entrepreneurs who have both succeeded and failed in a crowdfunding campaign.
5. Ensure the round is closed properly
Achieving your numbers on the crowdfunding platform is great but that money needs to be secured offline as well. You cannot relax until all the documents have been signed; money is in the bank and forms submitted to Companies House.
6. And make sure you deliver
Everything complete? Now the hard work really begins. In our case crowdfunding brought us over 100 investors, and every single one of them from those investing £10 to those investing £10,000 expect success and a financial return. We are aiming for a further investment round later this year on the back of the huge growth we're seeing but we can't take our eye off the ball for a minute. We have big and small investors keeping us in check.
Crowdfunding might be the hip way to kick-start your business but the pressures are as real as they've ever been.