Is Crowdfunding Right for your Business?
Crowdfunding has certainly attracted plenty of hype in the last couple of years, but that doesn’t necessarily mean it’s the right for you. There are so many small business hacks out there that it can be almost impossible to distinguish the facts from the fiction. So, to help you determine whether crowdfunding is right for your business, here is our even handed and impartial exploration of the suitability of a crowdfunding investment.
What is crowdfunding?
Crowdfunding shot into the public consciousness in 2013, when Grand Designs’ own Kevin McCloud raised a £1.9million investment in his company, Hab Housing, through crowdfunding platform Crowdcube. This secured the column inches required to turn this little known funding technique into the startup community’s flavour of the month.
Very simply, crowdfunding is a collective method of raising capital for your business through the contributions of a wide network of individual investors. Online crowdfunding platforms allow entrepreneurs to showcase their businesses to, and collect contributions from, a large number of potential investors who typically invest just a small amount of money each.
The different types of crowdfunding
Crowdfunding is available in a number of guises to meet the particular needs of your business.
- Donation – This simplistic form of crowdfunding involves a contribution being made towards the business without anything being paid in return. This approach is common amongst charities, political campaigns and social projects.
- Reward – A popular form of crowdfunding in which businesses offer non-financial rewards or perks in exchange for contributions. The advantage for your business is no debt, as you do not repay the investment, while investors typically benefit from money off discounts on launch.
- Debt (Peer-to-Peer) – In this case, crowds lend money to business owners and expect repayment (usually with a fixed rate of interest) over time. The benefit for your business is a relatively cheap source of finance (when compared to traditional sources of finance). The promise of a return also makes it easier to attract investors.
- Royalty – Investors are offered a percentage of the revenues the business generates once it’s up and running. A common example is a mobile app which requires funds to be developed. Once it’s released, the backers share the spoils.
- Equity funding – In the most recent form of crowdfunding to the hit the UK, investors receive shares in startup businesses in return for their investment.
The potential benefits for your business
Crowdfunding represents a cheap alternative to traditional venture capital or bank lending for small and medium sized businesses. However, not all businesses are successful in attracting the crowdfunding investment they need. Competition for investment is high, so do your research and try to understand the types of business that secure funding and the motivations of their investors before you put all your eggs in this particular basket.
The potential benefits of crowdfunding include:
Access to capital you might not be able to secure through traditional sources. For this reason, crowdfunding is particularly suitable for startups or businesses operating in high risk sectors.
- Generate interest in your business before it’s been launched. Crowdfunding can prove to be an effective method of marketing your business and establishing a loyal customer base before you start to trade.
- Crowdfunding can create an owner mentality amongst investors. This can enhance customer loyalty, engagement and even help to generate suggestions about improving your business.
- Crowdfunding can represent a cheaper source of finance than traditional funding. Rather than worrying about liabilities, crowdfunded businesses can generate profit from their first day of trading.
- Risk tolerance of investors is high. Crowdfunding investors do not always except a return. This allows them to invest with their hearts in ideas they love, rather than being ruled by their heads.
Here at Match Capital, we help startups raise funding more efficiently by ranking 600+ investors and crowdfunding sites in order of who is most likely to invest in your business. We have an investor page that showcases their strategy, portfolio, website and much more, meaning you can attempt to raise capital from the investor or crowdfunding site most likely to invest in your business.
Typically with crowdfunding, you need to have cornerstoned 25% or more of your target before you list on a crowdfunding website, to increase your chances of achieving your target.
Of course, whatever level of investment you attract, there are likely to be tax implications. So, before you take crowdfunding any further, we advise you to consult an accountant to help you fully understand your position.
At Match Capital, we help businesses secure the investment they need. Get in touch today and we’ll help you find the right source of funding for your business.