Unfortunately, crowdfunding it isn’t quite as easy as registering with one of the platforms, sticking your pitch up, and letting the crowd do the rest. There are lots of things to consider before choosing to go down this route, including fee structure, how much legwork you will have to do, and what it means for follow-on rounds.
We hope this resource will help you decide whether crowdfunding is the right way forward for you.
Based on our research, the sweet spot for equity crowdfunding tends to be:
- Seed stage businesses
- Some tech angle (or a food & beverage business)
- Generally consumer-facing
- Raising between £150k and £500k
The myth of the crowd
The first thing to know is that there are two crowds. The first is the crowd you know (your network). The second is the crowd you don’t know (investors you acquire through you or the platform marketing the campaign). For the crowd you don’t know to invest, you'll need to have part of the round raised already so you'll still need to get lead investors.
The magic number is roughly 30 - 40% raised before you go live. The vast majority of failed crowdfunding campaigns are the ones that never get past 50% of their funding commitment. So, if you can get yourself past the halfway mark, your chances of success are much higher in terms of the crowd joining in.
In many ways, this is no different than how it works when fundraising in general through angels or VCs. If you can get the initial commitments and validation, then the rest comes a bit easier.
Pros of Equity Crowdfunding
There are some definite benefits of equity crowdfunding over traditional fundraising. This list is not exhaustive but covers the key ones we’ve observed.
Ease of transaction
The platforms do all the leg work in terms of collecting funds and issuing shares, making the transaction process easier. It also gives you a place to receive funds as people are willing to part with them, allowing you to avoid herding cats if you are raising from several angel investors when completing the round. Also, crowdfunding platforms usually bundle all individual investors into a single nominee company, so your cap table doesn’t include each investor. Finally, since the lower transaction costs and single nominee makes collecting a smaller amount from each investor feasible, people can invest in you for as little as £100, thus potentially increasing your breadth of potential investors.
The crowd will eventually (hopefully) come
As mentioned - if you can get past the 50% committed mark you are generally in good shape, and the crowd is more likely to join in. Drumming up the first 50% means you are in much better shape to get the last 50% from existing platform investors.
Building validation, customers and loyalty
Crowdfunding forces you to do a bit of marketing to not only build support for your campaign but also get your brand out there. You are not only generating potential investors, but you are creating name recognition and potential customers for your business. Also, your investors are likely to be pretty loyal customers because they are part-owners of the company. You also get the added benefit of additional validation of whatever it is you are building.
Drawbacks of Equity Crowdfunding
There are always drawbacks!
Investors (can) add much value beyond the cheque they write - with a vested interest in ensuring you succeed and don’t lose their hard-earned (okay, not always hard-earned) money. They might have relevant experience, whether they were a founder themselves, or worked in that particular sector. They open up their networks and help you solve problems.
Crowdfunding, on the other hand, gives you many investors with much smaller stakes, and thus less incentive to get involved in the business.
Crowdfunding isn’t cheap! In the UK Seedrs fees are 6.5% of funds raised + £2500 completion fee, while Crowdcube is 7% of funds raised, plus associated Stripe payment processing fees (0.5% for the UK, 1% for Europe and 2.9% for the rest of the world). The costs are higher than average for most angel networks or syndicate (though some can run much higher).
A failed campaign can send a negative signal to potential future investors - so be sure you can raise the round.
You still do the legwork
As mentioned previously - you still have to do the hardest part which is getting the first commitments. Generally, once you build a bit of momentum the rest follows easier, but this is not always the case, so think about whether you want to just complete on your own with angel investors rather than go through a platform. Sometimes the effort required is the same, and you would be unwise to assume that the crowdfunding platform will deliver to you loads of investor appetite.
We hope this primer has helped gauge whether crowdfunding is a good fit for your startup. Equity crowdfunding is an early market that will likely evolve and improve over time. It is therefore too early to make a final judgement on outcomes. There may also be some regulatory and competitive shakeups to come in the not too distant future. It is worth watching for this, and we’ll aim to update this article as/when these things happen.
Crowdfunding is not a panacea, fire and forget solution to fundraising. You will have to do the bulk of the work yourself to raise initial funds, including driving potential investors to your campaign. There is, of course, the added benefit of being a marketing exercise for your business in a way.