With many banks tightening their purse strings and grants or other start up incentives becoming much harder to find, many entrepreneurs may need to find alternative sources of funding to get their start-up off the ground or fund their expansion. Indeed, 65% of entrepreneurs planned to seek alternative finance in 2012, according to a survey by Huddlebuy.
With this in mind, in December 2011 Business Secretary, Vince Cable MP launched a taskforce to 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 significant 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.
Sites such as Crowdcube.com maintain the quality of pitches on their site by validating each one by financial scrutiny. They also only accept pitches from Limited Companies. These challenges are not insurmountable however, especially for the committed entrepreneur.
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.
The HMRC can also offer tax incentives through the Enterprise Investment Scheme (EIS), where investors can claim 30% tax relief on qualifying investment opportunities.
Is Crowdfunding for me?
Some questions to ask before you embark on a Crowdfunding campaign.
- Am I or can I easily become a limited company?
- Can I communicate my idea effectively to strangers?
- Am I willing to give up a share of my business to outsiders?
- Do I have an existing network of supporters, customers, and suppliers etc who will kick-start my funding campaign? – Not essential but a fast start gives other investors early social proof that your idea is worth looking at.
- Am I willing and able to promote my pitch via social media and via online and offline networks? – Finding investors will take work and is not a passive process. Be prepared to live and breathe your pitch for 90 days!
