What is crowdfunding?

A quick guide to crowdfunding, what it is and how to access it

Crowd funding may seem to many people like a relatively new phenomena, but it’s roots go way back to the 1700’s and the Irish Loan Fund. Modern-day crowdfunding, as we all know it, has its origins in the late 90’s.

The first recorded successful instance of modern crowdfunding occurred in 1997. British rock band Marillion crowdfunded their reunion tour through online donations from their fans. This inspired ArtistShare to set up and become the first dedicated platform for crowdfunding in 2000. This saw the beginning of the crowdfunding industry, which has grown year-on-year since.

According to P2PMarket Data, the UK is the third largest ‘alternative financing’ market in the world, behind China and the United States (1). The sector suffered a dip in investment in 2020 due to the Covid-19 pandemic, but has recovered to continue its growth throughout 2012 and 2022.

The UK is the second largest crowdfunding nation globally based on transactional value ($62 million), behind only the United States ($504 million) (1).

What is crowdfunding?

Crowdfunding is a way for businesses to raise money online from a large group of people – usually members of the public, rather than from just a few investors.

The popularity of this form of funding has seen the market grow at an alarming rate, which is now predicted to grow by $196 globally by 2025 (2).

How does crowdfunding work?

An entrepreneur has an idea to either start a new business based on an idea or passion, or an established business wants to develop a new product, but neither has enough capital reserves to develop their ideas into reality.

The entrepreneur posts their idea onto a crowdfunding platform and asks for donations to help raise the capital they need to develop their idea. Individual investors each invest a small amount towards the idea to build up towards the financial target.

Are there different types of crowdfunding platforms?

Not all crowdfunding platforms work in the same way. There are five different types of crowdfunding:

1. Rewards crowdfunding – The Kickstarter model in which investors get rewards in exchange for monetary contributions. The rewards could range from early access to a product to future discounts, or swag to a simple personalised thank you message. This is a relatively easy way to start crowdfunding because the bar is low, and your crowdfunding campaign can double as market research, for example, if people won’t donate £20.00 to your product or service, can you realistically expect them to buy the product/ service once it’s developed?

The key problem with Kickstarter campaigns is that success rate is quite low. Only 40% of Kickstarter campaigns succeed, while only 14% of those looking to raise $10,000 or more succeed. You will also need to create promotional materials for your campaign, which can run for at least 3 months before you get anywhere near your target.

2. Debt crowdfunding – Also known as crowdlending and peer-to-peer lending. Debt crowdfunding is essentially a loan from many people. You might need a good credit score before you can access this type of lending. It’s important to be aware that his is a personal loan not a business loan, so you will have to pay the money back, which will typically be at a very high interest rate.
3. Donation crowdfunding – No need to give rewards or share revenue. This is most suitable for non-profit organisations and charities.
4. Equity crowdfunding – This is when investors acquire a piece of your business. Investors are paid when your business reaches a predetermined exit event, such as acquisition, IPO, or a funding goal. Equity crowdfunding is Angel investing. Even though you a lot of funds can be raised via equity crowdfunding the process can be very slow and can contain complex rules with red tape to negotiate.
5. Royalty crowdfunding – Once your venture begins making money, that’s when investors receive a percentage of the revenue. It’s similar to equity crowdfunding, but you retain full ownership of your business, however, you will need to show a lot of revenue potential to be successful in raising the required funds. (3).

Is crowdfunding regulated?

The rules around crowdfunding are regulated in the UK by the Financial Conduct Authority (FCA), and every person-to-person lender and every provider of equity crowdfunding must meet the FCA’s requirements (4).

What are the benefits of crowdfunding?

You can raise a lot of funds very quickly to achieve your dreams and turn your ideas into reality.

What are the risks of crowdfunding?

• You take on personal financial risk.
• It can impact your credit score.
• Some of the rules around crowdfunding can be complex.
• Some forms of crowdfunding can be slow.

Crowdfunding sites to consider for your fundraising

In the UK:

1. Seedrs
2. Crowdcube
3. Crowdfunder UK
4. Syndicate Room
5. JustGiving
6. Funding Circle
7. Fundable

Global sites that accept UK projects:

1. Kickstarter
2. Indiegogo
3. Companisto
4. Eureeca

How can you begin crowdfunding for your business?

To attract investors, you will need to take a few steps to prepare:

1. Choose your platform – Each fundraising site will have different fees and terms and conditions, so it’s important to take your time to do your due diligence when choosing the platform, you want to use.
2. Fill in an application and await approval from the crowdfunding site you have chosen – You will be required to submit your personal details and business information at this stage.
3. Pitch your project – You’ll need to describe your idea, project, product, business or charity, so try and make it sound as attractive as possible.
4. Build your fundraising page – Set your fundraising target and build your donations page. Ensure there are investor incentives to help you hit your target, because if you don’t reach your goal, you won’t receive any of the pledged funds.
5. Promote your business or product – Build it and they will come won’t work. Once you’ve built your donations page, you’ll need to consistently promote it.

Disclaimer:

At Caunce O’Hara, we are passionate about helping small business thrive. Our content covers many topics you may find relevant and useful to your business. Please do not take this content as professional advice. To find out more on a subject we have covered in out articles, please seek professional assistance.

Sources:

1. https://alternatives.financesonline.com/crowdfunding-statistics/
2. https://www.prnewswire.com/news-releases/crowdfunding-market-to-grow-by-usd-196-36-billion-during-2021-2025–13-86-year-over-year-growth-in-2021–technavio-301249041.html
3. How Does Crowdfunding Work? 5 Types for Small Businesses – YouTube
4. https://www.fca.org.uk/consumers/crowdfunding

https://p2pmarketdata.com/articles/crowdfunding-statistics-worldwide/

https://www.crowdfundinghub.eu/wp-content/uploads/2021/09/CrowdfundingHub-Current-State-of-Crowdfunding-in-Europe-2021.pdf

https://www.easyship.com/blog/best-crowdfunding-sites

www.lenderkit.com/blog/b2b-guide-crowdfunding-in-uk/

https://www.startups.com/library/expert-advice/history-of-crowdfunding

https://www.fundable.com/crowdfunding101/history-of-crowdfunding

www.smallbusiness.co.uk/crowdfunding-uk-small-business-everything-you-need-to-know-2548127/