Tuesday, 18 June 2019
Crowdfunding is where a large number of people pool their money together to back an idea or business, typically via an online platform. Some of the more popular crowdfunding models include reward-based, donation-based, micro-lending, peer-to-peer, peer-to-business and equity.
What you might not initially realise is that crowdfunding can offer multiple benefits other than just the monetary gain. Having access to a large crowd who is engaged and interested in your idea is great for measuring the demand for your product/service.
Appearing on a large platform gives you the opportunity to raise awareness of your business, which can have a direct and positive impact, such as driving traffic to your website and social media accounts. Additionally, having conversations with potential investors can also help highlight or even discover hidden strengths or potential weaknesses with your business plan, which you can then go on to address.
A wide variety of businesses across various sectors and stages can raise through crowdfunding. Rewards-based crowdfunding will most frequently list products, services, projects or simply an idea, allowing the backer to pledge an amount of money for a reward, with structures tiered to reward the largest backers to receive the highest value or most unique reward. The amount companies raise on these platforms, such as Crowdfunder and Kickstarter, can be anything from £500 up to £1m. The most popular bracket for Kickstarter rounds is between £1,000 - £10,000.
Equity crowdfunding explained
Equity crowdfunding enables startup, early and growth-stage businesses to raise finance from a ‘crowd’ of everyday investors, professionals, angels and venture capital firms, in return for an equity stake in the business.
With equity crowdfunding a business generally already has some traction and is looking to raise anything from £50,000 to around £4m (€5m under the current EU Prospectus rules) or more under a Prospectus.
Equity crowdfunding facilitates investment in return for a pro-rata equity stake in the business. The type of businesses available for investment through equity crowdfunding is increasingly diverse, making raising finance accessible to a range of businesses irrespective of stage or sector.
Investments can be made from as little as £10 with no maximum in place, making it increasingly accessible to your customers, which typically culminates in pro-rata ownership of the company via ordinary or B investment shares. Shareholders have a vested interest in seeing your business succeed, so inviting your existing network to invest is a great opportunity to increase engagement, loyalty and advocacy amongst your own crowd.
Primarily investments are made with the end goal of making a return within, on average, a 5-10 year timescale via a liquidity event such as a trade sale. In some cases this could be a share buyback or secondary market, or in rare cases an IPO. The potential returns are significantly higher on the equity side of crowdfunding but so are the risks - given the fact that a reasonable proportion of startups fail. It is important to have an exit strategy, as investors will want to know how they can make a return on their investment.
A final, rather important consideration on the equity side of crowdfunding is the government tax incentives for investors. Early stage businesses in a large number of sectors are able to apply for tax relief, which enables eligible investors either a 30% or 50% tax relief on their investment with the aim of de-risking investments into startup and early-stage businesses. This is a great message to convey to your network if you raise money through this finance option as it’s very appealing to potential investors.
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