A Guide to Equity Crowdfunding for Startup and Small Businesses Entrepreneurs

Benefits of equity crowdfunding

This is an article first published by Enterprise Nation in their ‘Learn Something’ series: https://www.enterprisenation.com/learn-something/guide-to-equity-crowdfunding/. There is an earlier article on rewards-based crowdfunding.

Enterprise Nation members – or any startup or small business owner – hardly need to be reminded that starting a business is risky. One of the benefits of equity crowdfunding is it’s a risk that many small investors are prepared to share and contribute towards, and sometimes for other reasons than seeking a financial return on their investment. I have experience of hundreds of pitches from startup founders who wanted backers to either order their new product or buy a stake in their business.  It gives me valuable insight to share with anyone who wants to explore using crowdfunding, and this guide to equity crowdfunding for startup entrepreneurs answers several common questions.

Benefits of equity crowdfunding for entrepreneurs

Startup businesses are turning more and more to a range of alternative finance options for early stage investment. Equity crowdfunding platforms are website marketplaces that bring together businesses that want investors, and people looking to invest modest amounts in ways that provide better returns than the negligible high street interest rates.  As well as raising money there are several other benefits for entrepreneurs.

  • It can be good marketing, it gets a business noticed.

  • Successful backing provides “proof of concept,” helping a business to then get further investment from other sources.
  • Feedback from “going public” with ideas and aims helps to refine plans and targets.
  • It’s a virtuous circle in which customers can become investors and investors can become customers – sometimes very valuable ones.
  • It encourages investors to become brand advocates, climbing “the loyalty ladder” to give the businesses positive word-of-mouth support
  • It is a public event, establishing a confirmed value that early stage investors clearly agree with.
  • Investors may choose to back a business where they identify more with its social, ecological or environmental aims than its financial prospects: for many such people the prime reward is the buzz of helping an enterprise they admire to get off the ground.
  • One of the benefits of equity crowdfunding equity is that it is not a loan, the money is not repayable. Though there is a degree of responsibility to shareholders, and legal obligations.

Why don’t more new businesses use equity crowdfunding?

Crowdfunding isn’t easy. When you look at crowdfunding projects hosted on the various platforms they are like icebergs, which show 10% above the waterline. Below the water is a massive amount of unseen work. I have identified seven key elements of crowdfunding projects, and they all have to be executed well to have a real chance of success. Here are three fundamental ones:

  • Build a crowd of potential backers, which may have to start months before a crowdfunding project actually goes live on a crowdfunding platform. This requires marketing that includes any amount of activities, techniques, social media and other communication channels.
  • At least 30% of the financial target should appear in a project within the very first few days of going public, and it requires personal pre-selling by the project leader. It could be an angel investor or a VC. Money arriving quickly creates momentum, and gives confidence to potential backers who may otherwise sit on the fence. Platforms are unlikely to let a crowdfunding project go to a public phase if it has not achieved this level of pre-backing at a private pre-selling stage.
  • It vital to communicate a clear vision of what the money will be used for, how it will advance the company’s development, how that progress will be measured, and any intentions to run subsequent rounds of fundraising.

There is also a quality bar set by crowdfunding platforms. They only earn from successful projects, so they don’t want to waste time on weak ones. A business owner might get knocked back several times to improve any part of their project.

The time these matters can take means that turning to crowdfunding only as a last resort, perhaps after exhausting every other option, can make it impossible. Think months ahead so you do not have to rush and take shortcuts, because a business that fails to reach its financial target will receive nothing.

How long does equity crowdfunding take?

After preparation to complete the seven key elements to a good standard, the equity crowdfunding platforms generally agree on around allowing three months, starting with a “Hidden phase” as shown in this chart created by the Nordic platform Invesdor. The “Public phase” usually runs for four to six weeks. It’s hard for fundraisers to maintain the required intensity level for longer.

Benefits of equity crowdfunding
Source: Scandinavian crowdfunding platform Invesdor

What do investors look for?

Think of crowds of investors as hunting in packs to uncover signs of weakness that will cause them to make their investments elsewhere. Any number of potential backers can ask detailed questions through the crowdfunding platform. One of their benefits of equity crowdfunding is that the answers will be made visible for all potential backers to see and maybe comment on further. Questions will include items such as these:

  • what the money raised is going to be spent on and how far it will advance the business’s development
  • evidence of a true market opportunity
  • financial statements and projections
  • timetabled KPIs to monitor progress
  • intellectual property, or some other hard-to-copy factor of exclusivity
  • existing or potential competitors
  • the management team’s abilities and experience
  • strengths and weaknesses of supply and distribution chains
  • the impact of any known forthcoming legislation
  • current and future customer interest/sales prospects
  • eventual exit strategy

All the information – not just most of it – has to be prepared in advance and made ready for swift replies. Larger investors may request personal calls or meetings – project leaders have to make sure their schedule allows time for this. Questions can come in at any time of any day. It’s full-on 24/7, don’t go on holiday!

Potential investors also look for very advantageous tax benefits offered by HMRC. UK income tax payers who invest in businesses registered under EIS (Enterprise Investment Scheme) and SEIS (Seed Enterprise Investment Schemes) are able to claim a refund of up to 50% of their initial investment through tax relief. If a business later fails, investors can claim a further refund. When a business succeeds, investors can shelter returns from Capital Gains Tax. There are also very early stage SEIS benefits for company directors. They really are worth checking out. Further information is readily available from a number of equity crowdfunding platforms  including Seedrs, Crowdcube and Crowd For Angels.

How much does equity crowdfunding cost?

In the Preparation and Hidden phases of equity crowdfunding (see earlier image), there are costs for preparing documents, maybe intellectual property fees, a video and image library, and a budget needed for crowd-building and marketing activity in the build up to and then during the public crowdfunding.

If a startup business considers offering its suppliers payment with equity, they need to keep in mind that shares acquired this way are void of EIS and SEIS tax benefits, so will be of less value. 

On completion, crowdfunding platforms all charge commission on successful projects, plus sometimes a completion fee, and there will be transaction fees for handling the investors’ payments. Build these costs in to the fundraising target. Allow for 10% of the total raised to begin with, and check with each platform how much you can bring this down by, and what else they can provide.

How much to ask investors for

Do not expect or attempt to raise all the money you need to fully grow the business in one round of funding. Plan it in stages. As a business grows it commands a higher company valuation, meaning startups are able to raise money in subsequent rounds based on higher share prices.

Road builder MacRebur recently ran its third round of equity crowdfunding. In Round 1 its share price was £7. In Round 2 it was £17 and this time each share was valued at £21, marking the company’s growth.

The Cheeky Panda, a brand of bamboo-based tissues I talked about in the reward-based crowdfunding article, valued shares in its first round of equity crowdfunding at £4.26. It offered 10% of the business for £50,000 in 2017, and when they hit target it represented a public statement that “the market” believed the business was worth £500,000. Then they raised further investments from an angel investor, and institutional backers came in later on. In their second round of equity crowdfunding each share was £18.25, and it was £36 in round three in 2020. Their fourth round in June 2021 saw its shares priced at £50. This is likely to be the final round of equity crowdfunding before an IPO when they have grown revenue to over £50m a year, which could be in 2022 or ’23.

What support does a crowdfunding advisor provide?

An experienced crowdfunding advisor knows the standards required by the crowdfunding platforms, and can save a business owner time and money by avoiding a series of knockbacks to improve a project.  They can also negotiate with the platforms to gain added marketing support and other “extras.”

When a crowdfunding project team looks for professional support, there are many marketing, PR and video production companies that have added ‘’crowdfunding’ to their list of capabilities and services. My own experience of some of them has shown patchy competence, with little unerstanding of how to unlocjk the benefits of equity crowdfunding. Do the ones you might choose really understand the dynamics and nuances of crowdfunding projects? A specialist crowdfunding advisor will be able to tell, and can also fulfil a Campaign Coordinator role to steer the entire process.

A crowdfunding project has a start date, an end date, and takes a lot of work. If the financial target is not achieved it’s all for nothing. Though success can make dreams come true and transform lives forever. Follow me on Twitter for frequent examples of crowdfunding projects, and please get in touch when you want to discuss your own crowdfunding project.

How to use reward-based crowdfunding for more than raising business finance

Reward based crowdfunding does more than raise money

In five years as a strategic crowdfunding adviser, I have seen and heard hundreds of pitches from start-ups that wanted backers to either order their new product or take a stake in their business. It’s given me valuable insights to share with anyone considering using equity or reward based crowdfunding for business purposes. This is an article first published by Enterprise Nation in their ‘Learn Something’ series: https://www.enterprisenation.com/learn-something/how-to-use-crowdfunding/

The simplest form of crowdfunding asks us to make online donations through platforms such as GoFundMe or JustGiving to a worthy cause, or to someone who needs help to get through a personal difficulty. Despite the number of small businesses pleading for help recently to tackle Covid-related problems, this form of crowdfunding is not particularly viable for a start-up business.

In this article I focus on reward-based crowdfunding. Among many other benefits, reward-based crowdfunding can provide proof of concept and generate pre-paid orders for goods that may not yet even exist. A follow-up article will cover equity crowdfunding, in which private companies raise funding through offering  investors an opportunity to become part-owners in the business.

Reward-based crowdfunding

This is the sort of crowdfunding that runs on Kickstarter and Indiegogo (US platforms that operate internationally), and the UK’s Crowdfunder platform, for example. Kickstarter alone has hosted over half a million projects. Just 38% of them were successful, raising over $5.1bn. Over half (54%) of the successful projects raised between $1,000 and $10,000. The overall average amount raised is $2,580.

It may not sound enough to launch a business, and although results can’t be taken for granted, a professional approach can significantly outperform these average figures. It’s not luck that divides the winners from the losers, it is hard work and careful planning. For anyone prepared to do that, it can be truly life changing.

De-risking the first production run 

Project owners create content that compellingly displays and explains the benefits of their new product(s). This information is hosted on reward-based crowdfunding platforms, which also process pre-payment from people who place orders for the item(s). They understand they are not ordering something from Amazon or eBay that will be delivered quickly.

Under a commonly used ‘all-or-nothing’ model, the value of pre-orders needs to reach a minimum financial target, by a set date, before there is an obligation to deliver anything. Given the costs of an initial production run and the volume of goods that would be produced, project owners can set a price per unit and calculate a breakeven point.

If the target is reached, the crowdfunding platform advances the pre-payments and production goes ahead. If the target is not reached the money is returned, and the project owner can return to the drawing board. This real-life research programme saves anyone from being left with production cost debts and a stock of unwanted items.

Projects sometimes fail to hit their target because the marketing effort was inadequate. Perhaps the project owner just didn’t tell a big enough crowd of the right sort of people. The marketing has to be as professional as financial plans and projections.

In a scenario where finished products do already exist, it is also possible to use rewards-based crowdfunding without setting a minimum target. This is the ‘keep-it-all’ model, and all orders must be shipped, regardless of the total number. This model applies to most of the projects on the Indiegogo platform, and that is the major difference between Kickstarter and Indiegogo.

Added benefits beyond raising money

Crowdfunding can test demand and build a customer pipeline

I met a textile designer/market stallholder at Greenwich Market who makes and sells her own clothing range. Niki Pearson was crowdfunding to raise the money to buy fabrics and anything else needed for her next collection of hand-illustrated, ethically made scarves and accessories.

Reward based crowdfunding does more than raise money

The rewards for people who backed her project were priority delivery and product discounts. The crowdfunding was both covering some production costs and lining up some confirmed orders.

If Niki hadn’t gained enough support, she would have been able to create some different designs and try again.

Corporate crowdfunding

Even international corporations use reward-based crowdfunding. Coca-Cola used it to distribute a limited amount of mineral water from Switzerland direct to consumers. This meant it had buyers’ contact details and could ask them for product feedback. It used crowdfunding as a product research exercise.

Crowdfunding to verify ‘proof of concept’ 

Have you seen a recent TV commercial for People’s Energy? It is a relatively new renewable energy supplier, with a stated aim to return 75% of profits to its customers. This could disrupt the energy supply market, though a business model like this hasn’t been attempted before. Who would invest long-term in a business dedicated to giving away 75% of its profits?

In 2017, People’s Energy raised almost £500,000 through a reward-based crowdfunding project. Over 2,000 backers donated the money to help the business meet early set-up costs. It was repaid in 2018, and those early supporters will enjoy discounted energy bills for as long as they remain a customer.

The crowdfunding success provided ’social evidence’ that People’s Energy was based on credible principles, and helped to impress institutional investors. The number of customers before the TV advertising campaign had grown to over 40,000.

Reward-based crowdfunding can generate impact investment

In a recent UK project on Kickstarter, with a £13,000 minimum target, a surfer/marine activist/clothing entrepreneur was offering t-shirts made with seaweed fibre to both highlight his original clothing range and to promote action against ocean pollution. It taught me that an acre of underwater seaweed can absorb 20 times more CO2 than an acre of forest. Good crowdfunding is good marketing.

Crowdfunding to validate a product innovation

In 2016, a reward-based crowdfunding project on Crowdfunder tested demand for toilet tissue made from bamboo rather than paper. Bamboo grows very fast, with three crops a year. Massive volumes in China are simply left to rot, making it a very sustainable product. It is also naturally stronger, softer and more hygienic than paper tissue.

Reward based crowdfunding does more than raise money

After exceeding an initial target of £10,000 of orders, and based on positive user feedback, the founders of this startup had the confidence to order more supplies and it quickly became a top seller on Amazon.

The Cheeky Panda’s products are now available in major supermarkets; it has beaten global, market-leading brands to win international awards; and in June 2020 it broke its £10m monthly sales barrier. The Cheeky Panda has also run three rounds of equity crowdfunding, which is the topic of my next article.

My role as a strategic crowdfunding advisor

If you’ve been using the hyperlinks in the article you’ll have seen what a number of crowdfunding projects looked like online. Many crowdfunding users fail to realise they are seeing just the tip of an iceberg, and that so much preparation work is invisible below the water line.

For regular examples of other crowdfunding projects you can follow me on Twitter, and for insights in to successful crowdfunding techniques there are further articles on my website. When you’re ready, please get in touch to discuss your own project: [email protected]

How to Run Successful Equity Crowdfunding

Expert Insights to Successful Equity Crowdfunding

I had the privilege of putting questions to a number of international experts in an event organised by Crowdsourcing Week about what goes in to a successful equity crowdfounding round. This article sums up their key insights. If you want to discuss any plans of your own, I’m an independent crowdfunding advisor, which means I have no ties to any particular crowdfunding platform beyond my own personal investments. Send an email to [email protected]

Raising capital through equity crowdfunding

Andrew Zhang of Republic, a U.S. equity crowdfunding platform, ran through the essential structure of a money-for-equity campaign.

They have certainly hosted enough projects to have built up a wealth of insight and experience. Republic has enabled over 150 companies to raise a total of $45 million. Last year the average raise was $500,000. Most of the investors were non-accredited, and the raises were capped at a top limit of $1,070,000 by SEC regulations.Top Insights to Successful Equity Crowdfunding

Successful equity crowdfunding can run alongside other funding mechanisms that between them can bring in a maximum of $5m.

There is a strict vetting process to ensure that only the best opportunities are put to Republic’s database of investors: under 1% of all applicants end up launching a campaign.

However, keeping to the theme that equity crowdfunding has democratized the process of funding a startup business, 40% of project leaders have been women, and 20% have been Black or Latinx.

Funding generally comes from four sources: friends and family; people who know the business – customers, suppliers, other stakeholders; Republic’s network of investors; new supporters brought in by marketing activities.

Expert Insights to Successful Equity Crowdfunding

The usual timeline is for a three to four month campaign from going live online to issuing shares to new shareholders. Though prior to this there are issues including arriving at a company valuation, preparing marketing materials, and pre-selling to reach c. 30% of the financial target. Pre-selling ensures the public stage of a successful equity crowdfunding campaign starts with a bang and not a whimper, and gives it dynamic momentum that attracts investors looking for a home for their money.

Lessons from 10 years of crowdfunding in Europe

Christin Friedrich, CEO of the Innovestment platform in Berlin, is also Chair of the European Crowdfunding Network.

Key lessons include the realization that at whatever stage of a company’s growth, in addition to raising money, successful crowdfunding involves, builds and strengthens communities. In an increasingly competitive environment this requires expert communication skills.

To be a successful equity crowdfunding project it should be clear what it is asking for; what the organisation raising the money hopes to achieve; and who will benefit. Any funder can go on to become a customer, an advocate, or a supplier. So keep communicating after the crowdfunding closes, share news about your progress through achieving milestones or report on KPIs.

As well as improved professionalisation of all aspects of the process, regulations are adapting to crowdfunding being a global practice. Funds need to flow freely to encourage cross-border financing, though authorities have to be aware of laundering. European harmonisation through the ECN will ease cross-border payments from outside the EU – which of course from 1 January 2021 includes the UK.

Retail investor access to VC deals

Equity crowdfunding is often described as having democratised access to investment funds for startup owners who do not mix in the same circles as high net worth individuals and VC managers. In the same way, equity crowdfunding has opened up opportunities for retail investors to invest in private companies, sometimes alongside institutional backers.

Jonathan Medved is CEO of Israel-based OurCrowd.  As the country’s biggest VC investor, he said their links with crowdfunding are becoming more stretched and tenuous than before, though they still allow individuals to piggy-back on their VC investments. For a management fee and a 20% carry-over on profits, retail investors can enjoy the same pre-IPO terms as a VC. Half of OurCrowd’s investment deals are in Israeli businesses.

OurCrowd’s prospects are looking good. Their investor network includes 50,000 U.S. accredited investors. Jonathan is delighted the U.S. SEC (Securities Exchange Commission) is relaxing its stringent rules on who is allowed to invest, and how much they can invest, through crowdfunding projects. Professional qualifications can now replace former demarcations based on income or savings definitions. And smaller businesses will be able to raise more than the previous cap of $1,070,000.

Also, a recent normalisation of political and trade relationships between Israel and the United Arab Emirates has the potential to unleash a torrent of investment capital, perhaps as much as half a billion USD in the first 12 months.  

Crowdfunding for Policy Makers

Author and management consultant Tim Wright, of TwinTangibles, closed the event with a session based on insights gained from co-authoring a recently published book “CROWDASSET, Crowdfunding for Policy Makers.” The book looked at crowdfunding from a variety of perspectives, given that policy makers can represent the interests of diverse stakeholders.

His visual device representing the core benefits of a crowdfunding campaign relates to core policy maker interests. In gaining a better understanding of what is of key concern to policy makers, crowdfunding project leaders can better ensure their campaign is fit to succeed.

Expert Insights to Successful Equity Crowdfunding

Naturally, the key element of the whole exercise is that businesses want to grow. For that they need Finance, which in equity crowdfunding is achieved by selling part-ownership of the company. This aspect is overseen by financial regulators and authorities that ensure compliance with financial regulations. National tax regimes differ on how they treat the funding received, cross-border investing is scrutinised for possible money laundering, and the U.S. has an added complication of different rules that apply to accredited and non-accredited investors.

Some countries still bar equity crowdfunding in the interests of protecting unsophisticated investors from possible financial harm, including India.

Crowdfunding also provides Insight to company founders through receiving feedback from people on the nature and structure of the business, validation of the value put on the business, and feedback on the proposed products or services to be delivered. Business trading standards authorities, as an example, would be keen to know that any products offered by firms using crowdfunding meet statutory minimum requirements.

Good Communication is vital for successful equity crowdfunding. This covers the marketing activities, raising awareness and stimulating sales. Most countries have extensive regulations on what can and can’t be said about crowdfunding opportunities, which can differ from one to another. So a crowdfunding campaign can’t always be picked up from one country and then run again in another.

Networks relates to a business’s customers, suppliers, supporters (who may not always be customers), and social media followers. Trading and Advertising authorities would once again be involved here.

And finally, there are also the vested interests of the crowdfunding platforms themselves, who are often members of their own professional trade representation and lobbying group. Such groups include the UK Crowdfunding Association, European Crowdfunding Network,  National Crowdfunding & Fintech Association (NCFA) in Canada, and Bundesverband Crowdfunding eV in Germany.

The breadth of interests and responsibilities of related policy makers is thus extremely wide.

Don’t forget, if you want to disucss your own thoughts or plans for an equity crowdfunding project feel free to email me in confidence, I’m an independent crowdfunding advisor: [email protected]

10 Top Tips for a Career Change Fuelled by Crowdfunding

Image source: simplybusiness.co.uk

Covid-19 vaccinations have started and perhaps provide a route back to some normality within a few months. Though many businesses haven’t had the luxury of being able to simply batten down the hatches and wait that long, and many people who used to work for them face a turbulent 2021 full of change.

The ranks of the self-employed and small businesses are going to grow. Crowdfunding provides solo entrepreneurs and startup businesses with many benefits, including product testing and raising awareness alongside raising finance without melting down credit cards, re-mortgaging the family home or taking on other forms of a loan guaranteed against personal assets.

Business experience is valuable

Those who had reached the autumn of their career may feel particularly uncomfortable about going it alone in a fast changing world where digital natives appear to be increasingly calling the shots. Yet as The  Blockheads’ band leader Ian Dury might have said, there are reasons to be cheerful.

A study conducted by the US Census Bureau and two MIT professors found:

  • A 50-year-old tech startup founder is 2.2 times more likely to be successful than a 30-year-old.
  • A 50-year-old startup founder is 2.8 times more likely to be successful than a 25-year-old.
  • A 60-year-old tech startup founder is 3 times more likely to be successful than a 30-year-old.  

Not everyone works in tech, though I find it reassuring to know that founding a successful startup isn’t the exclusive preserve of the young, and that the younger business founders aren’t always the best. In my role as an independent crowdfunding adviser I have met many startup founders of all ages. It is always dangerous to make sweeping generalisations, though the high value of transferrable skills and just general understanding of how businesses run is much stronger among older founders. They appreciate far better how solidly things have to done, how robustly claims and plans have to be validated, and that hope isn’t a strategy.

10 top tips for a career change

I’ve been made redundant twice, and worked for a company that folded and left us all high and dry. I know how former salaried employees in their 50s feel, and I offer my ten top tips on setting out in business alone.

  1. Doing new things, outside of a comfort zone previously full of support, is scary. You’ll get through it.
  2. Most of your previous contacts have become useless because they were part of that former comfort zone, your former life.
  3. Reconsider the people who you know, and build connections among a new group of people who are going to be able to help you.
  4. Think equally about how you can help them, relationships will not be built just on how they could help you.
  5. It’s difficult to achieve a target daily pay rate, so do what comes up that looks like it would be good to be involved with.
  6. But don’t forget that time is your most precious asset, particularly when starting a new enterprise later in life.
  7. What you knew before is not going to be enough. You should remain curious and love learning. This is now easier than it ever was with the range of material available online.
  8. Add practice to your knowledge, by simply getting out there to start providing others with the benefits of your knowledge and skills. Even work free for a local charity or community group rather than keep them to yourself. This will help teach you how to best present that knowledge in a way that builds confidence.
  9. Confidence is what your new customers, and maybe later on partners or investors, will recognise and buy in to.
  10. Work with people you like, who respect you, and pay you on time. Life’s too short to do otherwise.

Considering crowdfunding?

If you want to know more about crowdfunding, either as a means to check consumer demand for a new product, or to raise finance for a business to grow, you could start by following me on Twitter. I also regularly write articles about crowdfunding for Crowdsourcing Week. When you’re ready for a conversation, please first email me at [email protected]. I am an independent crowdfunding adviser, providing objective and impartial advice with no ties to any particular crowdfunding platforms.

International Lessons on Achieving Crowdfunding Success

My work with Crowdsourcing Week as a content marketing creator and as an independent crowdfunding advisor has brought me in to contact with crowdfunding experts and thought leaders from around the world. We have talked about reward crowdfunding, equity crowdfunding, and crowdfunding being used by major corporates. I’d like to share some recent insights.

Lessons from 10 years of Crowdfunding in Europe

Christin Friedrich, CEO of the Innovestment platform in Berlin, is also Chair of the European Crowdfunding Network.

Top Insights to Successful Equity Crowdfunding

Key lessons learned at the ECN include the realisation that at whatever stage of a company’s growth, in addition to raising money, successful crowdfunding involves, builds and strengthens communities. Though in an increasingly competitive environment this requires expert communication skills.

An equity crowdfunding project should make it clear what it is asking for; what the organisation raising the money hopes to achieve; and who will benefit. Any funder can go on to become a customer, an advocate, or a supplier. So keep communicating after the crowdfunding closes, share news about your progress through achieving milestones or report on KPIs.

As well as improved professionalisation of all aspects of the process, regulations are adapting to crowdfunding being a global practice. Funds need to flow freely to encourage cross-border financing, though authorities have to be aware of laundering. European harmonisation through the ECN will ease cross-border payments from outside the EU – including the UK.

Evolving best practices in Reward Crowdfunding

New Zealander Nathan Rose is a crowdfunding strategist and author, his latest book is about reward crowdfunding. Across several years he has been able to track changes to what used to be, and what are now, the key factors for rewards crowdfunding success.

Crowd-building and effective communication strategies have definitely changed over the years. For example, these days, many more successful projects have used paid-for social media advertising.

Though project owners should not rely on purely virtual contact – he recommends getting out to events and meet influential people in person. Though beware of trade shows where more people are likely to be like yourself, looking for investment, rather than be potential backers.

PR efforts to crowdsource media coverage remain a valid activity, though not for the reasons you might expect. A published article is unlikely to generate much traffic to a crowdfunding project, though a collection of media logos is a strong endorsement of the viability of a project once site visitors see them.

Nathan also warned of a classic error. He still comes across project owners who calculate the production cost of the rewards they will supply, and set a donation value without checking  the fulfilment costs to deliver the items. Seemingly successful projects can then sometimes incur a loss for the project owner, or are simply abandoned leaving many disappointed backers.

Tips for startup founders on running Equity Crowdfunding

Cheryl Campos, Director of Growth and Partnerships at the US equity crowdfunding platform Republic. Cheryl provided the article’s main image on a general timing plan for an equity crowdfunding project.

Before accepting an investment opportunity to put to its network of half a million investors, Republic uses four important criteria to evaluate startups: “The 4 Ts.”

Team
A startup funder has to have prior career and industry experience that adds up to a set of skills and expertise that can give investors confidence. But few investors will back a one-man (or woman)-band, and want to see a credible management team already in place, a team that has bought in to the founder’s vision of the startup business and have the ability to make a solid contribution.

Traction
Evidence of traction includes a passionate and engaged user base. Perhaps this has been achieved by an earlier round of rewards crowdfunding?

Technology
Is the startup’s product range superior to competitors? Or maybe their technology to make their products is superior, delivering a cost advantage. Are they following the sector’s traditional business model, or have they developed breakthrough innovations to shake up the established incumbents?

Terms
The terms a startup offers investors can vary, based on different methods of estimating a company valuation and with different classes of preference or voting shares, for example. It could make it harder to reach a financial target if crowdfunding backers receive poorer terms than other investors.

Corporate use of Crowdfunding

Esben Bistrup Halvorsen, Co-founder and CEO of Danish platform Lendino, gave a Crowdsourcing Week webinar some examples of major corporations using reward crowdfunding.

Sony has a co-creation and crowdfunding platform called First Flight, which operates within Japan only. It encourages entrepreneurial “Challengers” to propose ideas and suggestions for new products and services and allows them to canvass for input and support among a community of Sony fans and early adopters.

Fleshed-out ideas that have withstood this crowd’s scrutiny can then go on to a reward crowdfunding stage to check for demand to actually acquire the product or use the service. Where response from Sony’s First Flight crowd is strong enough to warrant investment, Sony makes the products and services available. Who knows, someone may come up with the best idea since the Sony Walkman!

Thinking about your own Crowdfunding?

In this most recent stage of my marketing career I’ve immersed myself in crowdfunding for the past six years. The crowdfunding projects you see hosted on any of the crowdfunding platforms are like looking at the 10% of an iceberg that’s visible above the water level. If you want to know the full extent of what has to be prepared to achieve success, let’s have a call. In the first instance please send an email to [email protected]

Crowdfunding Benefits More Than Just Startup Businesses

Various forms of crowdfunding enable startup businesses to inexpensively test market new products, and for private companies to trade equity in exchange for an investment from new shareholders. However, perhaps it’s my time spent sailing at Greenwich Yacht Club, as well as my work as an independent crowdfunding advisor, that recently drew my attention to two very well established businesses that are currently using crowdfunding to pursue a range of objectives.

Rewards Crowdfunding

Rancourt is a US family-owned and run business that has been making handmade moccasin-style shoes, popular with “yachties,” since 1967. They subsequently expanded their range to include boots, dress shoes and leather sneakers. Today, like many other businesses the world over, and despite its good reputation, Rancourt is suffering under Covid-19 lockdown restrictions.

Crowdfunding isn’t just for startup businesses

Through their own website, they have started offering shoes in a limited number of styles on a rewards crowdfunding basis at wholesale prices. They will collect orders to a threshold of around 150 pairs per style, then make shoes in batches of 300. This will ensure they don’t produce an over-supply of stock that will tie up their stretched cash resources and then simply gather dust.

There are several benefits to trying to generate business even if it will not make them much immediate profit.

  • It will keep their artisan workforce employed
  • It will generate business for their supply chain
  • It gives new customers an opportunity to experience their premium products at an advantageous price
  • The cash income will contribute to central overheads
  • They will avoid producing unwanted stock

In crowdfunding terms this is known as the “All or Nothing” model. A crowdfunding project can ask people to pre-order, while also setting a minimum total order figure. That figure will be calculated to cover the raw materials, ‘tooling up’ and all other costs of a first production run, plus delivery of the finished goods.

If the stated minimum target is reached, production goes ahead on a de-risked basis. If it isn’t reached, any pre-payments are returned to customers and the product creators can have a rethink without having incurred costs of producing unwanted goods, hiring storage space or servicing a debt.

In the UK, crowdfunding operates outside the Sale of Goods Act. Due to the time it could take to reach the minimum order total, and produce and deliver the goods, some of the earliest ‘purchasers’ may have to expect to wait longer than 28 days to receive their orders.

Equity Crowdfunding

The second sailing-related project I noticed is being run by a Swedish engineering company, GreenStar Marine International. They have been in business almost 20 years and make a range of inboard and outboard electric motors for all types of recreational boats.

They have no protected intellectual property in their motors, and now that sustainability and safeguarding waterways is a higher priority for many boat owners and users, GreenStar want to expand their silent-running and fume-free product range and dealer network faster than they would be able to through organic growth.

They are offering equity in the business to investors who will become shareholders, and thus share the risks and rewards of company ownership. Crowdfunding has democratised the business fundraising process, that was previously available mainly to people with access to “old boy networks” of VC investors or high net worth individuals.

At the time of writing GreenStar Marine International had raised 131% of their target with 69 days still to run.

With almost two decades’ experience of running their business, they are confident of a high rate of return for investors when they go ahead with an IPO planned for late 2021. Though capital is always at risk, and nothing can be guaranteed.

To learn more about Crowdfunding, registration is now open for free tickets to an all-day webinar on August 27 featuring a range of international speakers. The link gives further information.

In the meantime, feel free to contact me if you are considering crowdfunding to test a new product, to launch a new business or expand an existing one. I am an independent crowdfunding advisor, uninfluenced by formal ties to any specific crowdfunding platforms. Email me at [email protected]

Why Do Many Startups Still Fail After Reaching A Crowdfunding Target?

I have looked at this topic because I help small businesses and startups raise money through crowdfunding. There are plenty of times when an influx of investment allows them to scale up, which can often mean introducing new procedures and “control levers” to steer colleagues/employees, and maybe suppliers and customers, in new directions. It doesn’t always run smoothly.

Unfortunately for these plans, most people are naturally and inherently change resistant. It’s in our DNA to want to keep things around us they way they are. It’s a fundamental part of our defence mechanism as it helps us to spot anything out of the ordinary or unexpected that could be a threat. “Human beings are programmed to fear the unknown,” says a recruitment tv commercial for the Royal Marines.

Many change initiatives fail because they are decided by a management minority and then foisted on to the majority, employees or other stakeholders, who are suddenly supposed to adopt new ways of working that are unknown to them. Without adequate pre-selling or involvement in a process to bring them on-side from an early stage, a change initiative can be sunk by a majority of people simply sticking to doing what they previously did in the ways they previously did it.

This can even be the cause of friction between business founders if they didn’t all agree on the scaleup measures to begin with. In a business’s early days, it might all be about taking risks. As a business develops and goes through successive funding rounds, whether it’s money from a crowd or institutional investors, or even sales, the emphasis – and perhaps pressure from new shareholders – can change to “let’s not start to muck it up now that we’re nearly there.”

Perhaps high risk-taking mavericks that were the company’s early spearhead are still in the team, but may be less disposed to a more cautious approach – and the new people who will now help implement it. This is one example of how friction can develop, distracting effort away from building the business before it’s even standing on its own two feet.

This is what’s meant by “company culture eats strategy.” Company culture is an emotional element that binds colleagues together with shared expectations of each other, and it has to be tackled alongside procedural ones to initiate change. A startup team will have often developed a strong culture, meddling with it can be tricky.

For more on the topic, take a look at this article (which is nothing to do with me, I just liked the look of it from the ones I found in a Google search): Culture eats strategy for breakfast – The Management Centre. It also has a five point plan to initiate change successfully.

Equity Crowdfunding Works for B2B Businesses

There is a common misconception that crowdfunding is only applicabe to B2C businesses. On recently seeing a question posed on Quora, asking if anyone had got some examples of B2B startups that had used crowdfunding, there were three that immediately came to mind.

Energytech
A crowdfunded B2B business I have invested in is Pavegen. They generate sustainable electricity from people walking on their floor tiles which are installed in high-traffic places like shopping malls and sports stadia.

Their customers include transport system operators, and owners of shopping centres and sports and entertainment venues: Pavegen – Global leader in harvesting energy and data from footfall.

Transport infrastructure

Another B2B company that has used equity crowdfunding in the UK is MacRebur. They reinforce asphalt with recycled plastic to create a more resilient road surface, and help reduce the amount of plastic waste.

They have also resurfaced some airport runways, and recently announced a pothole repair material that will be available in 20kg bags: macrebur.com. Their customers include airport owners, local councils and highway authorities.

Agritech

To give a third example, I made an equity crowdfunding investment not long ago in an agritech business called Hectare. Traditional farmers’ markets in the UK are closing down at a rapid rate, meaning more and more farmers have to make long and arduous journeys to take livestock to market. And sometimes it means driving their fit and healthy animals through areas where there is a higher risk of disease.

Hectare provides online marketplaces for farmers to check current prices and sell animals at SellMyLivestock and crops at Grainindex. Their B2B customers are farmers and agricultural produce buyers: Hectare Agritech | Reinventing Farm Trading

Equity Crowdfunding and Venture Capital Working Together

Equity Crowdfunding and Venture Capital Working Together
Not so long ago it was still quite common to come across articles that tried to pitch VC investors and equity crowdfunding supporters and platforms against each other, as if every startup business entrepreneur faced a binary choice of which investment route to pursue. There are growing signs that the complementry rather than competitive nature of these sources of startup and scaleup business funding are beginning to be appreciated.

Many startup founders seek investment budgets that are beyond the resources of friends and family backers, yet are too small for VCs to normally bother getting out of bed for. And if a business is in its earliest days without a trading history or future sales orders, there’s precious little hope of securing a business loan, whether from a traditional source like a bank or from a peer-to-peer lender such as Funding Circle. So there is a true gap in the business investment market that equity crowdfunding occupies, at the same time as providing better returns for small-scale investors than they can get from high street deposit accounts or investment schemes.

It remains fair to say that equity crowdfunding is not yet a fully developed entity due to the small number of exits that have allowed investors to reap their rewards: the UK Crowdfunding Association’s website has just one solitary case study (though there have been more). Other business finance commentators harp on about the startups that still fail, sometimes within months of raising seven-figure sums through crowdfunding, as if crowdfunding ought to provide some mystical defence shield against business failure.

Despite these shortcomings, the rude health of hundreds, even thousands of startups around the world that have traded equity for an investment from a crowd of backers supports enough confidence for the practice to continue to grow and spread.

It has now reached a point where venture capital firms are not only taking notice but some also want to be involved. In the UK, for example, the startup support division – called G – of the global accountancy firm Grant Thornton works with the equity crowdfunding platform Crowdcube.

It is a symbiotic relationship: Crowdcube can offer its clients a longer business development path than just realising their earliest investment rounds, and Grant Thornton gains an entry point to build relationships with promising entrepreneurs before they are big enough to usually be worth their attention. G also offers to make introductions to some of its network of investors who have indicated they are open to the idea of making early seed-stage investments. Here is an example of this co-operation in practice.

GunnaEquity Crowdfunding and Venture Capital Working Together is a range of uniquely-flavoured, craft-made soft drinks which aims to disrupt the established carbonated drinks marketplace in a similar way that craft beer has. It retails at a competitive price for a product made with better quality ingredients, and contains less than 5% sugar to be part of a healthy lifestyle. In 2018 it was available in over 3,500 UK stores, sales were up 300% on the previous year, and their highly experienced founders wanted to raise funds to accelerate the growth rate.

Initial discussions with Grant Thronton indicated that £500,000 would be appropriate to build distribution through recruiting additional sales people and investing in trade marketing. Although this amount is below Grant Thornton’s minimum threshold, their growth finance team remained involved to get Gunna investment-ready to run equity crowdfunding via Crowdcube to raise the money.

Support from some cornerstone investors who wanted to get involved at the ground level, introduced by Grant Thronton, strongly reassured a crowd of smaller retail investors. The equity crowdfunding project generated £819,150 from a total of 245 backers. As Gunna grows it’s likely there will be a need for further, larger rounds of investment which will meet Grant Thornton’s VC-backing criteria. Gunna’s hoped-for exit strategy is acquisition by an international drinks company.

A less formalised example is that of a business founded in 2013 that recycles surplus fruit and vegetables to make traditional recipe relishes and chutneys, Rubies in the Rubble. They were able to gain investment backing from Mustard Seed, a VC fund that takes a principal investor role in world-class early-stage businesses that generate compelling financial and societal returns.  However, beyond accepting £160,000 from Mustard Seed, the founder of Rubies in the Rubble, Jenny Costa, used it as cornerstone funding to launch an equity crowdfunding project on the Seedrs platform.

A rule of thumb has evolved based on empirical evidence that successful crowdfunding projects ought to start with very early pledges of at least 30% of their financial target. This is achieved through personal pre-selling by the project leader and their team to guarantee – as far as possible – that their project starts with a bang and not a whimper. This creates momentum as it gives vital confidence to what are usually smaller retail investors who require some reassuring encouragement to take the plunge.

Equity Crowdfunding and Venture Capital Working TogetherRubies in the Rubble set a target raise of £300,000, in which Mustard Seed’s investment easily covered the 30% requirement. By 3 June 2019 the project on Seedrs has easily surpassed the initial target and wss overfunding at over £535,000.  The funds are to support the launch later in the year of a mainstream ketchup product and a vegan plant-based mayonnaise. The business aim is to capture 3% of the UK ketchup and mayo market by 2023, whilst continuing the fight against food wastage. A trade sale is the most likely exit strategy.

Please get in touch for further insights and support on how you could use crowdfunding to raise money to startup or scaleup your business, plus reap the benefit of numerous other advantages. I’m an independent crowdfunding advisor, not tied or affiliated to any particular platforms: [email protected]

Crowdfunding does more than raise money

Crowdfunding does more than raise money

I was recently asked about crowdfunding by the founder of a startup business that makes a range of non-alcoholic wine.  There was nothing confidential in my reply, so I thought I’d share it with you.

You’re absolutely right that crowdfunding can be a more time consuming way to raise money compared to perhaps a VC investment or an angel investor. Yet there are other benefits that go way beyond the money it raises.

For example, VCs were queueing up to invest in Chapel Down (the celebrated English sparkling wine maker) when in 2014 they launched their equity crowdfunding campaign. Beyond raising £3.9m in three weeks, their CEO Frazer Thompson told me that crowdfunding had generated 1,500 brand advocates who would spread positive word-of-mouth, buy Chapel Down products at every gift-giving opportunity, and create sampling opportunities by stocking their wines (now beers as well since they built a brewery with some of the money they raised, and gin too) both at home and in their company drinks cabinets. Priceless!

Crowdfunding creates a virtuous circle whereby customers can become shareholders and shareholders become customers. I’m caught up in it myself as an investor in a craft brewery and a gin maker. If “my brands” are available,  why drink others? Shareholders catapult themselves right up the brand loyalty ladder.

Hop Stuff Brewery started five years ago when it raised £58,000 through offering 34% of equity. It’s now valued at over £25m, with products stocked in Wetherspoons (which encourages lower than regular cost product trial), Tesco and Majestic Wine; it has a growing chain of beer and pizza outlets; and international sales and franchise brewing agreements.  Hundreds of their 1,000+ investors from three rounds of crowdfunding on Crowdcube attended an “Investor Fiesta” event at their new brewery back in August.

A network of investors can be used for research purposes and to ask for ad hoc assistance such as help recruit staff,  recommend suppliers, volunteer their own services, and so on. At the Hop Stuff event I heard a fellow investor volunteer to use his contacts to help sort out supplies of CO2, which if you remember was in short supply in the summer.

Crowdfunding does more than raise moneyEven if it’s not a main aim of the crowdfunding, it could find you an angel investor. This happened to some people I know who started a business making tissues from bamboo. To begin with, all they wanted was an initial £10,000 of orders through rewards crowdfunding to provide validation they weren’t wasting their time. A backer was impressed with what he saw and stepped forward to invest, which allowed the founders to greatly speed up product development and company growth. So do eveything as professionally as possible.

They were a top-seller on Amazon very quickly. Within three years the company founders raised £500,000 in October 2018 for 10% equity on the Seedrs crowdfunding platform  – they had a business valued at £5m!

Their latest news is The Cheeky Panda tissues are now stocked in Tesco and Morrisons; in the summer they signed a £1m corporate investment deal that valued them at £20m; and right now they are running a second round of equity crowdfunding for existing investors in which they are offering 5% for £1m.

Good crowdfunding is also good marketing. I call it an ultimate direct marketing campaign. There’s a start date, an end date, lots to do, and if you fail to hit target you don’t raise any money. Naturally there are risks, though by breaking a crowdfunding campaign down in to component parts each potential risk can be addressed and minimised. I’ve created a Seven Stage Assessment to check if a business is ready to start crowdfunding, and identify areas that need to be addressed before going public.

My approach is more from a marketing angle, since that’s what I’ve always done. I am not a finance expert and not qualified to give financial advice. Though I can provide an experienced layman’s assessment on how appealing any offer may be to the public. I do have a post-grad diploma from the Institute of Direct and Digital Marketing and a Professional Diploma in Management from the Open University Business School.

One vital tip is that crowdfunding should not begin until you have done enough personal pre-selling for 30% of the financial target to fly in to your crowdfunding campaign within the very first few days. This applies whether you’re trying to generate product orders or offering equity. This gives immense confidence to other backers who don’t know and haven’t met you, and creates valuable momentum. So if you have a target of £200,000 your pre-selling should reach a guaranteed support level of £60,000 in the bag before you start crowdfunding in the public eye (ideally more to allow for dropouts).

Early success is newsworthy and hard-working PR will generate media coverage to add to your early momentum.  On the other hand, crowdfunding without pre-selling is like shovelling quicksand – hard work and you get nowhere.

How much it costs and how long it will take depend on:

  • how well your business rates against my Seven Stage Assessment
  • how much work has to be done to become investment-ready
  • of that, what can be done internally and how much has to be outsourced
  • including how enthusiastic and good you are at using social media – and “it’s ok, my kids use Facebook, they can help” isn’t good enough
  • success rate of using PR to secure media coverage
  • how long it takes to drum up support to reach the first 30% of your target.

If you have no social media networks to drive people to your crowdfunding project it may first require months of work to build some. Or months to accumulate impressive media coverage you’ll be able to refer to, or both, ideally.

Outsourcing support and input can even begin with the pitch document. A 30-chart deck may be very thorough but it’s too much for a potential equity investor to wade through with enthusiasm. Most look for the first reason they can give themselves as to why not to invest so they can move on to the next opportunity. Simply having to spend too long to get a feel of an opportunity is a good enough reason to discard it right away.

Don’t forget the taxman. Many retail investors prefer businesses to be registered with HMRC under EIS and SEIS agreements. These Enterprise Investment Schemes allow tax-paying investors to claim valuable rebates of up to 50% of the cost of their investment, and shelter capital gains from CGT. Under SEIS a company founder can invest up to £100,000 in their own business and claim a refund. Make sure you understand and take advantage of these benefits for yourself and your backers.

To close, what you see online when people and organisations run crowfdfunding campaigns is like the tip of an iceberg visible above the waterline.  Invisible under the water is a vast amount of planning and preparation, and a fair amount of stress. It’s not impossible to run a crowdfunding campaign alone if you’re tough and resiliant enough, though most people need some help and support, be it technical or emotional or anything else. This comes either from a team of willing supporters who between them provide all the necessary skills required to achieve your success, or you need a budget. Most times it’s a bit of both. If you want to talk about your ideas that could transform your life please get in touch, [email protected]