Crowdfunding can be an excellent way of generating start-up funds, or funding a new product, but there’s much more to it than just having an idea.
Like all methods of generating business funds, crowdfunding takes work. But if you hit the right note with your campaign it’s a great opportunity to access funds if you can’t or don’t want to get a business loan.
What is Crowdfunding?
Crowdfunding is essentially an alternate means of raising money when a loan isn’t desired or practicable. Generally, it involves raising money by collecting small amounts from a large number of backers, rather than a large amount from a single source, as with a loan or investment capital.
Crowdfunding as a practice has a long history. Centuries ago, authors and publishers used similar methods to secure financing for book projects, and war bonds—issued in the UK during WWI—work along the same lines. These days it’s all done via the internet, where a crowdfunding campaign can be published on any number of purpose-built platforms, and marketed using social media.
How it Works
Crowdfunding seems simple, but there’s a lot of work involved in setting up for success. Just as a business plan is needed to apply for a loan, it’s important to have a solid plan to bolster a crowdfunding campaign. It’s also important to choose the right platform for the purpose. For instance, there’s Kickstarter, where backers pledge cash in exchange for specific products that are delivered at a specified date in the future. At the other end there’s GoFundMe and IndieGoGo, where backers donate money without any expectation of return or reward.
Many people misunderstand how crowdfunding works, and mistakenly believe that they can create a crowdfunding campaign and easily generate enough money to fund a business idea or start-up. That’s definitely not the case. There are those occasional massive success stories, of course, but for the most part, crowdfunding is not a viable route to instant business cash. It’s not a means of bypassing the need to develop a business plan or find backers.
The truth is, crowdfunding is a potentially great way of accessing funds, but most successful projects are funded because they already haven a built-in audience of potential backers. They’re projects created by people with a large fan base, social media following, or blog audience; people who are already in the public eye for one reason or another; or people who know people that have an audience, and are willing to tell their audience about the project.
Unfortunately, the majority of people who start crowdfunding campaigns are convinced that they’ll be the exception—the one with the campaign that goes viral because it’s just that good. But those exceptions are few and far between, and if you start a crowdfunding campaign with that expectation in mind, disappointment is almost guaranteed.
The UK’s Biggest Crowdfunding Sites
The biggest crowdfunding platform is the US-based Kickstarter, but the UK has its share of successful platforms and campaigns. For instance, the US$1.2 million project created by UK musician Amanda Palmer in 2012 was, for its time, one of the most successful campaigns ever created.
As is the case globally, there’s a wide range of UK-specific crowdfunding sites, including Kickstarter-like platforms as well as those that are more donation-focused, like GoFundMe. When developing a campaign it’s always important to give serious consideration to the type of campaign and site that will best suit your plans. For business projects, some possible UK contenders include:
Crowdcube is an equity crowdfunding platform, which means backers invest in a business in exchange for equity. As of 2018 Crowdcube is the UK’s biggest crowdfunding site in terms of business investment funds raised, beating out its nearest competitor by 55%. In the first quarter of 2018, a total of £21.2 million was raised by Crowdcube campaigns. As a result of its ongoing success, Crowdcube tends to be the most popular platform for new companies looking for funding, as Crowdcube sees more first-time crowdfunders than any other investment funding platforms.
FundingCircle was the UK’s first peer-to-peer business lender, and from its headquarters in London has expanded to include operations in the Netherlands, Germany, Spain, and the US, in addition to the UK. FundingCircle’s customer base is mainly small to medium firms in the commercial and industrial sectors. In the UK, businesses can borrow up to £1 million (or £3 million for property development) for up to 5 years. For investors, says FundingCircle, their investment portfolio offers returns of up to 6% to 7% per annum.
Kickstarter launched in the UK in 2012, and remains the most popular site, both globally and in the UK, for project funding. Kickstarter’s mission statement notes that it’s not a business investment platform, so much as a project investment one. It’s designed to help people obtain funding for specific projects that have clear goals. It’s commonly used by people seeking funds for the development and production of a specific product—and the sky is the limit in terms of the ideas that have generated successful campaigns. Kickstarter campaigns have funded everything from household products, clothes, and games to music, books, and art.
Developed to serve the residential and commercial mortgage market, LendInvest was launched as the UK’s first peer-to-peer mortgage lending platform. The platform debuted on the London Stock Exchange in 2015 and continues to be successful, with a modest but consistent annual turnover. For eligible applicants, LendInvest provides mortgages for bridging, development, and transition financing, with loan funding provided by individual and group investors.
Another UK-based business investment platform, Seedrs investors can start as small as they wish, with investments starting at just £10. The company started out operating solely in the UK but has since gone on to expand into European markets too. As of 2018, Seedrs investors have collectively invested nearly £400 million, most of which has gone to UK-based businesses.
This crowdfunding platform is highly specific and is somewhat unique in that regard. It’s dedicated solely to helping authors fund book-publishing projects, and to date has funded nearly 400 individual projects, including works of history and philosophy, memoirs, novels, and graphic works.