There’s been a lot of recent buzz around crowdfunding, but is it best for your business? Crowdfunding can be particularly useful for idea stage startups, because without the figures to base a loan upon it can be difficult to get a bank to lend you the money, and often it’s too early for angel investors. Finding investors requires a large network, but putting together a contact-base from scratch takes a long time for anyone, and especially young entrepreneurs who may not have as much experience in their industry. Even with this in place, investors often don’t want to commit capital without seeing a product, but you can’t build a product without their money. It’s a lose-lose situation. This is where crowdfunding comes in. But what should entrepreneurs know about the platform?
How do you attract crowdfunders?
Current legislation in both the US and the UK is making it easier than ever to attract investors to your platform. SEIS in the UK, which offers benefits to those investing in small, young startups, acts as an incentive for investors as it lets them feel more secure about the money give away. The benefits can include up to a 78% tax relief in the first year of investment, and a capital gains tax holiday, so long as the company invested in is less than two years old, has under 25 employees, and has gross assets of less than £200,000. Similarly, the JOBS act in the US is helping do exactly what it says – jumpstart business startups, by reducing restrictions on equity crowdfunding.
But this doesn’t mean that traditional methods should be ignored. Many startups on crowdfunding platforms avoid methods such as offline networking, but investors wishing to give a more substantial amount will still want to get to know you and hear more about your idea in person. Networking is a good way to get the initial push of investment, and then you can use the crowd to fill in whatever else you wish to raise with smaller amounts. This initial push will make your business go up on the platform’s listings, which will make it seem more attractive to the general crowd.
Do also remember to look into the rules of your platform before you begin to advertise yourself. In most cases you can’t state the terms of what you’re offering outside of the crowdfunding platform – so avoid posting too much on your social networks, for example.
Why would crowdfunding be good for my business?
That can depend on the type of business you have. Many people believe that crowdfunding raises ‘dumb money’, but for a B2C company, which hopes to solve a problem the general public face everyday, it’s important to see that the ‘crowd’ are willing to invest in your idea. When your service is appealing to the public, it’s great to know that the public are willing to give their time and money to you. If you’re a B2B company, you may not find it as necessary to have the crowd validate the appeal of your idea.
So what do you need to think about before you raise investment?
It’s important not to raise too much capital. You should only raise what you need to take your business to its next stage. For the entrepreneur, this means that you can keep more equity of your company, and it also shows investors that you’ll be careful with their investment. Remember, if you later need some extra capital for your business, you can always do another round of investment. At this stage the valuation of your company should have increased, allowing you to retain more equity.
What are the disadvantages for investors?
There’s been a lot of media backlash about the ‘safety’ of an investor’s money. Many UK platforms aren’t regulated by the government, and if an investor is giving only a small amount of capital, they often gain such little equity that it can become diluted to nothing. However, in the US, the JOBS act means that all crowdfunding platforms must be registered with the SEC. It’s a good idea to look for platforms that are diligent with the investors and companies they support. One of the reasons why we chose to raise investment through Seedrs was because they were the first FSA-regulated crowdfunding platform in the UK, and we’ve had a smooth journey because of it.
Let us know if you have any more questions in the comments below. We’d love to hear your thoughts on crowdfunding, as well as any experiences startups have had that may differ from ours.