Courtesy of Thames Valley Business Magazine September 2012

A significant number of crowdfunding sites have sprung up to facilitate investment in new businesses. Kickstarter and Indiegogo, both of which are aimed at funding discrete projects, have been joined by new equities-based crowdfunding portals, like Cielex and Crowdcube. But what if you need funding for a business that is too complex to summarise in an elevator pitch, or not trendy enough to capture the public’s imagination? Is crowdfunding a viable or realistic alternative to traditional VC and angel capitalisation?

Crowdfunding (where social media platforms are used to raise equity capital for small businesses and start-ups) holds out the promise to fill the gap between early-stage “friends and family” financing and larger funding from venture capitalists or angel investors. It works by allowing your average “man on the street” to invest in projects that are of particular interest to him, allowing him to take a small stake in the business in return for contributing towards a funding target.

However, the success rate for crowdfunded businesses is notoriously low: often a project will fail to create the buzz required to achieve its funding target, or otherwise it is too poorly resourced to meet the demands of investors and consumers if the project does take off. So if you are considering crowdfunding your business, what can you do to ensure it is one of the success stories?

1. Watch the red tape

In the UK, the regulations surrounding financial promotion and collective investment schemes need careful consideration in this context, since they have not been adapted to deal with the crowdfunding concept. You need to ensure the platform you intend to use is fully conversant with the UK regulatory regime before you sign up. If investors wish to pledge any significant sums via crowdfunding platforms, they will probably need to become certified sophisticated investors.

On a more positive note, the government has introduced a number of schemes offering tax advantages to early-stage investors, such as the Enterprise Investment Scheme, where anyone investing between £500 and £1m in a qualifying business will have the added incentive of becoming eligible for income tax relief, worth 30% of the amount invested. Further, since April this year, investors pledging between £500 and £100,000 in a qualifying start-up benefit from 50% relief, under the Seed Enterprise Investment Scheme.

2. Self-awareness

Crowdfunding may not be a suitable option if it is unlikely your project will have broad appeal to consumers – a company that provides a service, or produces a business-to-business product, may be better off pursuing traditional financing routes. You will also need to calculate a realistic funding goal: if it is too high, your project may stall before it reached its goal (which, under the terms of many crowdfunding sites, will result in all of the equity pledged being returned to the investors), or if it is too low, you may find your project is too under-resourced to operate successfully.

3. Preparation

Some of the most successful crowdfunding projects have begun by identifying potential investors and courting them for several months before launching their campaign, often using other social media tools, such as blogs, Twitter and Facebook accounts, as well as video content, to foster those relationships. Remember that a potential investor’s opinion of any project will be based to some degree by how well it has been received by others.

4. Communication

Your investors are worth more than the sum of their investment: they are likely to provide free promotion among their contacts and become returning customers themselves, so it is crucial to keep them on your side. You must have adequate resources in place to promote your project on a daily basis, as well as to answer every email and phone call to keep your investors engaged with the project. Otherwise, you may find your campaign page filling up with negative comments from hacked-off investors, which may put paid to your project altogether.

Is crowdfunding the future?

While crowdfunding may not be suitable for some businesses, it evidently has the potential to make a great success out of others. Further, the idea has been mooted that crowdfunding may reinvigorate VC funding at the small-business end of the scale. If, for example, a VC were to pledge cash to a promising project once certain milestones have been reached via the crowdfunding platform, such backing may catalyze that project’s campaign and give it the momentum it needs to succeed. What remains to be seen is the extent to which regulation, seeking to protect the “man in the street” investor from unscrupulous operators, may help or hinder this nascent market.

Courtesy of Thames Valley Business Magazine September 2012