This form of finance has democratised fundraising, but entrepreneurs understand it is not a silver bullet

There’s been a boom in the use of financial technology and many businesses in the UK are reaping the rewards. No longer prepared to rely on traditional banks for funding or banking services, these businesses are instead going online to hunt down new providers of finance.

Among them are crowdfunding platforms such as Crowdcube, Crowdfunder, Seedrs, Indiegogo and Kickstarter. These online platforms have democratised business funding by allowing the masses to invest relatively small sums in businesses, a practice which would previously have been impractical.

Popularity with SMEs growing

Evidence suggests that crowdfunding is rising steeply. Research from Nesta found that, in 2014, £1.74bn was raised via crowdfunding platforms, with the money raised doubling year-on-year.

Business owners interested in raising money through crowdfunding must submit information and documentation about their company, which creates ‘the offer’ for investors. They choose the amount they require, state its purpose and offer terms spelling out what investors will receive – this may or may not be equity. Once the offer is complete it is published online and would be investors can back the business.

Of course, there will be fees, terms and conditions that any business applying for crowdfunding needs to look into, and these will differ for each platform.

How we did it: funds for relaunch
Stefan Aquarone, co-founder of payment app Droplet, has used crowdfunding to raise money for his business. The Birmingham-based business, founded in 2011, lets merchants receive payments from customers using their mobile phones, without incurring a fee. Droplet was popular with small businesses as, unlike the banks, it didn’t take a percentage of each sale. Last year, however, it decided to alter its business model by providing loyalty services to its customers. A relaunch was decided and this required fresh funds, so the company launched a campaign on Crowdcube.

‘We set a target of £500,000 but actually raised £575,000, and most of that came from people who were users of our product.  We wanted to expand using our user base as we feel we’ve always been on the side of the little guys. We really feel that the independents and the communities around them are what made us successful. So being able to allow them to own a piece of what we do was appealing,’ says Aquarone.

Business owners need to prepare

Aquarone is understandably a big fan of crowdfunding, but warns that it is not a silver bullet for businesses. He explains people are more likely to back you if they think you’re going to be successful. According to Aquarone, it is key, therefore, to ensure you have some backers lined up before you go live.

‘You need some momentum to get out of the starting blocks. The best thing is to line up some investors who know you to invest in you at the start. Then, when people read your pitch, they don’t see a big zero next to it. Our investors put in £200,000, which meant we didn’t get stuck on a sandbank where people won’t back you because they think you won’t make it,’ says Aquarone.

He also notes that the nature of crowdfunding demands openness and this could be a challenge for entrepreneurs. ‘Crowdfunding is all about the entrepreneur marketing the business. I think you need to be a bit more open than you would normally be comfortable with being. Giving cagey answers isn’t good.’

In short
Crowdfunding is an increasingly popular way for businesses to raise funds. But it relies on good marketing and well-honed messages to be a success. Think hard about why someone would want to invest and discuss it with potential backers before launching it online.

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