Finance · 5 August 2015

Crowdfunding for micro businesses – Charting the rise of the funding method

Crowdfunding harnesses the monetary value of the crowd to back new ideas
Crowdfunding harnesses the monetary value of the crowd to back new ideas

When it comes to alternative finance investment, crowdfunding is still a nascent industry. It came into being just four years ago when Luke Lang and I launched Crowdcube, the world’s first investment crowdfunding platform.

The idea behind Crowdcube was fuelled by my own experiences of raising finance and sparked by the frustration of watching Dragons’ Den, and seeing great business ideas fall by the wayside if pitch didn’t pique the interest of the five Dragons. It was representative of traditional routes to finance and we felt there must be an alternative option for businesses.

We wanted to harness the potential power of a crowd of investors, not just an elite few, by giving everyone the opportunity to be an “armchair dragon” and back great British Businesses. It’s an opportunity the public have relished. To date, our crowd of over 180,000 every day investors, professionals and VCs have invested more than £80m on Crowdcube, funding over 250 businesses of varying sizes and stages of growth.

From small businesses like Righteous, a young food company producing a range of salad dressings sold in over 600 supermarkets including Ocado and Booths, to the world-renowned Eden Project, which raised over £1.5m in less than 24 hours through a Crowdcube Mini-Bond.

Despite its relative infancy, crowdfunding has come a long way and is now recognised by many as a mainstream funding option. Crowdfunding has opened doors for businesses that would have otherwise found tough, or even impossible, to get off the ground or raise the capital needed to grow. With traditional routes to finance still difficult to access, particularly for startups and small businesses, investment crowdfunding has grown at a rapid pace.

According to a recent Beauhurst report, the percentage of seed-stage deals completed on crowdfunding platforms rose from five per cent to 30 per cent between 2011 and 2014, and venture-stage deals increased by 25 per cent in 2014 compared to 2013. It’s a trend that looks set to continue with Beauhurst predicting that half of seed-stage deals and 20 per cent of venture-stage deals in 2015 will involve crowdfunding platforms.

There’s been a seismic shift in the number of businesses turning to crowdfunding, far from being a last resort it’s fast becoming the first choice for many businesses looking to raise finance – from startups seeking seed-stage investment to more established businesses raising growth capital.

Pip and Nut, a brand of nut butters which raised £120,000 on Crowdcube last year, is a great example of the power of the crowd. The company’s founder, Pippa Murray, spent three months living in a shed to get her business off the ground and following investment from the crowd, Pip and Nut is now stocked in leading retailers such as Selfridges, As Nature Intended and Booths.

There’s also businesses like Adzuna, the UK’s fasted-growing job search engine, which recently finished pitching for investment on Crowdcube. It’s a VC-backed company with an executive team hailing from brands like eBay, Zoopla and Gumtree. The diversity of businesses looking to the crowd for investment is a real demonstration of its accessibility and appeal to businesses across the board.

Crowdfunding not only gives businesses a platform to access a wider pool of potential investors it can offer a whole host of benefits such as the ability to engage existing customers whilst attracting new brand advocates, which can be a fruitful source of experience, skills and contacts. There’s also the ability to leverage media coverage of a crowdfunding raise and the business, not to mention the post funding perks of having a crowd of people with a vested interest in helping drive the business forward.

Factors for crowdfunding success

Whilst crowdfunding is accessible and enables businesses to take back control of raising finance it’s not a sure-fire way of securing investment. Any business looking to seek to raise finance from our crowd of investors will go through our stringent due diligence process, circa 50 per cent of those businesses then go on to successfully seek investment.

For businesses considering crowdfunding, it’s important to have a clear and concise proposition outlining why someone should invest, how the investment will be utilised, along with an outline of the market opportunity and the team behind the business; all of which needs to be backed up with a sound business plan and robust financial forecasts. From our experience we know that people are more likely to invest in a business if the proposition is something they are passionate about or if it’s just too interesting or gripping to ignore – so businesses that tick one of those boxes are off to a good start.

Lastly, investors will of course want to know about the potential for return on their investment, so the business needs to clearly outline when and how that may happen. When it comes to promoting a crowdfunding raise, the biggest investment businesses will need to make is time and effort. Of course it helps if additional budget can be allocated to a dedicated marketing campaign, but it’s not always possible and it certainly won’t guarantee a successful crowdfunding raise. There are plenty of activities small businesses can do to promote the raise at a relatively low cost. Around 80 per cent of the businesses to fund on Crowdcube have less than ten employees at the time of seeking investment, so if you’re a micro business looking to raise finance, crowdfunding is certainly an option worth exploring.

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ABOUT THE EXPERT

Darren Westlake is the co-founder and CEO of Crowdcube, an online platform that enables startup, early and growth-stage businesses, from a range of sectors, to raise finance with the added benefit of being backed by the crowd.

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