Crowdfunding (also known as crowd financing or crowd sourced capital) is where a number of people each invest, lend or contribute small amounts of money to your business or idea. This money is combined to help you reach your funding goal. Each individual that backs your idea will usually receive rewards or financial gain in return.
Crowdfunding usually takes place through a website. The platform will manage any online payments and may often offer services such video hosting, social networking and enabling contact with contributors.
This guide explains the different types of crowdfunding, examines the benefits and risks, and gives advice on whether this type of finance could be right for your business.
It also highlights things to consider when choosing a crowdfunding website, and where to find more information and support.
Is crowdfunding right for your business?
Crowdfunding can be a way of raising finance relatively quickly, often without upfront fees. It provides an alternative to funding from conventional means (eg a bank loan).
To raise funding you will typically have to showcase your idea to potential investors through a crowdfunding website. An investor will select what they want to get in return for providing a specific amount of money. This is usually based on what you decide to offer - this could be a stake in the company, a percentage of your profit or even rewards, such as gifts.
Crowdfunding can help you to generate funds for a project but can also allow a business to market test a product that may only be in planning phase. This process of raising this type of finance may also help to promote a business or product before it has launched.
Investors using crowdfunding will often look for:
- evidence of a tested idea that has the potential for future growth and development
- an idea belonging to a high growth sector (eg technology), or an industry that the funder has a personal interest in
- a niche idea that has an established audience in the marketplace
See Nesta's (National Endowment for Science and Technology and the Arts) guidance on understanding alternative finance.
Types of crowdfunding
An overview of the different crowdfunding options and the benefits of each
There are different crowdfunding options to choose from. Each type has different benefits for businesses and investors. You will need to consider which one is right for your business, project or venture.
Reward crowdfunding allows investors to contribute to your venture in return for non-financial benefits.
This type of funding is commonly used for creative projects. It usually operates as a tired system - the more an investor donates to your fund, the greater the reward they will receive (eg credits on a record cover, tickets to an event, free gifts etc). A benefit to the business is that the reward doesn't usually cost much to deliver.
Debt crowdfunding provides investors with the chance to fund your project in exchange for financial interest on their investment.
This finance option may provide you with borrowing at a lower cost than that offered by applying for a loan through a bank. The advantage of this model is that it may be easier to win support for a campaign, as the backers are attracted to getting a return. This type of crowdfunding may work best for businesses with a track-record of revenues.
An equity crowdfunder will invest money in return for shares, or a small stake in your business, project or venture.
This type of crowdfunding could work best for growth-focused companies in areas where there is potential for return.
This type of crowdfunding is designed for charities, or those who raise money for social or charitable projects, to gather a community online and to enable them to donate to a project.
While most established charities coordinate this through their own website, crowdfunding platforms can be useful for smaller organisations and people raising money for personal or specific charitable causes.
NESTA (National Endowment for Science, Technology and the Arts) has published crowdfunding guidance which provides further information on the different types of crowdfunding, statistics, examples and key considerations.
Things to consider when choosing a crowdfunding website
As crowdfunding becomes a more popular form of raising finance for business projects, there are a growing number of crowdfunding websites available to host your funding campaign. It is worth taking the time to research the different online platforms to find the one that will work for you.
There are a number of things to consider when choosing a crowdfunding platform, including:
Type of investors - individual, business and institutional investors can all pledge money to a project, but some platforms stick to having one specific type of investor.
Fees - different platforms have different structures to price their services. These might include arrangement fees, administration fees, legal fees, success fees, transaction fees, commission fees etc.
Type of platform - some platforms are purely a page that brings businesses and investors together. Others have a more active role such as one to one support and advice with your campaign.
Platform format and design - each website offers its own model, layout and pledge process, which attracts certain types of investors. Knowing what's important to potential investors and which platforms they like will help determine which is most likely to lead to the funding target being reached.
Security - will investors feel secure giving money to the website? You must ensure that the platform you choose to use is secure and follows all legal requirements when handling online funding transactions.
General v niche site - different platforms focus on different types of project. There are even platforms specifically for certain types of projects, from charities to technological products.
Overview and examples of crowdfunding websites that can be used to fund your business, project or venture
There are many crowdfunding platforms, each with different funding models and requirements. It's important to research and choose one that's best for your business, project or venture.
Kickstarter is a funding platform for creative projects.
Indiegogo is a funding website for nearly any kind of idea, business or project.
Back Her Business, a joint intiative from Crowdfunder and Ulster Bank, is a funding platform for female entrepreneurs. The crowdfunding is available via time limited competitions taking place throughout the year.
Read NESTA (National Endowment for Science, Technology and the Arts) guidance on other crowdfunding platforms.
Regulation of crowdfunding
Overview of the regulation of crowdfunding by the Financial Conduct Authority in the UK.
Crowdfunding is mostly unregulated. From 1 April 2014, the Financial Conduct Authority (FCA) started to regulate some forms of crowdfunding in the UK.
The FCA regulates:
- Loan-based crowdfunding: also known as 'peer-to-peer lending', this is where consumers lend money in return for interest payments and a repayment of capital over time.
- Investment-based crowdfunding: consumers invest directly or indirectly in new or established businesses by buying investments such as shares or debentures.
The FCA also regulates payment services provided in connection with:
- Donation-based crowdfunding: people give money to enterprises or organisations whose activities they want to support.
- Pre-payment or rewards-based crowdfunding: people give money in return for a reward, service or product (such as concert tickets, an innovative product, or a computer game).
Find out more about the FCA's crowdfunding policy and how you can protect yourself.
Advantages and disadvantages of crowdfunding
If you are considering raising finance for your business, project or venture through crowdfunding, there are a number of factors that you might want to consider.
Eight advantages of crowdfunding:
- it can be a fast way to raise finance with no upfront fees
- pitching a project or business through the online platform can be a valuable form of marketing and result in media attention
- sharing your idea, you can often get feedback and expert guidance on how to improve it
- it is a good way to test the public's reaction to your product/idea - if people are keen to invest it is a good sign that the your idea could work well in the market
- investors can track your progress - this may help you to promote your brand through their networks
- ideas that may not appeal to conventional investors can often get financed more easily
- your investors can often become your most loyal customers through the financing process
- it's an alternative finance option if you have struggled to get bank loans or traditional funding
Six disadvantages of crowdfunding:
- it will not necessarily be an easier process to go through compared to the more traditional ways of raising finance - not all projects that apply to crowdfunding platforms get onto them
- when you are on your chosen platform, you need to do a lot of work in building up interest before the project launches - significant resources (money and/or time) may be required
- if you don't reach your funding target, any finance that has been pledged will usually be returned to your investors and you will receive nothing
- failed projects risk damage to the reputation of your business and people who have pledged money to you
- if you haven't protected your business idea with a patent or copyright, someone may see it on a crowdfunding site and steal your concept
- getting the rewards or returns wrong can mean giving away too much of the business to investors
For a comprehensive overview of crowdfunding as an alternative form of raising finance for your business, see Nesta's (National Endowment for Science and Technology and the Arts) guidance on understanding alternative finance.
Before deciding on a crowdfunding platform for investment, you might consider whether other forms of finance could better meet your needs - see alternatives to equity finance.
Seven tips on how to run a successful crowdfunding campaign
Top tips and advice to help you run a successful crowdfunding campaign
With the growing popularity of crowdfunding as a way of raising business finance, it is important to consider how to make your campaign stand out from others. Here are some tips for a successful crowdfunding campaign.
1. Think about your total investment goal
When setting your investment goal try to make it as low as possible. Calculate how much money you need to cover your campaign goal and any extra expenses, including the fee that the platform takes. Do not look at crowdfunding as a way to make profit at this stage. A target of £800 that is exceeded is much better than a target of £5,000 which is unsuccessful.
2. Market your crowdfunding campaign
Marketing your crowdfunding campaign is central to its success. Crowdfunding platforms will host your project but it is your responsibility to promote your campaign before it starts. Set aside time before your campaign launch to use social media, press, networking, exhibitions, local radio and promotional materials to create a buzz around your project. Aim to have a number of interested investors ready to back your project on day one of your campaign.
It is also very important to plan promotion of your crowdfunding campaign during the campaign as you may experience a lull after the initial launch.
3. Gain social proof for your project
Talk to your friends and family about your project - are they willing to invest in your project? If the answer is no, it is unlikely that investors with visibility of thousands of competitive projects would want to back you. Ask your family and friends for feedback and learn from it.
If your family and friends are interested in investing, this can be a great sign that you have a good idea - make sure that all these people are ready to start funding your project on the first day of the crowdfunding campaign. This will help to create a buzz around your project and can encourage other potential backers to invest.
4. Research similar projects for inspiration and tips
Some crowdfunding platforms do not take down campaigns once they have finished (whether successful or unsuccessful), this is a great opportunity to research similar projects to your own and see what works well and what doesn't.
5. Create a video that captures your audience and promotes your project clearly
Set aside a video budget to make sure that it is interesting and clearly presents the benefits of your project. When planning the content, create a video that can be used for future marketing opportunities to get the most for your money.
6. Communicate effectively and honestly with all your backers and potential backers
Make sure you communicate clearly about what your project is, what it is trying to achieve, how much money is needed to make it a reality and what you will deliver and when. Answer all questions that are directed at you. When possible answer the questions publically but in some cases you may prefer to reply privately.
When you do have backers, make sure that you keep them up to date with your product and always let them know if you do not think you will make a deadline you had previously set.
7. Be creative if you are offering rewards
If you decide to go for reward crowdfunding, let your potential backers know what's in it for them and make your rewards interesting if you can. One option is to offer different rewards for different levels of investment - this can encourage a potential backer to add more to their investment.