Should you raise money through crowdfunding

There is a buzz in financial circles about Crowdfunding. What is it really? Is it an easy way to raise money for a venture? Is it only for internet geeks? Is it real?

What is Crowdfunding?

The term Crowdfunding is sometimes used to include Peer to Peer (P2P) lending and sometimes excludes it. In this article we shall keep them separate.

P2P lending (2015 global market $25bn) is where the investor decides on the amount that they wish to invest and place it with a selection of companies selected by a broker. The loan repayments are made by the companies who take out the loan.

Crowdfunding (2015 global market $9bn)has a different emphasis. The company requiring the finance decides what it will offer. This may be in the form of advanced sales, other rewards, revenue share, equity in the company or a mixture of these. Charities also use the platforms to raise money for special projects.

Investors retain their funds until they decide an investment opportunity looks appealing. Having pledged the money, some sites require achievement of a funding target before investments are taken, whilst others allow whatever funds have been raised to be taken when the funding period closes, whatever level they have achieved.

There are many web-sites used for Crowdfunding, each making slightly different offerings and targeting different markets.

How successful is Crowdfunding?

In 2015 between 15% and 30% of offerings listed on Crowdfunding websites realised their fundraising goals. The average number of backers ranged between 20 and 100 depending on the web-site, with average pledges of around $100 and the majority of successful campaigns are for less than $10,000.

It could be that the market is young; the barriers to making a pitch are low; the offerings are of low quality; marketing strategies for raising investment are poor or it could be that there are too many requests for funds and not enough investors. A critical analysis will be required for a useful analysis.

However, in a more recent report by a company offering services in this market, it is claimed that over 50% of the equity crowd-funding campaigns were successful, raising on average £1.25m.

In running a Crowdfunding campaign it is essential to understand the dynamics and psychology in the market. Initial backers are key to success as many investors like the reassurance of others having already invested. Typically, at least 10% of the amount should be pledged to start others taking an interest. This level is usually driven by personal contacts. In the rest of the campaign period active continuous marketing is essential.

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