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.

Who Raises Money in Crowdfunding?

Headline grabbing deals in the music industry - the Arctic Monkeys, Sting, Marillion, Amanda Palmer….the list goes on…. were a great boost to Crowdfunding, being used as a means of pre-selling albums. However, based on equity deals, the biggest market remains Information Technology, followed by Industrials and Business/Professional Services. Media, Retail, Leisure and Entertainment are about half the size.

Running a Crowdfunding Campaign

Raising any type of finance is time-consuming and for most companies, unsuccessful. Having decided to raise finance and selecting Crowdfunding as the means it is essential to do homework. There are many blogs on the internet offering advice and snippets of information on what you should and should not do. There is little value in repeating them here. Instead, there are a number of points that you really should consider:

1. How much cash is needed and for what period?
2. How much time do you have to dedicate to fund-raising?
3. Is crowdfunding the only route, or should you be looking at other sources?
4. What are you offering in return for the investment?
5. Which is the most suitable platform?
6. Can you obtain a realistic proportion of the funds quickly through personal contacts?
7. Do you understand the marketing required?

The Future of Crowdfunding

Many industry reports expect the Crowdfunding platforms to consolidate and the market to grow substantially. A degree of regulation will be required, which will increase costs. Crowdfunding is eating into the market used by Angel Investors, but this may lead to a consolidation in the market where Angel investors with particular interests who invest a substantially larger amount can sit alongside those making much smaller investments.

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