Crowdfunding is raising money directly from a large number of people all putting in relatively small amounts of money.
Debt crowdfunding is when investors lend money to a company, who then repays the investor on a regular basis. The company has to pay their debts before taking any profits, and if the company went under then debtors would get paid first. So this is a lower risk form of investment than Equity (see below).
Equity crowdfunding is when investors buy shares in a company and become part owners. They make a return on their investment either by being paid a dividend OR by selling their shares at a later date, when the company value has increased. The board of the company will decide whether to pay a dividend and how much, and if and when to sell the business, so this tends to be a higher risk form of investment as there is no guarantee of amounts or timescales for returns. Equity investments should have higher returns than debt investments, to compensate for this higher level of risk.
The donation model. This works on basic philanthropy, whereby people give money towards a good cause and are left with the warm glow of knowing they have done something positive, normally with some kind of social value. Within the arts, this has traditionally been represented by the concept of the sponsor, or patron, of a certain artist or field of creative work. Charities typically use this model with “Just giving” being one that many individuals use when raising funds for a good cause.
With this model investors (the crowd) make a pledge to the project for some money, and the project offers them something in return – like a poster or piece of merchandise, discounts on products or preferential terms on future purchases.
There are many ways for start-ups to raise capital – from friends and family, angel investors or venture capital funds, and of course banks, but Equity Crowdfunding is another way to raise funds directly from investors, using a web platform that links potential investors with those seeking funding to develop their business ideas.
Already the marketplace has seen that almost any type, shape or form of business can apply for funding. The popular misconception is that only tech start-ups are suitable to apply for equity crowdfunding, mainly because they have the ability to scale up rapidly as they require less physical infrastructure. This is incorrect, Crowdfunding is successfully supporting businesses and good causes irrespective of the sector they operate in.
Most Platforms operators will make an assessment of the suitability of your business to their process and the investment market for your type of business at any point in time.
For existing businesses. You should be able to demonstrate a well-managed business with potential for strong growth and potential profits or returns for your shareholders. Each time someone invests in your business they will be making a critical judgement and assessment as to whether your business will generate them a Return on their Investment (ROI).
For new businesses historical financial data is obviously unavailable therefore you need to demonstrate that your ideas are well researched, your business plan is robust, you have a clear strategy to deliver what you are promising, and have contingency plans when things don’t go neatly to plan.
There’s no easy formula for you to decide how much your company is worth – or may be worth in the future. For start ups this is particularly difficult, although licensed financial advisers and accountants can provide guidance on matters relating to valuation.
The platform operator is not responsible for the valuations set by companies undertaking fundraising through ECF platforms, so getting a realistic valuation is critical to raising the funds you need.
The process always begins with a registration on a Crowdfunding website/portal and verifying your identity and authority as a Director of the company. Once this has been confirmed you can begin the process.
The process for filling out the capital raising campaign requires you to provide a significant amount of information to the Platform Operator, usually on standard templates, this process usually taking several hours and requiring significant financial detail. The online systems usually provide a save facility that allows you to save and come back to your application so that you can collect the necessary information and give your business the best chance of being assessed and accepted onto the platform. Many Platform operators can offer dedicated advisors to assist but expect this to be chargeable to you.
Once you have filled out all the information, including a video that relates to your business you can submit your application for the Crowdfunding Operator to assess. Some operators provide a relatively light touch, depending upon the amount of funding you are attempting to raise and the type of funding/cause you are.becomes a major part of the process with business plans, marketing plans and competitor awareness being needed.
Funding regimes that are supporting either charitable donations or reward systems are the lowest level of checking, but for larger amounts the “due diligence“ process that you are required to fulfil
Platforms vary depending upon the type of funding being raised and the type of business you are. Selection of the right type of platform for you saves a vast amount of your time and increases the chances of you achieving your goals. Select your portal depending upon what type of funding you are looking for and make sure that the amount that you are trying to raise fits within their funding parameters.
Most sites do have max and min amounts they will try and raise for you so look at what they have already done already and make sure that you fit into their typical profile. Many portals are now focusing upon specific business sectors such as gaming, high tech, creative industries so make sure that you are a “good fit”.
These vary from site to site, he amount of assistance you need to complete your application, and the strength of your financial accounts if you are plying o borrow money. The interest rate will also depend upon the amount/quality of security and personal guarantees you can offer.
For loan based applications most Operators will require at least one form of security – just like a bank would. This can be a charge against company assets (for example if you are using the funding to purchase an item of equipment) but also many/most will want a personal guarantee against the amount you are wanting to borrow.
For existing businesses raising funds audited accounts are a must, together with projections of what effect the funding will have in the future and how you will be using the cash raised. For new business ventures detailed information on your plans and projections will be required with supporting evidence to justify your assumptions.
Once you have completed your application and it has been accepted (which can be days but is typically weeks) most portals will feature your application within a few working days. The Portal Operator will then allow a fixed period of time (typically 30 days but it can be longer) to allow you to reach your funding target. The Platform Operator usually will advise what is an appropriate timescale for your business.
If you achieve your target in less than the target period you may be able to close the deal and begin the processing of all the legal requirements. Some site allow over funding and some will allow you to retain any pledged funds even if you miss your target.
Once the deal is complete you can expect to receive he funds in about 10-14 days typically, less all the expected Operator expenses and charges.