What is crowdfunding? How to attract investment

Crowdfunding is an increasingly popular way to raise finance for a new business or project. Instead of looking for one big cash injection from a bank or traditional investor, crowdfunding is an alternative finance which involves asking a large amount of ordinary people for small amounts of money.

With dozens of online sites offering different crowdfunding models and opportunities, it’s easy to set up your own fund and be on your way to turning your idea into reality with the support of ordinary people. But how do you make your project a success?

What do businesses use crowdfunding for?

Crowdfunding taps into the passion and inspiration that lies behind so many innovative business ideas. Individual investments can start from as little as £10, but businesses have attracted huge backing through crowdfunding. BrewDog got £4.25 million through offering shares in return for lifetime discounts at their bars and online shop.

How could crowdfunding help my business?

The main benefit of crowdfunding is that it creates support and demand for your business as it’s getting off the ground. Your investors are likely to become your customers, and they can do a lot of the promotion for you, spreading the word through social networks.

It can be a great way to get your business noticed, as the creators of Kano found when they became the UK’s most crowdfunded idea last November. Among the backers who helped raise $1.5m in just 30 days to fund their kit to build a simple computer, was Apple co-founder Steve Wozniak.

Even if you’re not looking for high-profile backers, crowdfunding can be a simple and secure way for your family and friends to support your idea and raise awareness of your business in your local, or global community.

Most crowdfunding schemes will only release money once you’ve reached your funding target. If you don’t get enough investment in the time, you get nothing. Crowdfunding platforms will also normally take a percentage of your investment. And by releasing your idea publicly, there’s a small risk that someone may copy it.

5 top tips for successful crowdfunding

1. Make time to raise awareness

Some projects start slowly. You’ll need to dedicate time to promote your pitch every day. Spread the word through social media and encourage your supporters to do the same. Keep the momentum going.

2. Create a good pitch

Successful crowdfunded projects easily capture the imagination, have a great story and are easy to explain.

You have to inspire investors to back you, and that means appealing to their emotions, as well as their pockets.

While your initial pitch should anticipate potential questions, be prepared to engage with your investors and answer even more. Make sure you can deal with all the phone calls or emails.

3. Seed your idea through friends and family

Just as you research potential customers for any business, it’s really important to connect with them before you launch your pitch. Creating anticipation through word of mouth can help your crowdfund get off to a great start.

And, just like a busker always sticks a few coins in their hat, potential investors are more likely to pitch in if they can see that someone else believes in your idea too.

4. Choose the right platform

There are a host of different crowdfunding sites, each with a different focus, funding rules and likely investors.

Kickstarter is one of the best known and now has a UK site, but others include CrowdCube, Indiegogo and Seedrs.

Most work on the basis of donations, with investors receiving a gift or reward in return for backing your business.

Some are more like traditional loan schemes, and will expect to see investments returned with a small amount of interest. And there are crowdfunding platforms which give you direct contact with investors looking to invest in return for a stake in your company.

Some focus on creative projects like Unbound which funds publishing projects. Others may attract a more technological or ethically focused audience. Do your research and find the right site for your business.

5. Know how you’re going to spend the money

Investors like to know what they’re contributing to and what difference it will make.

It may be that you’re looking to start your business, so need to fund materials or cover set up costs. For example, in the North East, a team of journalists are looking to set up a new magazine. They need to cover printing and production costs, and by crowdfunding, they proved there’s a ready audience for their publication.

Crowdfunding can also be a great way of finding investment for projects for established businesses.

For example, Chagford Community Farm wanted to build a milking parlour for their goats and invest in cheese making. Thanks to over 200 backers they’ve reached their £15,000 target.