Crowdfunding for new businesses

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One of the benefits of the web is that it allows us to reach more people than ever before. Specialist finance websites, such as Kickstarter, have the potential to reach a large number of would-be investors looking to contribute to business start-up costs.

Start Quote

You don't need to go to a bank, you don't need to go to that middle-man, you don't need to do that negotiation. It's just you, straight out there, using the power of the network of people that are looking at these websites.”

End Quote Martha Lane-Fox

This approach is known as 'crowdfunding' and has become an increasingly popular alternative to raising money through conventional means like bank loans.

It also means that people wishing to support a business can do so by making a small financial contribution, often as little as £5, and allows potential funders to spread their investments or donations across a number of projects.

Baroness Martha Lane-Fox is a successful entrepreneur and co-founder of Europe's largest travel website, as well as being chair of digital skills organisation Go ON UK.

She sees crowdfunding as having many benefits for anyone thinking of setting up their own business, "You don't need to go to a bank, you don't need to go to that middle-man, you don't need to do that negotiation. It's just you, straight out there, using the power of the network of people that are looking at these websites."

She adds, "You really don't have to be technical to enjoy using crowdfunding. Just go to one of the existing platforms and put your product, service or idea out there."

Different types of crowdfunding

The best known crowdfunding websites such as Kickstarter, IndieGogo and RocketHub provide businesses with a platform to offer investors who pledge cash-exclusive incentives related to the business.

Crowdfunding models

Kickstarter for Lee 'Scratch' Perry: Back on the Controls
  • Pledges in return for rewards or perks
  • Cash offered in return for share of the business (equity)
  • Donations with no return - just a nice warm glow

Perks might include sneak previews or a credit on the business website.

Another way of raising funds for a new business is to exchange a stake in the business for the sum of money required to launch the product or service proposed.

This is how Dragons' Den works, with business people asking investors for money known as venture capital. This stake is sometimes referred to as 'equity' in the business.

Finally, some crowdfunding platforms ask only for donations with no perks, other than the knowledge that the project will be funded, being available for investors

Meet the entrepreneurs

Maddy & Becky: Maddy's Fish Bar
Maddy and Becky Maddy and Becky in the fish shop

Maddy and Becky are opening a fish and chip shop in London's New Cross. Maddy describes the venture as a traditional chippy with 'very modern twists'.

Crowdfunding total: £20,000 - achieved and plan to open end spring 2014.

Platform: Kickstarter

Perks offered: Pre-launch menu tasting for two, honorary contributor listing on business website. Minimum pledge £5.

Becky insists that she is not tech savvy, but she was excited to watch the pledges coming in for Maddy's Fish Bar on a mobile app.

Maddy and Becky know that they must be able to deliver the perks promised funders at the same time as getting the business up and running or they will lose money.

Daniel Boyle: Lee 'Scratch' Perry - Back On The Controls
Lee 'Scratch' Perry Reggae legend Lee 'Scratch' Perry

Record producer Daniel believed that a bank was unlikely to fund his project to produce a new album 'Back On the Controls' with reggae legend Lee 'Scratch' Perry.

Crowdfunding total: £14,000 - expected release spring 2014.

Platform: Kickstarter

Perks offered: Pre-release digital download of album, vinyl copy signed by the artist.

Daniel says: "It's hard work. It's a hustle. You're asking people for money and how do present that in the right way?" He stresses the importance of involving people who have pledged with the project and engaging with them as a community.

Using a public platform to raise money allowed Daniel to see how many of Lee 'Scratch' Perry's fans were keen to hear new material. It allowed him to get a better sense of demand for the album and avoid being saddled with all the costs of producing the new album himself.

Andrew Wordsworth: E-Car Club
Andrew Wordsworth Andrew Wordsworth of E-Car Club

The UK's first all-electric vehicle car club in the UK, targeted at people who want the convenience of a car but don't want the expense and hassle of owning one.

E-Car Club was funded using this kind of model but instead of going direct to potential investors they used a website called CrowdCube. Instead of relying on one source of finance, the site attracts a larger number of small investments to cover start-up costs.

This allows the individual funders to spread their risk across a range of different investments rather than putting all their eggs in one basket.

Crowdfunding target: £100,000

Platform: CrowdCube

Perks offered: A 20% share of the business, sometimes referred to as equity, split between the number of investors (around 60 individuals) who contribute to meeting the target set on the website.

Andrew says: "Investors are obviously looking for a financial return - they hold shares in the company".

Selling your business idea

Martha Lane-Fox has some sound advice for would-be entrepreneurs using crowdfunding.

- Think very carefully about what you're trying to fund

- Do your homework so you understand the scale of the project

- Create a short, simple description of what you want cash for

She adds that using crowdfunding is a good way to test a product or idea without going into large-scale production. For instance, providing the money to demonstrate how something works and test the appetite for the before seeking further funding for the business to operate on a larger scale.

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