There’s a new kid on the block when it comes to raising cash, and over the past few years it’s been taking the business world by storm: crowdfunding.
Crowdfunding harnesses the power of the internet by allowing you to appeal for cash directly to members of the public.
Using a reputable crowdfunding website such as crowdcube.com or crowdfunder.co.uk, you can make your case as to why people should back your project.
In return you give funders a variety of rewards, ranging from an equity stake in your business to perks that make them feel part of the team.
In fact it’s a formula that’s become so successful that it’s been successfully used by some companies to raise millions of pounds.
Equity for Punks
One example is Scottish brewer Brewdog, which has grown from being a niche player in the burgeoning craft ale market to a market leader with global ambitions.
In 2013 BrewDog raised £4.25m via crowdfunding to expand from its Scottish base and launch its products around the world.
The brewery smashed all previous crowdfunding records by selling £1m of shares in the first 24 hours of the offering, which it calls Equity for Punks.
It is currently raising a new round of crowdfunding investment to open a chain of craft ale bars in the US.
Brave new world
Co-founder James Watt said: “The mental shackles that have tied down British SMEs to the staid and unimaginative traditional methods of raising funds have been untethered. We have ushered in a brave new world.”
As well as receiving equity in the business, investors also receive rewards, including a 5% discount in its bars around the world, a 20% discount in its online shop, and a VIP tour of the brewery.
Early investors in the company are estimated to have made a return of 2,800% earlier this year when San Francisco private equity company TSG Consumer Partners bought a 22% of the company in a £213m deal that values the company at £1bn.
Meanwhile Sheffield-based Abbeydale Brewery has used the power of crowdfunding to throw a huge 21st birthday party and ratchet up enthusiasm to build a new, bigger, brewery.
The ‘Piss-Up in a Brewery’, as the event was called, saw more than 550 ale enthusiasts explore the brewery and trying some exclusive brews, with many guests asking how they could invest.
Barry James, founder of fellow Sheffield-based business the Crowdfunding Center, said, “When local success story Abbeydale Brewery approached us about their hugely ambitious plans for the future, and asked whether they could be crowdfunded, we couldn't resist putting what we've learned to work for another Sheffield business.
“What this, along with all the data we've collected from 500,000 crowdfunds around the globe, tells us is that crowdfunding is not just about funding apps, tech and startups within sight of Silicon Roundabout but real businesses across the UK like Abbeydale Brewery, fostering growth, success and creating more jobs. We’re excited about what comes next!”
How does crowdfunding work?
Some crowdfunding sites vet new launches, while others don’t.
However, both for your own benefit, and because you are taking other people’s money on trust, you should always put together a sound business case explaining why you need the cash.
That means drawing up a fully costed business plan detailing your goals, just as if you were applying for a bank loan.
Crowdcube, one of the longest established sites, insists on business plans that show three years of financial projections.
You should also show you have carried out the necessary market research and that you have the right people in place to make it work. Set out your financials, showing evidence for your expected income growth and the costs you will incur – and they need to be honest and realistic.
Shares or rewards?
You also need to decide whether you are going to offer shares in your business. It’s a major step, so don’t give away equity lightly, particularly if you are hoping for a buyout further down the line.
Big investors don’t like lots of small investors who might be reluctant to sell – one way round this is to offer non-voting shares.
Alternatively you might feel you can just offer rewards in return for a cash pledge. For instance, The People’s Energy Company is raising cash on Crowdfunder to take on the big energy suppliers. If you pledge £100, you will receive free energy worthy £20 once 20,000 live customers have registered.
Whatever your approach, once you have decided on your plan of action, choose your crowdfunding site and post your project.
A word of warning if you are reading this with a view to pledging cash for an equity stake in a business venture – there is currently no secondary market for selling on shares in a private limited company, which means you will be unable to sell on your stake.
Another twist on crowdfunding is using it to raise loans, rather than selling equity or offering rewards. Money&Co is a crowdfunding site set up by former fund manager Nicola Horlick, who hit the headlines in the nineties for juggling a high-flying career with raising a big family.
With Money&Co, your business proposition is vetted by the site and rated for risk, with A+ being the lowest risk and C+ the highest risk. You pay a listing fee, and then your loan application is put into an auction, where people can bid as to how much of your loan they are prepared to cover. One the full amount has been raised, the auction can be left open for up to 14 days in a bid to lower the rate of interest.
Business can borrow up to £3m, while lenders can get returns of between 6% and 10% per annum, less a one per cent annual Money&Co fee. However, if you are thinking of lending through a site like this, you should always remember your capital is at risk if the company you are lending to goes bust.