Crowdfunding: What You Need to Know
If your business needs an injection of capital, could crowdfunding be the way to achieve it?
There was a time when small companies relied heavily on their banks for business funding, but in recent years the UK banking sector has become more reluctant to lend money. Alternative forms of funding, such as taking investment from a high net worth individual or Venture Capital (VC) firm, have become more popular, but even they can have their downsides.
The credit crunch, short-termism, exorbitant fees and limited pools of capital mean there are some valid reasons to avoid many of the usual options.
This all sounds like bad news if you’re a company that needs funding for, say, business expansion or additional marketing, but the good news is that there is now a viable alternative.
In October last year, my company, Clear Books, raised £840,000 using a unique approach. We did it ourselves and the fees were less than 1%. This alternative is crowdfunding, the collective effort of individuals who pool their money for a common aim. We took the crowdfunding model and did two extra things with it:
Firstly, we actively sought out ‘fanvestors’, customers with a passion for the company, know the product inside out and are keen to own part of the business that serves them. More than 700 Clear Books customers are now shareholders of the business, a community of loyal advocates. These shareholders have their customer hats on and have bought into our long-term vision rather than chase a fast buck.
Secondly, we avoided crowdfunding platforms and built our own. Using a crowdfunding platform costs with fees typically in excess of 5% of the funds raised. By doing it ourselves we kept them under 1%. We developed our own software to accept applications, take payments and issue share certificates directly to customers.
Crowdfunding worked well for Clear Books because certain key elements came together perfectly. We already have more than 5,000 customers and that gave us a community to reach out to. Furthermore, customers use our cloud accounting software every day so they are very familiar with the company, the product and team. Also, our customer base is made up of business owners and entrepreneurs and that made it easy to explain the concept.
Here are some considerations and tips if you’re thinking of crowdfunding for your business:
- Ask yourself, is your company appropriate for crowdfunding? Look at other businesses and sectors that have successfully gone down this route to see if there are any similarities with your proposition.
- Do you have a community of customers or potential ‘fanvestors’ that are passionate about your business? If not, crowdfunding might not be your best approach.
- Always research and test your target community by asking them if they would be willing to invest. Croudsourcing opinion is a very effective way of testing the waters. Clear Books did this and it gave us the confidence to proceed.
- Because there are different ways of crowdfunding and various platforms, do your research and settle on one that’s right for your company and your finances.
- As with all forms of funding, take professional advice and do things properly.
- Be crystal clear about why you are raising the money, what you intend to do with it and how your investors might benefit. And remember that with crowdsourcing, the benefits aren’t always just financial return.
- Tell a compelling story and reach out to your community using all of the marketing and communications tools at your disposal, including email, social media and PR. And do this long before you intend to start the crowdfunding – you need to get people learned and warmed up!
- It helps if you can encourage the ‘hardcore’ of your community to invest as this will pave the way for others.
- Keep your community up to speed with regular updates.
The landscape for business funding has altered and banks and VCs needn’t be the default option for all companies. Our philosophy at Clear Books is to champion and support the small business community. We do this by providing cloud accounting, payroll and HR software. With our crowdfunding initiative it was rewarding to see that the small business community was willing to support us too.
Tim Fouracre is founder and CEO of Clear Books, the cloud accounting software company