The Alternative Finance universe is expanding and evolving, but for most small and medium sized businesses in search of funding, there are two basic options – namely borrowing or selling equity via a crowdfunding platform.
Borrowing via an online platform is the most popular of the two, at least in terms of the sums of money involved. According a major survey of the market, carried out by the Cambridge Centre for Alternative Finance and published at the end of 2017, platform lending to businesses totalled £1,232 million in the previous year, while money raised through equity crowdfunding rose 11 per cent to £232 million.
But crowdfunding continues to attract huge amount of attention from businesses. Indeed, according to accountancy firm Cowgill Holloway, “equity crowdfunding” was the most searched term by SMEs in 2017.
Arguably that isn’t surprising. Aside from providing a means to raise money, crowdfunding can also be an effective marketing tool. That is certainly true of rewards crowdfunding, which is often used simply as a means to sell ‘interesting products’ before production begins by asking ‘donors’ to pay up front.
A Marketing Tool
Equity crowdfunding can also be a useful marketing tool. For one thing, campaigns generate publicity. Equally important, if, say, 100 or 500 investors take a stake in a startup or early stage business, almost by definition they become advocates. What’s more finance can be raised relatively rapidly.
So if you’re seeking money, plus a marketing boost, crowdfunding might appear to be the way forward. But it’s important to remember that not all businesses are investable or suitable. Here are some of the factors you should be considering.
Check One: Does The Business Have Growth Potential?
A business doesn’t have to have growth potential in order to borrow. All that investors require is is a degree of assurance – backed by due diligence – that the company is in position to honour its investment. In contrast, equity investment is about growth – and in particular, growth in the value of the shares. Some crowdfunding investors might be less demanding on growth potential than VCs or angels, but they will want to know how the business intends to deliver a return on their investment.
Check Two – Is There an Easy to Understand Proposition?
Equity Crowdfunding platforms are not all the same. Some focus on specialist areas, such as robotics or renewable energy. But as a general rule of thumb – although this is not universal – on the more generalist platforms, easy to understand propositions tend to attract more investors. There is a simple reason for this. Even in the world of professional investors, highly technical areas such as life sciences or A.I. tend to be the domain of specialists. Similarly in the crowdfunding world, retail investors are more comfortable with products they can relate to.
Check Three – And Can You Tell a Compelling Story?
And assuming you have product that can be easily described, it is also important that you can tell a compelling story about why it will be successful in the market. There are two sides to this. One is the video pitch, designed to capture the attention of a potential investor who may have a limited attention span – or at least be time poor. But equally, it’s important to have evidence that the company’s offering will succeed. A company that has been trading for a while should be able to produce figures for sales. For a startup, the key to winning investors might be a prototype (proving the concept) coupled with a realistic business plan and extensive market research.
Check Four – How Will You Use The Funds?
Just like professional investors – who may also be present in a crowdfunding round – those who commit £100, £500 or £2,000 to a proposition will want to know how you intend to use the funds raised in service of growth. Clarity is key. It is equally important to ask for a realistic amount of money – neither too high or low – to achieve the growth goals.
Check Five – Would Rewards Crowdfunding Be A Better Bet?
As previously mentioned, in a rewards crowdfunding campaign, no equity changes hands. Instead, a company might persuade 1,000 investors to pay upwards of a £100 to be the first owners of a household gadget. This provides a means to kickstart a business without surrendering any control. However, when the money comes in, it is spent. Equity crowdfunding provides a means to raise capital, not simply to sell a set amount of units but to genuinely grow the business.
Check Six – Are You Comfortable with an Exit Plan?
It’s likely that a crowdfunding campaign will only represent part of your fundraising story. For instance, you might start with a crowdfunding round, then go on to raise cash from angels or VCs. All these investors will ultimately be looking to secure an exit through a sale event. If you are not comfortable with this – or to put it another way, if you want to retain ownership indefinitely – another form of fundraising might be more suitable.
That’s why the diversity of the Alternative Finance market is important. If crowdfunding isn’t the right course for a business, then there are a range of other options, such as Peer-to-Peer lending, Private Debt Platforms – such as provided by The Route — Finance, invoice trading, and Initial Coin Offerings.
To find more about The Route’s Private Debt Platform call: 020 3141 9040