Crowdfunding, the practice of raising money from many different backers (or ‘the crowd’), is still a relatively new concept. Indeed, even the best-known platform, US-based Kickstarter, only launched in 2009 – so you’d be forgiven for being unsure as to which platform is right for your business.
Certain characteristics exist almost across the board, such as the opportunity to upload a video introduction to your pitch, and the all-or-nothing model (whereby if you don’t hit your fundraising target, you don’t receive a penny). However, the key difference between the UK’s main crowdfunding contenders is whether they ask you to offer rewards or equity to your backers.
Reward vs. equity
It is important to evaluate the pros and cons of each model. The reward-based approach is most common as it has fewer legal constraints. This means that if your project proves especially popular, you may be able to raise more than your funding target. This model is well suited to creative start-ups and can provide an opportunity to pre-sell your product and raise money for its manufacture.
However, as many of these platforms use PayPal (or similar payment providers) you need to allow for an additional 2-3.5% charge on every transaction and adjust your target accordingly, to take these costs – plus the commission of your chosen platform – into account. Equity-based platforms generally operate by bank transfer, so are relieved of these additional charges.
Generally speaking, equity platforms are well suited to start-ups requiring larger amounts of finance. But, you will have to decide how much equity you’re prepared to give away in return for your investment – based on a realistic valuation of your business. (Of the more than £4m successfully raised through Crowdcube by the autumn of 2012, the average amount of equity released was 16%, and the average amount raised was £146,552).
As crowdfunding involves lots of backers offering small amounts, each individual investor will generally only own less than 1% of your business. However, because your investors will receive equity in your business, they will be much more concerned with the growth potential of your idea and the potential returns.
To meet your target on an equity-based platform you need to not only capture the imagination of the crowd, but demonstrate that your idea makes good business sense. However, thanks to the government’s Seed Enterprise Investment Scheme (SEIS) you can also offer potential backers tax relief for investing in your start-up through crowdfunding via platforms such as Crowdcube and Seedrs.
Equity-based platforms
Crowdcube
Website: www.crowdcube.com
Good for: Raising large investments and building a community with a vested interest in your business’ success
Suitable for investments: Of £5,000 or more
Commission: 5% of successful investments
Maximum investment period: 90 days
The world’s first equity-based crowdfunding platform – and the first to host a £1m investment through crowdfunding – Crowdcube provides the structure of traditional angel investment, but with the power of the crowd from which to seek it. Investments start from just £10, empowering ordinary people to invest, and helping start-up and growing businesses meet their targets through power in numbers.
Ideal if you need to raise large sums of finance, investors receive greater equity stakes in your business the more they invest. For example, if you offer 10% of your business for a £100,000 investment, someone investing £10,000 will receive 1% equity. You can also offer prospective backers exclusive rewards, including tax relief, as an added incentive to invest.
The first Financial Services Authority (FSA) regulated crowdfunding platform to enable investors to become direct shareholders in UK companies, Crowdcube provides investors with access to advice from independent experts from the Financial Ombudsman Service (FOS). Investors can also benefit from the option of claiming compensation through the Financial Services Compensation Scheme (FSCS).
Startups
Website:
www.crowdcube.com/partner/startups
Good for: Raising seed capital and larger investments with the support of over 250,000 Startups readers each month
Suitable for investments: Of £5,000 or more
Commission: 5% of successful investments
Maximum investment period: 90 days
Hosted in partnership with Crowdcube, our crowdfunding platform follows exactly the same equity-based model. Entrepreneurs that raise investment through the Startups platform will have access to a large community of start-up support, from Startups.co.uk’s audience of more than 250,000 unique visitors a month.
Every successful investment will be profiled on Startups and these will be further publicised to our ever-expanding social media community.
SeedUps
Website:
www.seedups.com
Good for: Tech start-ups with no previous experience of raising investment, and sourcing high net worth investors
Suitable for investments: Of under £500,000
Commission: 2% of successful investments (+ another 2% taken from investors)
Maximum investment period: 180 days
Where crowdsourcing meets crowdfunding, SeedUps is suited to tech entrepreneurs who are uncertain of a suitable valuation for their start-up. Each pitch owner must first introduce their business and outline their finance target, then await feedback from sector-relevant members of the crowd. Investors’ bids are used to create a valuation for the business, with only the best bids presented to the entrepreneur.
SeedUps only allows sophisticated investors and high net-worth individuals in the US, UK and Ireland to invest through the site, meaning entrepreneurs who have never raised investment before could benefit from investors’ insights and experience. The pitch owner can then use this feedback to tweak their offering before going live with their crowdfunding page.
Seedrs
Website:
www.seedrs.com
Good for: Pre-revenue UK start-ups that are either at concept stage or about to officially start trading
Suitable for investments: Of under £150,000
Commission: 7.5% of successful investments (+ 7.5% taken from investors’ profits)
Maximum investment period: 90 days
Helping early-stage start-ups access support to bring their ideas to fruition, Seedrs is specifically aimed at pre-revenue businesses. This means that potential investors – who are likely to be individuals looking to develop an investment portfolio, rather than ordinary members of the public – can get involved from the very beginning, support your growth and get the best rate of investment.
That said, friends and family can support your pitch too – investments are accepted from £10 upwards. However, to protect the intellectual property of early-stage ideas, businesses are publicly listed with only a number and a brief description, with investors having to sign in and complete a short questionnaire before they can see your firms’ name and full proposition.
The FSA regulated platform acts as a nominee and sole shareholder, managing the investment made by crowdfunders and distributing profits to them, with a 7.5% charge.
Reward-based platforms
Kickstarter
Website:
www.kickstarter.com
Good for: Creative projects with a clear ambition (such as to get a product to market)
Suitable for investments: Of any amount (no minimum or maximum limit)
Commission: 5% of successful investments
Maximum investment period: 60 days
Just launching in the UK as this article went to press, Kickstarter has already become revered in the States. Its biggest success stories include the Pebble “smartphone watch”, which raised more than $10m (£6.4m) of a $10,000 (£6,247) goal, and the Double Fine Adventure game, which raised nearly 10 times its $400,000 (£250,000) goal.
Well-suited to product-based businesses, the platform favours projects relating to art, design, fashion, film, food, games, music, photography, theatre and technology, rather than those with a social cause. Unlike some of the equity-based platforms, Kickstarter requires projects to have a clear goal, such as to make a book or produce a product, rather than simply requiring funding to start up.
Peoplefund.it
Website:
www.peoplefund.it
Good for: Socially minded start-ups with a good idea to change the world
Suitable for investments: Of under £50,000
Commission: 5% of successful investments
Maximum investment period: 70 days
Part of the River Cottage family, Peoplefund.it is owned by Hugh Fearnley Whittingstall’s production company Keo Films – and maintains the brand’s values of community, sustainability and homegrown innovation.
Targeted at individuals with fresh ideas for fledgling community projects, on Peoplefund.it – as with some other platforms – backers can choose to further support the projects they love by choosing not to receive a reward. If a project doesn’t meet its target first time round, pitch owners on PeopleFund.it can try again. However, they are asked to review and improve their proposition first.
Pleasefund.us
Website:
www.pleasefund.us
Good for: Small-scale, extraordinary and creative projects
Suitable for investments: Of any amount (no minimum or maximum limit)
Commission: 5% of successful investments
Maximum investment period: 90 days
Very much the people’s platform, Pleasefund.us attracts a large variety of project-based pitches, from philanthropic filmmakers to creative innovators. Particularly suited to entrepreneurs with an ethical objective, the platform may also suit start-ups seeking finance for a particular project, such as to pay for presence at an international event.
Although there is no ceiling for investments on this platform, the average successfully-met target is between £3,000 and £4,000. Pleasefund.us plans to introduce the option to release equity soon.
Crowdfunder
Website:
www.crowdfunder.co.uk
Good for: Creative, ingenious or humorous ideas and start-ups that are a bit of a ‘wildcard’
Suitable for investments: Of £100 or more
Commission: 5% of successful investments
Maximum investment period: 60 days
The sister site to Crowdcube, Crowdfunder uses the same structure as its equity-based relation but is tailored to entrepreneurs looking for backers rather than investors. Without the need for businesses to deliver financial returns, Crowdfunder is focused on being a creative forum for dynamic, original and meaningful projects.
The targets of pitches successfully funded through the platform since June 2011 have averaged £1,500 (but rising) and businesses pitching the kind of products people want to own, or games they want to download, have enjoyed particular success. The platform is also well-suited to start-ups with an unconventional, tongue-in-cheek or innovative but untested idea.
Sponsume
Website:
www.sponsume.com
Good for: Fun, artistic ideas and start-ups requiring funding for a specific project
Suitable for investments: More than £200
Commission: 4% of successful investments
Maximum investment period: 90 days
Well suited to fun, radical and social start-ups, Sponsume has a large artistic community ready to back one-of-a-kind ideas. With pitch targets averaging between £5,000 and £7,000, this platform is especially useful for funding one-off creative projects, such as producing a short film, festival or exhibition.
Ideas relating to the arts, start-ups in the music or film industry ,and projects with a political, charitable or community element may be particularly well-received; as may entrepreneurs seeking funding to launch an innovative new product.
Fundageek
Website:
www.fundageek.org
Good for: Pre-launch and early-stage start-ups focused on technical innovation
Suitable for investments: Of any amount (no maximum limit)
Commission: 5% of successful investments (or 9% if premium marketing resources selected)
Maximum investment period: 90 days
Although based in California, Fundageek allows entrepreneurs and backers anywhere in the world to use its technology-focused crowdfunding platform. For businesses this means they have a global audience of potential backers to promote their idea to, as well as an audience with existing insight and interest in the tech sector.
Designed to showcase the most innovative new ideas on the tech scene, Fundageek also allows entrepreneurs to raise funding for research projects. This makes it particularly well-suited to pre-launch businesses and innovators requiring finance for product development, or to get an idea to market.
Buzzbnk
Website:
www.buzzbnk.org
Good for: Social enterprises and other ventures pursuing social change
Suitable for investments: Of between £5,000 and £30,000
Commission: £25 registration fee, plus 5% of successful investments
Maximum investment period: Unlimited, but 90-180 days advised
Unlike other crowdfunding platforms, Buzzbnk allows backers to pledge their time and support, as well as their money – such as by pledging to write a blog, share your campaign via their social networks, or run a banner on their website. In fact, Buzzbnk straddles the gap between equity and reward-based platforms, as you have the option to offer interest payments, as well as non-monetary rewards, depending on the size of the pledge.
Buzzbnk campaigns are commonly funded by a large number of small (£10-£20) pledges, but each campaign can be split into achievable milestones. For example, if £5,000 would allow you to lease a space, that could be your first milestone. When you hit this, the money will be released and you can reset the timeframe with another milestone – for example, £3,000 to buy the stock for that space. Buzzbnk donates more than 73% of its profits to charity.
Indiegogo
Website:
www.indiegogo.com
Good for: Product-based businesses with a bit of a gimmick factor and start-ups with a story
Suitable for investments: Of any amount (no maximum limit)
Commission: 4% of successful investments or 9% of flexible funding campaigns
Maximum investment period: 60 days for fixed funding and 120 days for flexible funding campaigns
Indiegogo somewhat bucks the trend of crowdfunding. For, as well as offering the all-or nothing (‘fixed funding’) model, it also allows you to host a flexible funding campaign, through which you keep all funds raised even if you don’t hit your target.
This may suit if you can make progress with even a small amount of funding. However, it should be approached with caution, for if you raise too small an amount of money to deliver on your pitch, your backers aren’t going to be happy.
Projects on Indiegogo range from fundraising for cancer treatment to community projects, but the most successful start-up campaigns are those with a mass-appeal product, such as a ‘salt gun’ to kill flies and a multi-functional iPhone case.
As well as these platforms, there is Funding Circle – which provides swift access to low-cost loans from investors – and you can also find business backers through the UK Angel Investment Network.
If you have had a successful experience on another UK crowdfunding platform, get in touch and share your recommendations.