10 steps to crowdfunding your business

Most businesses that attempt to crowdfund are either not accepted onto a platform or don't reach their fundraising goal - mainly because they're unprepared and don't understand exactly what it takes to attract investors.

Here are 10 steps that will help you get your crowdfunding business proposal right.

1. Is crowdfunding right for you?

Most businesses arrive at crowdfunding having failed with the traditional alternatives. Since the global recession, banks have made it far more difficult for small businesses to get loans, and now very rarely provide funding for anything they deem as potentially risky. At the same time, many startups are often considered too small or early-stage for traditional angels and VCs, leaving businesses struggling to find the capital they need to grow.

But crowdsourcing isn’t right for everyone. Its format favours the more entrepreneurially minded business leaders with an existing following and brand awareness, whether that be through social media or a strong database of contacts. If your business lacks the ammunition to generate early traction, you could face the agonising feeling of watching your pitch fall flat in front of a very public online audience.

2. Debt vs. equity

Your next decision is whether to opt for debt (paying back loaned money plus interest within a fixed term) or equity (giving away shares of ownership in exchange for capital). A lot of this will come down to two key factors: how much ownership you want to retain of your business, and how sure you can be of having the cash flow to repay lenders. Younger companies tend to try to avoid equity crowdfunding if the value of their business is still relatively low, but it is the logical choice for companies that have already accumulated a lot of debt through other means – and if you don’t make a profit, you usually don’t have to pay investors back.

If you do go down the debt route, you will need healthy cash flow – but as repayments tend to be less regular than ordinary loans, you’ll have more flexibility around capital. There are two main types of debt crowdfunding you can choose between: mini-bonds and peer-to-peer lending. Mini-bonds offer the most flexibility because repayments tend to fall annually or biannually, and the investor will also be tied in for a longer amount of time – usually three to five years. But they demand the highest interest rates around – normally 7% or 8%. Peer-to-peer lending, on the other hand, involves lower interest rates, although still higher than a bank would offer. However, the repayments are more regular – normally monthly – and less personal as lenders can redeem their loan parts at any time subject to the crowdfunding platform being able to reallocate them to new lenders – an option that doesn’t yet exist in mini-bonds.

3. Value your business realistically – and don’t ask for too much

Placing an over-ambitious valuation on your business won’t do you any favours. People will see through it and the pitch will fall before it’s even got going. Investors will want justification of the valuation – so keep it objective and seek advice from some financial experts. Then, think very carefully about your fundraising goal. Asking for more than you need is a sure-fire way to blowout, and being a success story relies on hitting your target. On the other hand, if you set it too low and it flies off the shelf, you’ll kick yourself later.

4. Don’t slack on the business plan

When it comes to crowdfunding, you mustn’t rush together the business plan, which the platform you choose will request to see before accepting you. They will want to know exactly what your plans for growth are, your financial forecasts, and how you will spend the funds. Seeing as crowdfunding platforms vet this, along with your financials, before listing, it’s by no means uncommon for businesses to fall at this first hurdle. Do your research and examine some successful crowdfunding pitches, and then adapt the things that you like to your own business plan. If you’ve gone for the debt option, you’ll likely have to provide at least two years’ worth of accounts posted with Companies House, and maybe also have a strong credit score. Assets aren’t important, but crowdfunding platforms and investors will want proof of the quality of your business.

5. Provide tax breaks

Many investors on crowdfunding platforms are also there because of the impact from the recession: interest rates at the banks are poor and they’ve found a new way to grow their savings. They’re looking for the largest possible return on their investment, so make sure you register your company as compliant with the Enterprise Investment Scheme (EIS) or Seed Enterprise Investment Scheme (SEIS). These schemes provide important incentives such as individual income tax relief and exemption from capital gains tax. The vast majority of ventures backed through crowdfunding platforms meet the required criteria, so certification will be an important stamp for your investment pitch.

6. Perfect your pitch

You will have to provide a summary of your pitch on whichever platform you choose – and this is the bigger factor that will define whether you succeed or fail to reach your fundraising goal. Whilst all the other steps are important, you will live and die by this chunk of text, so get it right. Make sure you include everything that you think an investor wants to know, but don’t ramble – make it clear, concise and relevant.

Investors will want to know about the history of your business, how you plan to grow it, what you will do with the proceeds, and how other investments have been spent to date. Communicating an exit strategy can also make a big difference, as will mentioning other investments in the pipeline. And finally, don’t forget to upload a video – it’s a brilliant opportunity to interact your brand with investors, and there is a high correlation between creating a good one and successful pitches.

7. Become the story

Getting all the relevant information in there is important to investors, but they also want to know about you and your management team – so get the right balance between professionalism and passion. Investors will be interested in your own entrepreneurial journey and are more likely to resonate with a human-centric pitch, so don’t be afraid to get your personality across. Explain why you started the business and how passionate you are about your products. Fundraising will come much easier if you engrain yourself in the story of your pitch.

8. Incorporate rewards

Many successfully crowdfunded businesses drummed up interest by offering interesting rewards on top of interest or equity. Chilango’s now-infamous ‘Burrito Bond’ offered free burritos to investors, while other retailers have parted with vouchers. Not only is this another cost-effective incentive, but it also builds on that personal connection with the investor by essentially making them VIP customers and, even, brand ambassadors. Chilango is a perfect example of how crowdfunding can not only be an excellent way to raise funds, but also a wonderful marketing tool. A more personalised incentive encourages investors to become true stakeholders in the company, and can also encourage them to commit more by offering higher rewards for higher investments. It will also keep them interacting with the brand way past the end of the deal.

9. Keep the pitch alive with Q&As and updates

Your pitch doesn’t end when you open for investments, and it can be very easy to lose momentum. Most crowdfunding platforms have a question-and-answer sector, so keep the pitch alive by communicating consistently with interested investors and other people involved in your business. Remember, crowdfunding is all about bringing people together, so make sure this section is kept active and interesting. Keep on top of all queries and ensure they are answered quickly and fully – every investor counts. Everyone likes to feel important when spending money, so this section is a perfect opportunity for you to make investors feel valuable to the success of your business. Providing regular updates on both your business and the progress of the pitch is also an effective way of keeping traction strong. People may follow your pitch for a while before deciding to part with their cash, so populate your profile with as many relevant updates as possible.

10. Promote, promote, promote

One of the most common mistakes that businesses make when crowdfunding is assuming that writing a killer pitch and having a great product is enough. Reaching the first 10% of your goal is the most difficult stage of the whole process, and you will struggle if you think your job ends at uploading the pitch. It is your job to get the word out about this crowdfunding opportunity, so you must work tirelessly to promote it to any existing network of contacts you have, whether that be through a database or on social media. Approach the media too – any coverage you can get in the press could prove invaluable. Identify some relevant publications and websites whose audience are likely to invest, and think of an interesting story angle to pitch to them. Any traction that you gather in the early stages will gain momentum as your pitch attracts more followers, so spreading the word is a vital component.

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Praseeda Nair

Praseeda Nair

Praseeda was Editor for GrowthBusiness.co.uk from 2016 to 2018.

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Growth Funding