Contents

• How does crowdfunding work?
• Crowdfunding Platforms
  • Donation Crowdfunding:
  • Debt Crowdfunding:
  • Rewards Crowdfunding:
  • Equity Crowdfunding:
• Crowdfunding – Things to be considered
• Which type of crowdfunding platform should I use?
• How do I start a crowdfunding campaign?
  • Set a compelling story:
  • Plan your campaign:
  • Set up your campaign page:
  • Focus on social media
  • Keep updating:
• Concluding a campaign
• Advantages and disadvantages of crowdfunding
  • Advantages
  • Disadvantages
• Final Thoughts

Crowdfunding Campaigns – Business Opportunities

In recent years, an increasing number of businesses have considered crowdfunding to acquire capital. So, what is crowdfunding exactly, and how does it work?

Crowdfunding, which is commonly considered an alternative source of corporate finance, involves a large number of individuals contributing small amounts of capital that contribute to a funding target set by the company. Crowdfunding allows companies to raise funds without turning to traditional sources of money. It’s getting increasingly popular, especially as the economy continues to deteriorate during the pandemic and current global economic situation.

It is a method of getting funding for projects, campaigns, charities, and enterprises from many individual investors, usually through the use of an online platform. These businesses can get off the ground or start new projects by receiving the necessary cash flow boost. An entrepreneur can pitch their business or idea to almost everyone globally by using a web-based crowdfunding platform or social media. Most of these campaigns take place on the internet, have specified deadlines for raising funds, and declare specific financial goals.

Those looking to invest can be connected with suitable businesses, with some simply selecting what they consider to be a solid investment opportunity with significant returns.

The exposure of the firm seeking funding to a large number of possible investors, as well as the opportunity to express their objectives, aims, and future aspirations in detail, is an additional benefit for the company seeking money. This is especially useful for retail businesses, as it quickly locks in customer loyalty.

How does crowdfunding work?

Companies seeking to crowdfund in the UK use a variety of web-based platforms, including Kickstarter, Crowdcube, Seedrs, Crowdfunder, Indiegogo, and Funding Circle. Crowdfunding pages are typically hosted on the platform, which collects donations from investors while also giving them with online accounts and transparency into the process. To obtain loans or investments from as many people as possible, a company or individual seeking funding will typically pitch their project online, where a potentially millions-strong audience awaits.

In turn, the platform will pay the project initiator the funds gathered from the investors/audience, with a tiny amount taken as a service fee. There will be different criteria for applying to pitch and how much they can raise on each platform. It would be best to thoroughly explore the various crowdfunding sites to choose which platform is perfect for your business. It’s a wise idea to study their regulations thoroughly before deciding on a platform so that you don’t have to stop your campaign before it even gets started. Online crowdfunding platforms also allow borrowers to present their growth plans in a complete online document containing the regular cash flow and sales projections and an idea of their outcome.

Crowdfunding Platforms

There are many different crowdfunding platforms available, each with its own set of objectives and potential profits for investors. They usually fall under one of several categories, such as:

Donation Crowdfunding:

Crowdfunding pages are typically hosted on these platforms by individuals or organisations seeking funding for philanthropic causes. Donation-based crowdfunding is when people donate money to a campaign, a company, or a person in exchange for nothing. Individuals who donate money do so solely to assist your company’s growth.

Debt Crowdfunding:

These are peer-to-peer (P2P) lending donations based on debt. It comprises a group of micro-investors, where borrowers pay pre-agreed interest to lenders who expect their money back. This is more like a typical loan in that the investors are looking for a return on their initial investment as well as a set interest rate.

Rewards Crowdfunding:

When you use rewards-based crowdfunding, you provide individuals with the opportunity to be the first to buy a new product or receive a gift in exchange for funding. It is the most common type of crowdfunding platform used by small businesses. Investors will typically expect a return on their investment in the form of early access to the service under development or a free product once it is completed. While there have been some significant triumphs, you usually need a great prototype and strong marketing skills to succeed in this field.

Equity Crowdfunding:

Investors contribute money to a company in exchange for equity shares under equity-based crowdfunding. This is similar to selling stock in a company as a particular amount of equity in the company is exchanged for a certain amount of capital. Small companies and start-ups can use equity-based crowdfunding to give away a share of their company in exchange for funding. Investors will get dividends or distributions as the business expands and revenues increase in the future.

These contributions are a sort of investment in which participants obtain shares in the company based on the amount of money they contribute. Giving away equity can help start-ups get an alternate source of financing, but it can also result in the company’s control being compromised, which can lead to future challenges. However, one of the benefits of equity-based crowdfunding is that it allows you to attract and reach out to both potential customers and investors.

Crowdfunding – Things to be considered

Many people believe that crowdfunding is a simple or free way to make money, but it takes hard work to create a project that backers would consider valuable. As the popularity of crowdfunding grows, backers are becoming more discerning about the initiatives they support.

It can be challenging to get such widespread support. It takes a powerful marketing campaign, dependable founders, and a high-quality product to succeed. The challenges of crowdfunding are numerous for a company that only offers crowdfunded products. The following are the key challenges that must be considered carefully for the crowdfunding campaigns:

Trust Building – you must establish your brand’s credibility to attract potential investors’ attention.

Choosing the Best Platform – it’s a good idea to check a site’s amount of visitors, the types of visitors it gets, the total cost of operating the crowdfunding campaign, and the terms and conditions of using the platform to raise funds and select the best that fits your idea.

Developing enthusiasm in contributors – before launching a campaign to raise funding, you should get people interested in your idea.

Protect your idea from theft – register a copyright application straight away and share limited information publicly

Investor Recompense Planning – commit yourself and meet backers or rather investors desires as you had it in agreement, during and after the campaign.

Avoid ending up failing – be sure that your idea is realistic and sounds successful before going for an investor.

Which type of crowdfunding platform should I use?

Here are some recommendations for choosing the best platform for you:

• A rewards-based platform may be suitable for you if you’re a seed or pre-seed firm with a compelling idea, a B2C (business to consumer) company, and can strike your marketing strategy.
• You might seek equity-based crowd funders if you’re already successful in your chosen market and have a targeted clientele that would allow you to expand and scale.
• A loan-based platform may be a better option than a bank if you have a steady cash stream and consistent revenues.

How do I start a crowdfunding campaign?

Once you’ve decided that crowdfunding is right for your business, how can you ensure a successful pitch and start an effective campaign? Here are a few points to be considered:

Set a compelling story:

Whatever crowdfunding method you choose for your company, keep in mind that the campaign’s success is dependent on the marketing strength you put behind it. A compelling story is attractive to both investors and donors. Explain how you came up with the idea, your team’s personality, and why your product is valuable. Don’t try to sell too aggressively; instead, let your product speak for itself. You’ll need to tell that story through your project page’s content, a video, and outreach via social media, your blog, email, and any other channel you can think of.

Plan your campaign:

For the best crowdfunding outcomes, plan for the campaign before initiating it. Spread the word to your family and friends that you’ll be starting a campaign. Before the launch, be active on your personal and company social media profiles. Make it as easy as possible for potential backers to locate you.

It takes time to create suitable marketing materials. Don’t try to make an informative video the day before the campaign begins; give yourself plenty of time to perfect it. Investing a few extra weeks in developing a strategy and raising awareness about your campaign will help you meet your crowdfunding target.

Set up your campaign page:

Setting up a crowdfunding page will vary differently depending on the platform. However, the following are the most important aspects:

• A thorough description of the project or company idea is offered on a crowdfunding page, including written and audio-visual communication as needed. Cover all of the critical aspects without going into too much detail. Include a variety of content photographs, testimonials, videos, and statistics to make your offer stand out and be recognised.
• The project’s background should be explained, giving as much information as possible about the project’s history and inspiration, among other things.
• It’s critical to have detailed information about the project’s initiators, including relevant abilities and prior experience.
• The project’s timetable, anticipated milestones, and budget should be well-defined.
• Offer tiers of incentives to encourage greater levels of investment. Details of the rewards are usually a free product or a subscription to a service. A discount on an early order, or first-run of your product, is the most common offer. It’s crucial to explain any different incentives based on the amount of money invested.

Focus on social media

Grab the attention of investors on as many social media platforms as possible, such as Facebook and Twitter. Instagram is a must if your product is visual. Make use of your current network and tell people what you’re up to, and urge them to tell their friends and coworkers. Make a contact list and start email campaigns frequently. Blogging, forums, social media influencers, google AdWords, shops & exhibitions are also the most effective tools during the promotions period.

Keep updating:

Don’t sit back and relax after you’ve launched your campaign. It is essential to provide regular updates to investors, in addition to creating a detailed crowdfunding page, to ensure that they are aware of how the project is progressing. Interact with your followers, keep sending emails, keep updating your content, and let them know when you’ve hit a campaign milestone.

Concluding a campaign

One of three situations happen once your crowdfunding campaign ends:

1. If the campaign falls short of its goal, contributions are returned to investors. If you don’t meet your target, some crowdfunding services still allow you to collect all of the money you’ve received, however, at a small charge.
2. If your campaign is successful, you will be paid the total amount you collected, less handling fees. Kickstarter, for example, charges a 5% fee to host the fundraising and a percentage-based cost to handle payments. These charges are only applicable for successful crowdfunding campaigns; those that do not meet their funding target will not be charged.
3. Because you still owe money to your donors, equity crowdfunding projects vary as far as how they end. This responsibility is contingent on the outcome of the contributions.

Whereas crowdfunding doesn’t ensure a project’s success or a company’s long-term viability, it enables many entrepreneurs to gain business acumen and foster collaboration for future prospects.

Advantages and disadvantages of crowdfunding

Crowdfunding has both advantages and disadvantages when it comes to raising funds.

Advantages

The following are some of the benefits of using the strategy:

Alternate funding source with little financial risk

It might be a cost-effective approach to raise capital with no upfront costs. Businesses that are unable to get financing through more traditional methods can use crowdfunding as an alternative source of funding. Instead of pitching each investor individually, you can build up your campaign fast and easily on the right platform and have it seen by millions of potential funders all at once.

Increased brand awareness

Pitching a concept or business over the internet may be a powerful method of marketing that attracts media attention. When you’ve successfully attracted a few investors, others will likely follow, and your campaign will get more traction.

Free marketing

Early adopters and supporters of your company are likely to promote it on social media as well. You can also use the platform for public relations and marketing, bringing visitors to your website.

Accelerate your business

Many products would never have seen the light if it hadn’t been for online crowdsourcing. Ideas that may not appeal to traditional investors are often more easily funded. This is especially true for quite niche products and may be disregarded by a conventional investor.

Test the market prior to launch

It’s a great strategy to see how the general public reacts to your idea; if people are eager to invest, it’s a good sign that your concept will succeed in the market. Because you’ll be attracting potential clients and contributors to your company, you’ll most likely get a lot of feedback on your product. You can then fine-tune your idea to make it as appealing as possible.

Disadvantages

Before starting a crowdfunding campaign, consider the following disadvantages:

Crowdfunding requires resources

When you’ve selected your platform, you’ll need to put in a lot of effort to build interest before the project officially launches; significant efforts and financial and/or time resources may be required.

Stealing ideas

Someone might see your business idea on a crowdfunding site and steal it if you haven’t protected it with a patent or copyright. Make sure you’ve registered any trademarks or domain names you need before going live.

Oversaturated market

As the crowdfunding industry is so crowded, you’ll have to make sure your product is one-of-a-kind and provides significant value to your customers. With a strong pre-launch strategy, you’ll have to work extra hard to make your campaign shine out.

Potential for no or too little gain

Most crowdfunding platforms require you to reach your funding goal before receiving any funds. Suppose you don’t get there in time. In that case, funds are typically returned to investors in this situation, and the project is unable to proceed, you won’t get anything, which can affect your company’s reputation.

Scammers

Scammers are by far the most common type of con in the crowdfunding world. There are many projects that have a successful fundraising campaign but fail to complete the project.

Final Thoughts

Among the topics discussed, you should consider how long your crowdfunding campaign should last, how to stay in the spotlight to funders if you’re doing equity crowdfunding, and how to keep your campaign’s enthusiasm if you want it to be a huge success.

There’s no such thing as a one-size-fits-all strategy to crowdfunding, so be sure you know what you want to accomplish with your campaign and compare your possibilities. Crowdfunding isn’t always straightforward, so plan to ensure you have a good idea and proposal.

However, if you put up the effort to promote your campaign, crowdfunding may be a valuable resource, whether you’re launching a new product, looking to expand operations, or simply trying to gauge your audience’s interest. As we’ve seen, if you’ve pre-qualified under the Enterprise Investment Scheme or Seed Enterprise Investment Scheme, you’ll be the most desirable to savvy investors. Our knowledgeable tax professionals can assist you in preparing your firm to be eligible for the scheme. Find out how Bloom financials can help you with crowdfunding project planning, development, and success. Feel free to contact us.