Archives For crowdfunding

Financing a startup used to be a precarious task for entrepreneurs due to the amount of debt they would accrue just to get their project off the ground. The days of worrying about credit cards and bank managers, however, are gradually becoming a distant memory thanks to the rise of crowdfunding for startups.

Crowdfunding allows entrepreneurs to pitch a business plan via the web to prospective investors; these investors may be other entrepreneurs, bands of investors, or simply individuals looking to invest some disposable finance.

And crowdfunding for startups brings a wealth of benefits, so let’s take a look at why it’s a good opportunity for launching businesses.

Diverse Range of Investors

With public knowledge of crowdfunding receiving such a boost in popularity due to the rise of Kickstarter, many first-time investors are now heading online to investigate potentially lucrative investment opportunities.

This is in stark contrast to the old days of investment, where it was more common for a small number of investors to invest large amounts of capital into your business. This certainly cut down on the admin, but also exposed startups to substantial risks e.g. if an investor suddenly pulled their money.

With crowdfunding, however, the levels of investment per individual are much lower and present less financial risk to your overall targets.

The Internet Allows You to Pitch Online

Due to the lack of capital in the early stages of a startup it’s always advisable to keep operations as streamlined as possible. However, the need to physically get out into the world and meet investors has meant it’s difficult to achieve.

Thankfully, crowdfunding for startups cancels a lot of the legwork involved by bringing all pitches online. This is crucial for entrepreneurs who simply can’t afford to be in two places at once and also reduces the stress of preparing individual presentations.

Crowdfunding Brings Feedback

Running a startup can be a lonely business at first, but the beauty of crowdfunding is that it brings in a broad range of investors who all want to take your business to the next level. This provides an amazing sounding board to work on ideas and gather feedback from. And at the startup level this is invaluable to help guide your business through those hazardous early days.

Media Exposure is Enhanced

Previously, funding ventures failed to capture the public’s imagination as they were primarily conducted behind closed doors and far away from the public eye.

Crowdfunding, however, has become a unique phenomenon in that it can generate headlines very quickly if the media picks up on your vision. This, in turn, can then spread like wildfire across social media, raising your project’s profile even higher. It’s this publicity which can help you maximize the investment into your business with virtually no financial outlay.

And the benefits of this increased exposure aren’t just limited to the amount of investment your startup receives. It also brings in organic traffic to your brand and helps to raise your brand’s profile as well as bring potential customers into your conversion funnel.

We’ve shown that there are a myriad of benefits when it comes to crowdfunding for startups, so bearing this form of investment in mind should be a given for any startups.

The Rapid Growth of Crowdfunding for Equity

Crowdfunding for equity may not be the most obvious investment option available, but it’s hard to argue against its ever increasing rise in popularity with investors.

Since 2011, when it first started gathering pace in the UK, equity crowdfunding has been viewed as an attractive opportunity for investors. However, all investments come with a certain amount of risk and the more innovative the investment model, the more scepticism there is from investors.

That’s why analysing the growth behind crowdfunding for equity is an important step in assuring investors that it’s a model worth investing in.

The Early Days of Crowdfunding for Equity

Crowdfunding for equity first started to grow in the US market during the middle period of the 2000s; towards the end of that decade the first crowdfunding platforms were launched. These investment opportunities mostly centred on technology ventures and the success soon spread to the UK.

In 2011 the UK saw the launch of its first crowdfunding platforms and, since then, the market has continued to grow.

Continued Growth of Crowdfunding for Equity

During the model’s initial popularity in 2011, around £1.6m was invested amongst 7 projects. By 2014, however, a total of £24m was invested across 101 projects and that was just in the first 6 months of the year. This figure may not sound industry shaking when you consider that peer-to-peer lending generated £193m in 2013, but those half yearly 2014 figures reported for equity crowdfunding made up 18% of all visible deals in the UK.

When you consider that, in 2011, crowdfunding for equity only accounted for 2% of all visible deals in the UK, you begin to appreciate the sharp rise in the model’s fortunes. And this growth, of course, fuels interest in the model even further to attract newer investors to the model and continue its expansion.

However, analysing the actual investment at play in crowdfunding for equity would appear to be less successful than the hype preceding it lets on. 2.2% of total visible UK equity investment was attributed to crowdfunding for equity in the first half of 2014, but this was only a rise of 2% when compared to the same figures from 2011.

The small percentages at play, though, are misleading; equity for crowdfunding actually grew quicker between 2011 to 2013 than the total UK equity investment from the same period. This highlights the pace at which crowdfunding for equity is growing and why it remains a highly lucrative means of funding.

The Future of Crowdfunding for Equity

Crowdfunding for equity is becoming more and more recognisable to investors in the UK due to its rapid growth over the last four years. This has been further strengthened by the Financial Conduct Authority’s involvement in regulating crowdfunding for equity to ensure the model is correctly monitored and investors are offered protection. Although the majority of small to medium businesses are yet to dip their toe into equity crowdfunding, it’s expected that more and more of them will turn to this investment model in the near future.

One of the key components to successful crowdfunding is the involvement of angel investors who are proving to be a lucrative source of finance for businesses of all shapes and sizes.

It’s a good idea to understand exactly what an angel investor can bring to your business, so let’s take a look at their makeup and objectives.

The Basics of Angel Investing

Angel investors are those investors who look to invest their own capital in to investment opportunities such as crowdfunding for equity. Their investment will be made as either an individual investor or a group of investors.

Their aim, as with all investments, is primarily long term profit, but they also promise to bring plenty of experience to the project as well to help support the business and grow. Ideally, these angels are looking to make a return on their investment within 3 – 8 years.

In the UK there are estimated to be around 20,000 angel investors, but this number is steadily growing as the success of crowdfunding schemes gathers more pace. Despite a relatively small number of investors, they are regularly contributing around £850m per year which marks them out as highly productive investors.

Are Angel Investors the same as Venture Capitalists?

The traditional funding source for a business has been through venture capitalists, but angel investors are a very different and modern phenomenon.

Venture capitalists tend to deal in high amounts of capital – sometimes a minimum of £1m – whereas angel investors are more likely to invest in smaller amounts from £5,000 up to £500,000. This marks angel investors out as highly desirable investors when it comes to crowdfunding for startups.

Due to the large risks taken by venture capitalists with their weighty investments, they tend to delay the investment process due to their due diligence processes. Angel investors, however, are dealing with much smaller amounts of capital and are able to make their decisions much quicker.

And venture capitalists will often insist on forming and joining a board of directors to keep a close eye on their substantial investment. Angel investors, though, are much more likely to take a passive role in the day to day running of any investments.

What Appeals to Angel Investors?

Angel investors are usually wealthy entrepreneurs and have a keen eye for a good business opportunity. As a result they will look for certain aspects in a business to confirm it’s a viable investment opportunity.

The first port of call will be to identify and evaluate the team behind the project. Those teams which have amassed plenty of experience and relevant skills will always make for an attractive proposition. As with all business ventures, communication is vital from day one, so dealing with angel investors’ queries needs to be prompt and accurate.

Secondly, angel investors will strive to understand the project to see what their investment will be funding. They tend to favour projects which solve visible problems in unique niches as this promises better returns on their investment than opportunities in crowded marketplaces. And, of course, the potential returns on their investment need to be clear from day one.

Angel investors, then, stand out as a unique funding opportunity be it crowdfunding for equity or startups. Their investments can be seen as highly important steps in advancing the potential of business opportunities and improving performance.

It is no secret that as a society, we are quickly losing faith in the banking system. As technology continues to grow, there is a fast approaching sub-sector in alternative finance that could provide us with a solution. Crowdfunding platforms have completely transformed how we approach business through the medium of new technology. The good news doesn’t stop there.

Crowdfunding is just the tip of the iceberg in terms of the new industry norm, especially when it comes to finance. In the UK in 2014, equity-based crowdfunding grew by 420%. Because of its recent boom, many now ask whether crowdfunding is trustworthy, and if so, can it pick up the slack of the banks?

An attractive alternative to banking, this thriving industry has not yet reached its full potential. As more and more companies use crowdfunding as a fundraising opportunity, digital platforms continue to grow, offering companies an attractive and already popular resource. The UKCFA recently reported that, “The European online alternative finance market grew by 144% last year to nearly 3bn euros and could top 7bn euros in 2015.  The UK is by far the largest European country for alternative finance at 2.34bn euros (£1.78bn) in 2014.”

Small and large companies both thrive from crowdfunding because it gives the public a degree of control over what makes it onto the public market and what does not. It has particularly changed the way we view bank loans. As banks continue to let individuals and small companies down, there is now a shift in how we view the role of lenders. More so than ever before, we realise a financing system can indeed be built by and for the people. Highly decentralised and equal in its prospects, crowdfunding is that financing system.

In the near future, crowdfunding will surely replace lenders, as more people realize the success of this new financial platform.

The Millennial generation is increasingly interested in crowdfunding, an alternative financing system that allows members of the public to invest in a pitch before its completion. Many small companies have already caught onto this trend, and are using digital platforms to fund start-up and independent projects. However, crowdfunding isn’t just about getting a project completed. It opens avenues for large and small companies alike, allowing them to source new customers, market products and pre-order sales. It seems that when crowdfunding is involved, everyone gains.

Crowdfunding was originally conceived to support the financing of small companies. It offers an enticing alternative to companies who are looking to think outside of the box, while attracting a younger and Internet savvy crowd. The adoption of crowdfunding has the potential to completely change the current workplace. As technologies continue to develop, the digital skills acquired by young Millennials contribute to their advantage. According to Telefonica UK Chief Executive Ronan Dunne, by 2025, 75% of the UK workforce will be made of Millennials. As the baby boom generation slowly fades out, Millennials will carry the key workforce.

There are several reasons to adopt an alternative financing system such as crowdfunding. The Millennials’ jaded perception of the current system, predominantly its commercialisation, acts as a major incentive.  Many view larger scale marketing processes as artificial and insincere; something that the personal nature of crowdfunding attacks head on.

Crowdfunding platforms allow individuals, small companies and larger corporations to run a campaign that offers a transparent story: connecting suppliers to consumers, and companies to their backers. Potential backers can contact companies directly through crowdfunding platforms to ask questions about the project and ensure they are investing their money in a worthwhile company. For Millennials, this connection is very important. 30% of Millennials believe they will not need a bank account in the next fifteen years. Not only is this due to a loss of faith in the current banking system, but also a belief in alternative financing. They are counting on alternative finance to overhaul the banking system.

The digital revolution has allowed individuals and small companies to be innovative in completely new ways, from mobile devices and operating ecosystems to social media. Crowdfunding platforms not only provide financial support for those who need it, but they encourage a community of followers too. By engaging with people who will potentially become your backers, you can listen to their comments and receive helpful feedback to continue to expand and grow your company. Like we’ve said, when crowdfunding is involved, everyone gains.

On the first glance, It does not seem likely that the UK government would be that generous with its revenue. Nevertheless, these tax reliefs are available to investors in certain instances.

To be eligible for the relief, the company seeking the investment must have:

  1. A permanent establishment in the UK for a period of 3 years from the issue of the shares.
  2. All the money raised by the share issue must be used within two years in a ‘qualifying trade.’
  3. The trade must be carried on by the parent company or subsidiary which is a 90% subsidiary for a period of 3 years from the issue of the shares.

I guess the reasoning here is that if the company establishes a permanent establishment in the UK this must lead to some of the investment being made in this country which can only help better the economic prosperity of the country.

Spundge, a Canadian company, is currently raising EIS funds on www.crowdforangels.com. They have established a UK subsidiary and a London office as part of this process. Andrew Edwards of Spundge stated, “Raising investments for the UK subsidiary that is going to be responsible for driving forward its international development, through its London Office was made considerably easier with the availability of EIS tax relief for UK investors, to be able to invest via the Canadian Holding Company. That way investors can invest in the entire Spundge operation, including its intellectual property as well as all its  international business.”

Crowdfunding is a popular way for small companies to raise money and provides many marketing opportunities that would otherwise be unavailable. Since many ideas that are crowdfunded are innovative and exciting, it levels the playing field for smaller companies to develop their products.

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