02/03/2012

By Luke Lang, co-founder of Crowdcube

The underpinning principle behind crowdfunding is to get lots of people together to pool modest sums of money in order to collectively back a person, project, or idea. It’s still a relatively new phenomenon that has been made possible by sites like US-based Kickstarter and Crowdfunder in the UK. Crowdfunding naturally lends itself to creative arts projects, such as an art exhibition or short film where there is an existing community to tap into and rewards to say ‘thank you’ to supporters.

However, as the economic crisis deepens and business finance becomes almost impossible to get for start-ups as well as small, growing businesses, crowdfunding has become an alternative solution to plug the funding gap. Websites, such as Crowdcube, democratise investment to allow ordinary members of public to invest modest amounts of money in early stage businesses and receive shares in return. Once the preserve of the wealthy, it’s now possible for a nation of ‘armchair dragons', ordinary people or sophisticated investors to become business.

Benefits of tapping into the crowd

Spreading a business’s investment across tens or hundreds of smaller investors has many advantages. Firstly, you’ll get a bigger pool of talent and experience to tap into that will have a vested interest in your success. You’re less likely to be held hostage by a single large investor who could withdraw their offer at the eleventh hour, negotiate an unfair equity stake or become a high maintenance stakeholder who meddles.

You’ll be able to allow people to invest who previously wouldn’t have had the personal wealth to do so - family and friends, employees and even customers could now become stakeholders in your business and share in its success. Because they have a vested interest in the success of your business, these investors can also become your biggest advocates.

Top tips for crowdfunding success

To help your crowdfund succeed it’s worth remembering that:

- A good idea isn’t enough - Entrepreneurs with bright ideas are not in short supply, but to successfully raise a reasonable chunk of money you will need to back your idea up with good documentation.

- A business plan is essential as this will outline to potential investors the opportunity and how you intend to exploit it. You’ll need to back you plan up with good financial forecasts that plot your revenue, profit and cash flow projections so that an investor has some idea of the predicted growth trajectory and the potential returns that they might realise in the future. In essence you should cover everything that an investor needs to know to be able to make a judgement on whether or not to invest in your business, so it’s worth spending some time on it and making it stand out from the crowd.

- Tell people about it. Once you have a professionally written business plan and solid financial forecasts and you are live on a crowdfunding website you need to think hard about how best to promote it. This is your big chance so you should take every opportunity to tell people about the investment opportunity. Social networking sites like Twitter are great but if you think sending out one or two tweets is enough then you are mistaken. You’ll need to work hard at it, embrace the opportunity and channel all investor interest to your online pitch. You’ll need to nurture potential investors like sales leads, so be ready to answer questions and be sure to keep people updated on your pitch progress.