Darren Westlake is the founder of Crowdcube. In this article, he discusses some of the pitfalls startups should avoid when crowdfunding.
Crowdfunding is a flexible and convenient way of raising finance that enables businesses of all stages, from a range of sectors to bypass traditional routes to finance.
Despite its relative infancy, crowdfunding is now recognised as a mainstream funding option – far from being a last resort, it is often seen as a first choice funding option for businesses.
Yet, with around 60% of crowdfunding pitches reaching their target, it’s not a sure fire way of securing finance, so for anyone considering this route to finance, they need figure out how they can maximise this unique opportunity to pitch to a crowd of potential investors.
It’s fair to say that we’ve seen all kinds of pitches at Crowdcube – the good, the bad and the indifferent – with around 85% of those that apply to list on Crowdcube not meeting the stringent due diligence processes to make it onto the platform.
When pitching for investment, business owners need to think sensibly and with a clear head, as they would with any other important decision about their company.
It’s important to have a strong proposition for the business, which outlines the market potential, what makes it different or unique, and why someone would want to invest in it.
Find the passion
Investors are more likely to put money into a business if it’s something they are already passionate about, or they find interesting or compelling.
Crowdfunding campaigns have failed before simply because they fail to inspire potential investors.
Remember, you are asking people to part with their money – so they have to believe in what they are investing in.
Investors want to find out about the people behind the business, so highlight your credentials, history and expertise, and the team supporting you.
Pitches also fail because companies don’t promote themselves enough, and often this is down to lack of marketing, whether that’s PR, creative pitch materials, professional videos, etc.
Marketing is one of the most important aspects of a crowdfunding campaign and can be the difference between success and failure.
Every pitch on our platform goes through a thorough due diligence process, and this means providing detailed information about the business, traction to date and financials.
Businesses must ensure that all the information presented to investors is fair, clear and not misleading in any way.
We ask people not to be over-ambitious with their targets or to put people off by overvaluing the business. Don’t forget to ask investors only for what you need as well as a sensible contingency, why you need it and how the money will be spent.
It’s also important to outline the company’s strategy for growth and show that the business is scalable. Every investor wants to know about the potential returns on their investment, so it’s critical that a business can outline how and when this could happen.
Here are five tips to becoming crowdfunding-ready:
1. Be investment ready
Get your paperwork in order. Make sure you have a detailed business plan and financial forecasts so investors can evaluate your business and make a fully informed decision.
The Government offers attractive tax relief schemes of up to 50%, such as the Enterprise Investment Scheme (EIS) and The Seed Enterprise Investment Scheme (SEIS), for small business investors.
Find out from HMRC if your business is eligible before seeking investment.
2. Create that killer pitch
When it comes to your pitch, make sure it’s quality over quantity. Start with a clear proposition, which outlines what makes the business unique, the market opportunity and what your strategy for growth is.
Whilst investors will also want to know when and how they will see a return, many want to be part of the company’s story, so tell them what you hope their investment will help you achieve.
3. Engage your own crowd
If you already have a network of customers and suppliers, you’re at an advantage, so engage your existing community and offer them an opportunity to invest.
Reaching the first 10% of an investment target is the hardest part, so being able to leverage existing networks to raise investment and get early momentum means you are more likely to succeed.
4. Promote your pitch with passion
The most successful crowdfunding campaigns are those that are effectively promoted.
Businesses need to invest time and effort into this activity, but it can be done at a relatively low cost.
For example, invite potential investors to one of your locations to meet the team, do in-store promotions like posters and t-shirts and send emails to existing customers.
5. Maintain investor relationships
Once you’ve reached your investment target, maintain relationships with investors by keeping them up to date on how the business is progressing.
Not only are they investors, but they are also potential customers, brand advocates, business contacts and even potential suppliers or partners.
So it’s vital you keep them happy and engaged.