22 March 2020 5 min read

With its first success dating back to 1997, Crowdfunding is continuing to grow as an attractive alternative method of raising capital for new business or expansions for existing ones. Despite its popularity and growing notoriety, a lot of us are in fact left wondering what exactly Crowdfunding is, how it works, and whether it lives up to the hype.

What is it and how does it work?

Crowdfunding reverses the traditional investment model which focuses on obtaining large quantities of money from a small number of investors like banks or venture capitalists. Instead, the few becomes the “crowd,” with anyone being able to find a project and invest varying amounts of money.

There are 3 main species of crowdfunding;

  • Donation / Reward – people invest in causes with no monetary return because they believe in the enterprise; Jeremy Corbyn’s bid to become the next Labour party leader has been boosted by this form of crowdfunding
  • Debt – also known as peer-2-peer lending, the debt crowdfunding model follows traditional lending with investors being repaid on a regular basis just without the banks
  • Equity – investors contribute money in exchange for shares which fluctuate in value in accordance with the projects success

Testing the waters…what are the positives?

Bypassing traditional investment routes and going straight to the crowds is a great way to test the waters and develop your product or brand accordingly before it has been launched. Being able to connect directly with your target audience and utilising rapidly expanding social media outlets could be key to the success of your business without compromising your creative control. Craft beer brewers Brewdog have led the way in this regard with their #equityforpunks campaign allowing thousands of beer lovers to invest in their companies expansion.

Being able to tap into a distinct target base and market your brand online may also be a more efficient process of enticing investors compared to targeting countless private investors or banks who may focus more on financial returns than the sustaining your creative vision. Also, with there being very low entry criteria for projects, crowdfunding could be just the chance for any quirky concept to get its feet off the ground.

So what’s the catch…?

Crowdfunding is understandably an attractive option to gain capital and grow your brand. Nevertheless, there are a few things to note:

Intellectual property

Before you’ve started, making sure your intellectual property is sufficiently protected is vital considering the fact that you are making your ideas publicly known. You also need to ensure you can deliver on what you’re offering as if you are successful you will be obliged to carry out your planned idea. This may add a layer of unwanted flexibility to your project but reneging on promises could destroy any rapport you have developed with your customer base.

Follow the crowd

Key to the concept, “the crowd” is everything and without a good following your Cinderella story may be over before it has even begun since most crowdfunding platforms operate on an “all or nothing basis”. Not hitting your fundraising target may give you enough feedback to refine your idea and bounce back stronger but it could cause irreparable damage to your brand, so how you capture your audience is key. Grind & Co, by using various streams of social media and a trendy short video, have managed to almost double their original fundraising target in their pursuit of expanding their business.

Taking it all on board

Moreover, the increased customer engagement can be a blessing and a curse. While expanding the pool of potential investors could be just what the doctor ordered, an enhanced level of scrutiny coming from all directions could cause the headache you were hoping to avoid. Theoretically, despite certain consumer protection related restrictions from the Financial Conduct Authority, anyone with any degree of business expertise can become a crowdfunder. Despite the volume of investors they should not be viewed as just another face in the crowd; responding to their opinions may be a draining experience but is key to preserving your business reputation.

Do the success stories speak for themselves?

From NearDesk’s filling empty office spaces to the Chilango Mexican food chain, crowdfunding boasts plenty of impressive innovations that have enjoyed mainstream success. Any startup inevitably faces a long list of pros and cons for every aspect of their business and crowdfunding is no different. For the right idea, bypassing private investors and banks and heading straight to a buzzing fan base could be the best option but it definitely is not for everyone. With its rapid growth in popularity, crowdfunding offers an alternative option, but one that should not be approached with any less due diligence than considering traditional financing avenues.

Whilst trends such as Crowdfunding are undoubtedly helping to fuel the rapid growth of our fantastic startup culture in the UK, there are still a lot of legal issues that startups need to take care of.

We can help your startup avoid both the common and not so common mistakes a lot of businesses will make during the early years by explaining the pitfalls before it’s too late. But not only will we help you avoid those mistakes, we will also help you in every way we can to make sure your new business is a long term success.

Whether that’s introducing you to some of our existing clients and contacts or simply voicing our opinion on a potential new part of your business that you may not have considered yet – We believe in offering more than just a legal service.

Why not contact us today to book your free consultation to discuss your legal requirements in further detail – we’ll be delighted to talk to you.

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Alan Reid

Alan brings a wealth of director level, leadership and management experience to Hybrid.

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