Crowdfunding Your Business Idea

Crowdfunding is an online tool used to bring together individuals or organisations who have business ideas and potential investors who can help fund them. It’s an attractive premise for many entrepreneurs since investors come to you rather than you having to seek them out. When you raise money with crowdfunding, what exactly are you getting? What are you selling? And, frankly, is it worth the effort?

How does crowdfunding work?

What sets crowdfunding apart from more traditional sources of investment is its ability to reach many people at once. Often the total amount that an individual campaign is seeking to raise will be out of reach for a single, or small group, of investors. But, where many thousands of people, or even more, each pledge a small amount, it’s possible to fund even the largest of projects.

Not all crowdfunding is business-focussed – people have successfully used it to pay for everything from space missions to date nights – but here we’ll be concentrating on how you might use it to fund your business idea.

Through crowdfunding websites, people with business ideas can interact with potential investors, offering both updates on their progress and a range of rewards in return for any investment they gain.

Not all crowdfunding is created equal

There are a myriad of different crowdfunding platforms and, if you’re considering this option for your business idea, it is essential to choose the one which best suits you.

Reward-based

Many crowdfunding campaigns offer investors a reward of some kind in exchange for their investment. If, for example, you are raising finance to open a restaurant, possible rewards might include a free meal or access to a limited preview or opening night.

Equity-based

In the equity model, investors receive shares in your business in exchange for their investment. Investors can see this as a more attractive model since they will be buying into the company and – depending on your legal terms – may stand to benefit financially from your success. In certain circumstances, it is also possible to make these types of scheme tax-advantageous through schemes such as EIS.

Credit-based

Credit-based crowdfunding is similar to peer-to-peer lending but aimed at businesses. It puts individual lenders (note, this is a loan, not just straight investment) in touch with companies looking for financing. Terms and interest rates vary, and eligibility can be much stricter than with the banks; however, this type of lending is generally low cost.

The good, the bad and the very, very ugly side of crowdfunding

It’s not hard to see why the basic premise of crowdfunding is so appealing and, consequently, incredibly popular.

Advantages of crowdfunding your business idea include:

Exposure

If you have a great business idea, crowdfunding is an ideal way to get that idea into the public sphere, raise awareness and gain some early advertising.

Engagement

Because crowdfunding is an interactive process – you will be talking directly to investors, and potential investors, it’s a great way to build up a community around your business (all potential future customers). Your investors can also bring ideas, and feedback, into the project to help refine your business idea early on.

Easy to enter

You don’t have to spend long on any crowdfunding site to find some downright bizarre ideas and proposals. With no bank manager or business adviser to convince, anyone can get into the crowdfunding world; something which can make life much easier if you have an innovative or unconventional idea which banks may not be keen to support.

But there are downsides:

Intellectual property

You will be publishing your business idea, resources and plans on an open public website. Make sure before you start that you have all the patents, rights, trademarks and other protections you need otherwise you could suddenly find your brilliant business idea being ‘borrowed’ by a rival crowdfunder.

Engagement

Spending time talking to your investors on a public forum can be as much a risk as it is a bonus. Get it wrong, and it could tarnish the reputation of your new business for ever.

Can you actually deliver?

It is easier to raise investment than it is to deliver the project for which you’ve been crowdfunding. So the final thing to consider before embarking on a crowdfunding adventure is whether you can genuinely deliver the business idea you’re funding. If you can’t you’ll be leaving yourself open to negative publicity, and potential legal claims, for years and years to come.