Could crowd funding secure you new investment in your company?

I wrote an article recently that discussed the fall in the popularity of banks and the alternate sources of finance that SMEs have begun using in order to acquire the funding they require. The reality is that in today’s climate, it has become increasingly difficult for businesses to pass the risk assessment phase when applying for finance from a bank, and anything other than an exemplary credit history and a stellar cash flow forecast will tend to result in the rejection of a business’s loan request.

Due to this fact, a number of businesses have started looking at Crowdfunding as an alternative way of raising finance, with recent figures indicating that £9 million was raised through these platforms in the opening three months of 2014.

For all director’s who are unfamiliar with what crowdfunding is, it is a way of raising finance that consists of a number of people investing, (lending) low sums of money toward your businesses expansion. This money is then pooled collectively until that time that you reach your  finance target necessary to pursue your aims. In very simple terms you are borrowing directly from the funding source without the middleman (The banks).

Crowdfunding has garnered widespread popularity in recent times as it has provided businesses with an alternate source of raising finance in an era governed by tight lending. Other attractions to this fund raising platform is that it often leads to the finance being obtained quickly and without upfront fees, which are typical criticisms levelled at banks over their lending practice. It can also be a great way of enhancing a business’s reputation and making investors aware of its capabilities from a very early stage.

Whether crowdfunding replaces traditional lenders such as banks and building societies as a primary funding source in the UK remains to be seen. What is for certain is that the lower administrative costs, flexibility and increased exposure that come along with the process are highly attractive virtues that will continue to attract a following. Are you interested now? Well read our 7 point guide on how to optimise your chances of obtaining alternative finance, so you can take your business to the next level and send its revenue soaring to new heights.

1) Find your own investors.

By finding investors and having them pump money into your fund prior to going to a crowdfunding platform, you are exuding the image of a company that is worth investing in, as other investors will see that others have been willing to place their faith in your business. In order to ensure this happens, you will need to identify who you believe will be interested in being part of your crowd, whether that is your friends, company associates, private investors, other businesses or family members.

2) Try ‘pitching’ your business plan to investors before going to a crowdfunding platform

This means going to different organisations and pitching your business plan and product to a number of potential investors. Prepare your presentations and include answers to questions that you believe will be posed to try and expose deficiencies in your business plan. If you encounter any problems with this, or are surprised by a certain question, then add that to your list for the next presentation. Remember, the more people you get to support your fund at this early stage, the greater the chance of acquiring investors from a Crowdfunding platform, and the early investors provide a great chance to refine your pitches.

The merits of doing this can clearly be seen by the success of Grant Slatter, head of Shareight, a mobile shopping app, whose business managed to acquire a staggering £605,000 last month through the crowdfunding platform Seedrs. He says: “The key with Crowdfunding is you have to treat it as a mini IPO. Before you actually raise the money you have to go out there and connect with business angels, with family and friends and anyone you know and do the hard graft of raising interest in your business and answering questions. Then you will have a group of people who are interested in investing straightaway – and the true crowd who don’t know you will see that bigger business angels have invested, which creates a momentum.”

3) Keep it close.

There have been numerous examples of businesses performing a ‘closed fund’ raising, which consists of raising finance from a selection of hand-picked investors. One such firm that opted for this route was Escape the City, which helps those who work with corporations move away to a different profession. In order to raise the finance for their venture, they decided to undertake a closed fund raising in which only established investors were allowed to participate. From their 395 members, they managed to acquire £600,000, with each member putting in up to £20,000 to collectively obtain an equity share of 24%. Evidently the success of this strategy is dependent on whether you have investors on board already, but if you fall into this category then it may be worth avoiding a Crowdfunding platform and simply undertaking your own private fund raising, as this can save a great deal of time and money in the long run.

4) Re-work your pitch till it reaches perfection.

Anyone watching Dragon’s Den will know on average, your investors will likely give your pitch a handful of minutes to capture their attention before deciding whether to place their faith in you, so it is of paramount importance that you captivate them from the offset. Make sure your pitch is well written, clear and concise, and makes the merits of investing in your business clear. You are trying to convince someone to invest a small stake of their money in order to receive a high return, so the only base you have to cover is making your company seem innovative, low risk and ahead of the curve

Slatter elaborated on the importance of doing this, arguing: “The key is to provide very clear indications of how the money will be used to grow the business. And don’t over complicate that – keep things simple. If somebody is investing on a crowd funding site and looking to put £1000 in as put of a £30,000 portfolio they need to be able to grab what you are doing very quickly, so the nitty gritty detail isn’t that important to them. What is important is a clear picture.”

5) But stick to the truth and be realistic.

Promising the world and failing to deliver is a recipe for disaster and will deter investors in the future from taking a chance on you. And at the end of the day, you wouldn’t be lobbying for investment in your business unless you are certain that your ideas have promise. As such, convey the reasons you believe that you will be a success to your investors, and be honest about what your aims are and how long you expect it to take to achieve it. You will never be able to convince every investor that you will be a success, but being honest and passionately elaborating on the motivating factors that have lead you to believe you will acquire a high return on investment should go a long way to convincing others as well.

6) Make the investment terms clear.

At the end of the day, you only want investors on board who are clearly aware of the risks that come along with placing their money in your hands and are prepared to back you all the way. You do not want potential problems down the line with a disgruntled investor who failed to understand the consequences if their investment did not work out, so make the risks crystal clear on your website.

7) Do not get to close to any of your investors and establish a single point of contact.

This is because raising money through a Crowdfunding platform usually consists of a number of investors getting involved, and this could cause potential problems down the line. The last thing you want is being contacted numerous times a day be different investors who are all calling to try and place their own input into how your business should be run. Instead, it might be worth designating a single nominee to represent your business and act as a single point of contact. Many Crowdfunding sites offer this service, including the aforementioned Seedrs.

However, whilst you will want to keep overall control of your company’s direction in your own hands, it is still worth taking consistent measures to keep your investors happy and feeling involved with their investment. Always send them first notice of promotions, discounts and special offers to do with your product and ask them about smaller matters that do not hugely influence the direction of the business.