Crowdfunding Revealed 1/3
Crowdfunding is a very recent financial phenomenon that has disrupted the way funding is raised for businesses, projects and charity campaigns. For this series of blogs, I’ll be referring to equity crowdfunding, a very public way of raising funding. If successful, not only will the crowdfunding provide funding, it will also provide a fantastic marketing opportunity and provides credibility for your brand/product. On the other hand, with investors and competitors seeing the very DNA of your business, it’s a very public way of failing.
the practice of funding a project or venture by raising money from a large number of people who each contribute a relatively small amount, typically via the Internet.
We successfully completed a crowdfunding raise on Crowdcube at the beginning of 2017. This ranks as one of the biggest accomplishments for both the business and for me personally. I learned a tremendous amount from the process and if, as a entrepreneur, you’re considering launching your own crowdfunding campaign or, as an investor, you’re looking to invest, I’m going to share all of the inner workings of crowdfunding with you.
I’m going to break down my learning and experience into three parts; Preparing a Crowdfund, The Campaign and Post-Campaign.
Preparing a Crowdfund
Rewinding back to Summer 2016, we had conversations and meetings with the biggest UK equity crowdfunding platforms; Crowdcube, Seedrs and Crowdfunder. The main area we judged them on was their past performance within our sector, the Food & Beverages sector. Crowdcube, despite their higher commissions, stood out above the others based on their ‘Funded Club’ being rich in other F&B businesses.
|Seedrs||6% + £2,000 success fee|
There’s also the ‘payment processing fee’ which is typically 0.5% but can be substantially more depending on investor location.
One important difference with these fees was that Crowdcube charge 7% on everything that you raise. With Seedrs, if you introduce investors to their platform as part of a ‘pre-fund’ they’d waive the commission.
So on 21st November 2016 we were sent the term sheet, from Crowdcube, and so started the process…
Even typing ‘Due Diligence’ fills me with dread and the due diligence we experienced was grueling. I completely understand why. Regulation, reputation and trust. If you make it through the due diligence, investors are reassured that the campaign has had to pass a number of tests and stresses to ensure that everything is ‘above board’.
The due diligence went through the usual checks; Companies House, Company Registration, Management Accounts etc that was the easy bit. We then had our future forecasts, assumptions and terms with creditors and debtors stressed. It’s worth noting that Crowdcube won’t allow for any further capital raises within 12 months in the figures and they also don’t allow for any directors loans to be paid off over the first year.
We had our forecasts in an excel document but Crowdcube have their own template to apply the data to. This is where I had to get my accountant involved (all throughout the Christmas break!). We went backwards and forwards between Crowdcube’s finance department several times before everybody was happy.
Creating the Campaign
The video is your pitch to the World. For me, it was vital to keep it short and to the point. I’ve watched so many crowdfunding videos and, to be frank, I get bored after 2 minutes so I wanted to squeeze it into less than 2 minutes. Luckily, we had a great video design business in our office (www.webvid.co.uk). Our office in Vauxhall, including the cafe downstairs provided the backdrop as well as 1Rebel, the gym that allowed us to film the action shots.
Due Diligence reared its head again during this process. Everything we said in the video, and in the written section, was scrutinised. I wasn’t allowed to say that I came out with the concept for Rejuvenation Water back at University, 10 years ago, and that we were the first Amino Acid enriched spring water because I had no proof of the inception of my idea and I couldn’t prove that something else didn’t exist. Documentation had to be provided to prove commercial relationships, sales, they even wanted photographic ID and utility bills from all of the directors (one was away and literally off the radar). I have a folder on my computer containing all this documentation (93 documents) titled ‘Reference Bullsh*t’ which kind of reflected my mood at this point.
I can’t stress enough how integral a pre-fund is for any crowdfunding campaign…
How much you raise prior to going live is called the pre-fund. This is the cornerstone of most successful crowdfunds, creating the initial momentum for the campaign. This can be arranged privately off-platform, usually from verbal commitments, or most platforms offer a private period on the campaign where it is invitation only. Existing investors will typically make up a good proportion of this pre-fund, with the rest coming from extensive investor conversations. The private period, on the platform, is typically a weekend but can run for a while longer and allows investors to invest prior to the wider public. This is particularly attractive to invitation only investors if you are straddling your SEIS tax threshold. The private period allows the campaign to launch with, potentially, a large proportion of the funding already achieved.
Typically, for success, based on conversations and following a lot of campaigns over the last couple of years, 30%+ is what needs to be pre-funded. I also know of other companies that have launched their crowdfund with 100% of the campaign already pre-funded and simply use the crowdfund as a marketing/PR campaign, aiming to dramatically overfund without the risk of a very public failure.
We arrange £25,000, or 17%, in pre-funding via our existing investors and new investors. This meant that we needed momentum into our campaign and quickly…
Next week’s blog will be focused on the campaign itself and our journey to completion. If you have any questions regarding the campaign, or questions about crowdfunding as a whole, please email firstname.lastname@example.org and I’ll aim to cover it in the next blogs.