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The basics of crowdfunding

Crowdfunding is just one of many financing options open to small businesses in the UK, but it’s one steadily increasing in popularity. Here’s a guide to how it works and which sites you can choose from

Crowdfunding is a way of financing a project using the internet and social networking to get small amounts of money from a lot of people. A big part of its appeal lies with the access it gives you to a global audience. Crowdfunding sites helped raise £1.59 billion in 2012 which is projected to grow to £3.12 billion in 2013.

How does it work?

You set up a page through a crowdfunding platform, providing a clear overview of the project, the amount of money sought and what it will be used for. Supporters can then donate. You can choose to offer nothing in return, offer incentives and rewards to supporters at different levels, or give away equity. It’s then up to you to publicise your project using social media.

Regardless of which site you choose, there are some things you can do to increase your chances of achieving your goal:

  • Make a high-quality video. Most “pitches” use video and it can be what people rely on when trying to decide whether to invest
  • Offer enticing rewards. What would persuade you to part with your cash?
  • Set a realistic goal. This is about covering your costs and getting your project off the ground, not necessarily making you rich
  • Promote your project in every way you can (for example, get in touch with bloggers and reporters who write about similar projects)
  • Use the best images you can afford. Images can easily go viral on networks like Pinterest, driving more traffic to your project

Crowdfunding sites

Some crowdfunding sites will let you keep 100% of the project’s funds, regardless of whether or not you reach your goal, depending on the programme you choose to set up. Here are the biggest:

Kickstarter

Launched in 2009 and focusing on the arts, Kickstarter has helped to fund 52,000 creative projects via donations from 5.3 million people, pledging $903 million. If a project is successfully funded, they apply a 5% fee to the funds collected.

Indiegogo

Indiegogo began in 2008, targeting the independent film industry but quickly broadened its scope and is now the leading international platform. It charges a 9% fee on funds raised, but if you reach your goal, you get 5% back.

Crowdfunder

Falling between straight crowdfunding and equity crowdfunding is Crowdfunder, which stipulates that you reward investors. The UK’s largest crowdfunding network has launched more than 3,000 projects and raised over £1 million. All you need is your idea, five rewards and a short video explaining your project. If you don’t hit your target you don’t get charged.

Equity crowdfunding

This differs from crowdfunding by promising equity in return for investment. These are the best-known platforms:

Funding Circle

Launched in 2010, this marketplace helps businesses to find low-cost loans quickly. Local councils, universities and the Government have joined forces with Funding Circle to lend money to UK businesses. So far 60,428 people have invested £185,078,580.

Crowdcube

Also founded in 2010, this platform offers people equity in unlisted UK-registered businesses in exchange for investment. Crowdcube operates on the ’all or nothing‘ model: when a pitch reaches its target, the business receives the funding (and is charged a 5% commission). If it doesn’t reach its target then all funds are returned to the investors and no money is charged.

Seedrs

Using a similar model to Crowdcube, Seedrs allows investors to put as little as £10 into the start-ups and lets early-stage businesses with less than one year of trading history raise up to £150,000. Seedrs is also an ’all or nothing‘ platform.

The crowdfunders all have different strengths and specialist areas, so it’s worth doing your research to find the right one. For a full list of the top 100 crowdfunders, click here.



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