From artisan pizzas to documentary films, crowdfunding allows you to invest in a piece of a business. But is it a recipe for success?

Words: Clare Thorp
Photography: Pixeleyes

Have you ever dreamed of opening your own neighbourhood coffee shop? Maybe you’ve patented an idea you want to turn into a product but have neither the cash nor contacts to make it happen. Or perhaps you’re frustrated by recurring whispers of a yoga studio coming to your area and want to turn rumours into reality. Then you need to get in on the crowdfunding action. The biggest explosion in the business world for generations, it isn’t just shaking up the way start-ups get off the ground, but also repaying investors with money-can’t-buy perks, from free lunch for life to walk-on parts in a film, or the chance to have a stake in a future global brand. All for as little as £10…

Research by Nesta shows that, in the UK alone, crowdfunding is now worth a staggering £3.2billion annually. It’s already financed huge success stories, such as East London knitwear company Wool and the Gang, which supplies Whistles and John Lewis, and who raised over £1million on crowdfunding site Crowdcube last year. Outside of the UK, we’ve witnessed product innovations such as the Oculus Rift, the virtual reality headset acquired by Facebook for a cool $2billion, and the Pebble Watch, the precursor to the Apple Watch that raised over $10million on Kickstarter in 2012.

Nor is it just the ‘big guns’ achieving success; crowdfunding has become the means by which ordinary people can get finance for an idea that might otherwise never have got off the ground. It’s venture capitalism at its most democratic; the public having its say on what takes off, based on their tastes, passions and beliefs.

It’s also made it possible for anyone to have a stake in an exciting new business. “Investing in start-ups used to be for the wealthy and well connected,” says Luke Lang, co-founder of equity crowdfunding site Crowdcube, which launched in 2011. “Crowdfunding has transformed that, making it a lot more democratic and accessible; and you can invest as little as £10.”

What’s more, recent research by the Hebrew University in Jerusalem found that women enjoy higher rates of success in crowdfunding their projects – 69.5% v 61.4% for men, possibly because we’re more realistic when setting targets. “Crowdfunding is creating a global wave of creativity and innovation – a way for people to grow what might have been a hobby into something more,” confirms Barry James, CEO of the Crowdfunding Centre, which provides advice and support to entrepreneurs: explaining how to prepare for a crowdfunding campaign and helping them reach the people who might be interested.

“Crowdfunding is across 222 countries now, with the UK one of the leaders,” says James. “And its growth looks set to continue. In the future, it probably won’t be called crowdfunding – it will just be the norm.”

There are three types of crowdfunding: donation-based, where people give money out of goodwill; reward crowdfunding, where donators get an incentive; and equity crowdfunding, where investors get a share in the company. Once you’ve worked out what sort of return you want, the next thing to do is work out whether you want to invest in ‘the next big thing’, a global, multi-million pound project or product – or a smaller concern that is more meaningful to you and/or your local community. Here’s how to get started…

Know what you’re getting into

There are two ways to invest, either via sites such as Kickstarter and Indiegogo, where you receive exclusive products and experiences in return for cash, or through an equity funding crowdfunding site, like Crowdcube and Seedrs, where you can still invest as little as £10, but you get a small stake in the company which – if and when the company is floated on the stock market or sold in the future – you’ll see a return on. The latter type of investment is rapidly on the rise, growing from £84million in 2014 to £245million in 2015. It attracts some well-known names too: Andy Murray has ploughed his money into several projects, including Readbug, the ‘Netflix for Magazines’.

Don't expect to get rich quick

If you’re equity funding, you’ll only see a return on your money when a company ‘exits’ – ie, is listed on the stock market or bought by another company. This is still rare; out of 381 funded businesses, Crowdcube has had only two exits so far – the E-Car club, the UK’s first all electric car-sharing group, and craft beer company The Camden Town Brewery, which was sold to AB InBev. But this low success rate is simply because it’s still very early days for crowdfunding.

There’s no limit to how many people can invest – and it’s not unusual for targets to be exceeded. But don’t forget: “Once you’ve invested, you can’t take your money out,” says Lang. “It’s not like shares where you can sell them if you need a new sofa.”

Invest in what you know

Crowdcube advises that you only invest 10% of your net investable assets in equity fundraising as many of these businesses will fail and they’re very long-term propositions.

So, what should you consider? “If a company or entrepreneur appeal to you on a personal level, that’s a good place to start,” says Karen Kerrigan, executive at Seedrs, one of the UK’s biggest equity crowdfunding sites. “Knowledge of a particular sector will certainly give you an advantage in evaluating a business idea.”

And don’t just back one start-up. “You should invest a little across a number of businesses, rather than a lot in a few,” says Kerrigan.

Embrace perks not pounds

If you don’t fancy risking your savings in equity crowdfunding, a rewards-based campaign offers the same thrill of backing a fledging start-up. You won’t strike it rich –but then money can’t buy experiences, right? While a small investment of £10 in a local bookshop might see you rewarded with a limited edition tote bag, scale up your investment to £100 and you could be name-checked in the credits of a documentary, have a seat named after you in a cafe, or receive a personalised voicemail from the film maker you’ve helped fund – which is what James Franco offered (for $450 per greeting) when he crowdfunded a film of his book, Palo Alto.

It’s still not without risk of course; if a business goes bust before fulfilling the rewards it has promised, there’s nothing you can do about it. Last year, Zano, a mini drone start-up went down, taking with it £2.3 million and leaving 12,000 people who shelled out £139 empty handed. But, more often than not, this option offers the chance to play a part in building a business – along with the bragging rights if it takes off.

Sally Webster, 29, a keen crowdfunding investor who works in marketing, agrees: “I’ve found investing in crowdfunding really exciting. I ensure I invest in a wide range of businesses so that my risk is managed. “Not only am I looking at their operational structure and ability to scale, but I also expect a strong brand identity, which will help carve out a great marketing strategy.

“I sway between businesses that interest me on a personal level, to those that fulfil a need and have real growth potential. It’s important to have a mix of the two so that you can enjoy what feels like a bigger risk with the ‘passion projects’ without too much guilt.”

Ten years ago, if you wanted to launch a business, you’d go to a bank for a loan. Post-recession, it’s generally accepted a bank is unlikely to take a punt on your cold-pressed juice bar – and that’s where crowdfunding comes in. But how easy is it, and what are the golden rules?

Do your research

“Find out as much about each funding site as possible before signing up, including how much they charge,” says Laura Whitcomb, co-author of Money Made Easy 2015-16. All sites take a percentage, usually around 5% of funds raised, and some also charge a nominal processing fee of between 3-5%.

“Next, submit a pitch, explaining what you want the money for. You’ll usually need to provide a business plan that is chock-full of facts and figures, so check the small print because they all have different rules and regulations.”

Once your site green-lights your campaign – and most just check that it fits with their guidelines – you’ll upload your project page, setting a funding target and deadline. Each site has plenty of tips for structuring your campaign and will guide you through the process –Kickstarter has a ‘Creator’s Handbook’.

Tell your story

“The best crowdfunding campaigns couple a strong idea with a compelling back-story,” says Whitcomb. “These are the ones that get press and social media attention.”

A good example of this is the GoldieBlox range of toys, which features a girl named Goldie who loves to build things. This campaign raised $285,881 (£200,000) in 2012 after engineer Debbie Sterling decided more needed to be done to encourage young girls to pursue STEM (science, technology, engineering and mathematics) subjects.

So, don’t say you want to open a pizza restaurant – talk about how your Italian grandmother taught you to make dough, or how you’ll be sourcing the flour locally.

“It’s about people wanting to come on your journey with you,” says Barry James. “It’s inspiring people to share your vision.” Research by Harvard Business School has shown that this accompanying narrative is one of the biggest motivators for people donating via crowdfunding.

Network aggressively

“You should be planning for at least three months before you go live,” says Barry James. And be prepared to promote like crazy. “It’s a marketing exercise on steroids. There needs to be a group of people out there who you can reach, who are interested in what you are doing. Contact communities within your chosen area and use social media to spread the word; if you’re making an item of clothing, for example, email fashion bloggers to see if they’ll write about it.”

Get your timing right

Most crowdfunding sites offer a choice of timeframes for investment, but James recommends 35 days – five weeks. Don’t push your project to the wider world until you’ve got a decent amount pledged from friends and family (James recommends 20%): “Driving people to your Kickstarter page when you’re at 0% is like being naked in front of strangers.”

Most campaigns have a video on their page, but keep it short and snappy with a very clear message. You want people to watch it, quickly get what it is you want to do and then share. Don’t forget that it is as much about the people and passion as the idea itself – potential investors will want to know what/who the driving force is.

Finally, adopt a thick skin: “All campaigns dip in the middle, but you’ve got to keep positive,” says James. “Most campaigns rally right at the end.”

Get creative

Unless you’re signed up to an equity site, you need to offer incentives. The best cost little, but mean a lot to your customers.

“Give people wow factor,” says James. One US ice cream parlour named flavours after their investors, while a brave film maker had pledgers’ initials tattooed on him for £700 (but you don’t have to go that far).

An entrepreneur and an investor share their experiences of crowdfunding

“Kickstarter helped me realise my dream”

Emilie Holmes, 30, used crowdfunding to launch her business, Good & Proper Tea (goodandpropertea.com) – and has just opened her second shop in London

“In 2012, I quit my job in advertising and set about converting a Citroen van, ‘Watson’, into a custom-made tea-bar. I’d saved £20,000, but was £10,000 short, so went to my bank, but a loan meant interest of 19%.

I offered rewards on Kickstarter from £15 for a pack of tea to £1,000 for hire of the van. It was lovely finding people who believed in my idea and I made £14,000.

Last year, I used crowdfunding again through equity site Crowdcube. This time, it felt more grown up; I was appealing to formal investors who’d have a stake in my company. The smallest investment was £10, the biggest £60,000; I ended up raising £185,000.

I’d recommended crowdfunding to anyone interested in starting a business. Writing a pitch was the first time I’d had to explain what I wanted to do and that was useful in itself; it’s a great way to see if your idea’s viable.”

“I invest in companies I believe in”

Bekky Harrison, 29, a Business Analyst from Portsmouth, is a regular crowdfunder

“I started investing in crowdfunding campaigns two years ago. I was attracted to the idea that I could help make something happen for someone; anyone who’s willing to follow their passion deserves a chance.

The first campaign I backed was for a book called I Wonder What It’s Like To Be Dyslexic. I donated £35 in exchange for a copy of the book and a couple of prints. I now invest once a month, pledging between £20 to £200. I’ve invested in everything from tech start-ups, books, comics and films to individuals with a one off idea, like the woman who wanted to make a documentary about walking around Wales with a donkey. In return, I’ve got DVDs, artwork, a watch and my name printed in a book. 

So far, I’ve only made one equity investment – £95 for two shares in beer company Brewdog via Crowdcube. I haven’t crowdfunded myself, but if and when I do, I like to think I’ve built up enough karma points for it to succeed.”