Crowdfunding Demystified: Understanding the Fundamentals of Equity Crowdfunding

Author

Steven Williams
July 05, 2023

Hi, this is Steven from Drop. If you’d like to see if we can help you grow your business get in touch today.

In today’s email:

  • Crowdfunding Demystified: Understanding the Basics of Equity Crowdfunding

    • The fundamentals of equity crowdfunding

    • Decoding the 'crowd' and the 'funding'

    • Essential steps to prepare for your crowdfunding campaign

    • Premier UK equity crowdfunding platforms

    • Other funding options at your disposal

  • Tools to help you grow

Crowdfunding Demystified: Understanding the Fundamentals of Equity Crowdfunding

The Fundamentals of Equity Crowdfunding

Equity crowdfunding is a mechanism for startups and small businesses to accumulate capital by offering company shares to a large group of investors, or the crowd. It's a strategy for entrepreneurs to access a pool of potential investors ready to financially back and possibly mentor a company's growth. In return for their investment, these backers acquire a stake in the company, becoming shareholders.

Decoding the 'Crowd' and the 'Funding'

Let's dissect the two components of equity crowdfunding: the crowd and the funding.

The crowd comprises the investors who contribute funds to your campaign. This group can include friends, family, and even strangers who believe in your company's mission and potential for success. Equity crowdfunding campaigns are typically hosted on specialised platforms, such as Seedrs or Crowdcube in the UK, enabling you to reach a broader audience of potential investors.

The funding pertains to the capital raised through the campaign. These funds can be utilised for various purposes, such as hiring new team members, developing new products or services, or expanding your business.

Beyond raising capital, equity crowdfunding can serve as a potent tool for marketing your business. By running a crowdfunding campaign, you can showcase your company to a large audience of potential investors, customers, and partners, helping you build buzz and awareness around your brand and your offerings.

Essential Steps to Prepare for Your Crowdfunding Campaign

Now that you have a clearer understanding of equity crowdfunding, let's explore the essential steps to prepare for a successful campaign.

  • Develop a robust business plan: Before contemplating launching a crowdfunding campaign, it's crucial to have a clear understanding of your business, its uniqueness, and its revenue generation plans. This involves creating a robust business plan outlining your goals, target market, financial projections, and more. This will not only keep you organised and focused but also serve as a key resource for potential investors wanting to learn more about your company.

  • Build a strong team: A successful crowdfunding campaign demands hard work and dedication, so it's crucial to have a team committed to your company's success. This includes your core team members, as well as any advisors or mentors who can provide guidance and support.

  • Create a compelling pitch: Your crowdfunding campaign pitch is essentially a sales pitch for your business. It should clearly and concisely explain what your company does, why it's unique, and why it's a good investment opportunity. This can be in the form of a video, presentation, or written pitch, and should be tailored to your target audience.

  • Engage with your potential investors: One of the biggest benefits of equity crowdfunding is the opportunity to connect with and engage with your potential investors. This can be through social media, email newsletters, or even in-person events. The more you can build a relationship with your potential backers, the more likely they are to support your campaign.

  • Set realistic goals: It's important to have big dreams and ambitions for your company, but it's also important to be realistic about what you can achieve with your crowdfunding campaign. Set clear and achievable goals for how much you want to raise and what you plan to use the funds for. This will not only help you stay focused, but it will also give potential investors confidence in your ability to execute your plans.

UK Equity Crowdfunding Platforms

If you're looking to raise capital through equity crowdfunding, you'll need to choose a platform to host your campaign. Here are some of the top UK equity crowdfunding platforms:

  • Seedrs: Based in London, Seedrs is one of the leading equity crowdfunding platforms in the UK. It enables companies to raise capital by selling shares to a large group of investors across a wide range of sectors including technology, health, and food and beverage. Seedrs has a strong track record, having funded over 2,000 campaigns and raised over £1 billion in total.

  • Crowdcube: Another popular option is Crowdcube, based in Exeter. It allows companies to raise capital by selling shares to a crowd of investors across a wide range of sectors including technology, health, and food and beverage. Crowdcube has funded over 1,000 campaigns and raised over £1 billion in total.

When choosing an equity crowdfunding platform, consider the fees, the types of campaigns they allow, and the support they offer. It's also a good idea to read reviews and talk to other entrepreneurs who have used the platform before making a decision.

Other Funding Options at Your Disposal

In addition to equity crowdfunding, there are a few other funding options available for startups and small businesses in the UK. These include:

  • Angel investors: Angel investors are wealthy individuals who provide capital to startups in exchange for equity ownership. They are typically experienced entrepreneurs or business professionals and they often provide not just funding but also mentorship and guidance. They can be a good option for early-stage companies looking for seed funding.

  • Bank loans: This is a traditional way of borrowing money to finance your business, and can be a good option if you have a solid credit history and a clear plan for how you'll use the funds.

  • Venture capital: This type of funding is typically provided by professional investors, such as venture capital firms or angel investors, who are looking to invest in high-growth potential businesses. In exchange for their investment, they often receive a share of the company's equity.

  • Government grants: The UK government offers a range of grants and funding programmes for small businesses and startups, such as the Innovation Funding Service and the Small Business Grants Scheme. These grants are typically provided on a competitive basis, so it's important to do your research and make sure you meet the eligibility criteria.

  • Personal savings: For many entrepreneurs, funding their business with their own savings is a common way to get started. This can be a good option if you don't have access to other sources of funding, but it's important to be realistic about how much you can afford to invest and how long it will take to see a return.

In conclusion, equity crowdfunding can be a great way for startups and small businesses to raise capital and gain exposure. By preparing a solid business plan, building a strong team, creating a compelling pitch, engaging with potential investors, and setting realistic goals, you'll be well on your way to running a successful equity crowdfunding campaign. Remember, there are also other funding options available, so it's worth exploring all of your options before making a decision on which one is right for you and your business.

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