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Module 5 - Funding & investment

3. Crowdfunding

Crowdfunding has become widespread with startups in the last ten years as an alternative way of raising funds. There are two main types of crowdfunding: rewards based, and equity based.

Rewards-based crowdfunding offers people (often known
as “pledgers” or “backers”) a reward, usually a version of
the product or service the company is trying to raise money for, in exchange for money. These types of crowdfunding campaigns tend to be for smaller fundraisers (the average
size on Kickstarter is €18,000) though some campaigns have raised hundreds of thousands or even millions of euros. These campaigns are not free. Crowdfunding platforms charge between 3-7% – most charging more for a flexible campaign (one where you get the money regardless of meeting your target) than a fixed campaign (one where you only get the money if you reach your target). Rewards-based crowdfunding is a great way to raise initial funds for your startup and also has other benefits. It allows you to test the appetite for your idea, to create a community of loyal supporters likely to follow you along your startup journey, and to create a buzz around your brand and product/service.

Equity crowdfunding is similar to raising capital from investors (see section below of equity investment) except it is done through a crowdfunding platform such as Crowdcube, WiSeed, and FundedByMe. Individuals invest varying amounts for a share of the company with most platforms offering investment amounts as low as €10. Investors do this with the expectation of making a return within 5-10 years,
either through a trade sale (the company is sold to another company), through a buy-back scheme
(the company decides to buy back shares from investors) or through an IPO (an “initial public offering” whereby the company gets listed on the stock market). These campaigns require more thorough work than rewards-based ones as they require business plans, financial forecasts and valuations, whilst rewards-based campaigns do not. Equity crowdfunding falls under the country’s financial regulations with platforms needing to be approved by relevant financial bodies.

Crowdfunding is not an easier way of raising funds than other types of fundraising activities and the amount of work that goes into them should not be under-estimated. They require a high level of sophisticated marketing work.

How to make crowdfunding a success:

  • Preparation is key: plan what you need to do before your crowdfunding campaign kicks off, every step you will take it when it’s live and how you’ll manage things after. Your plan should the amount you’re raising, your marketing strategy, PR strategy and contact lists. Pre-draft emails and communications to go out at key times. It’s crucial to be prepared for the launch of the crowdfunding campaign but it’s also important to be prepared for when the campaign ends. Backers are putting money and faith in you so make sure you can deliver what you promise.
  • Be creative & genuine: make your campaign original and interesting for the people you’re trying to get on board. This seems obvious but many crowdfunding campaigns fail because founders believe people will want to back their business just because it’s “cool”. Tell a story and appeal to people’s emotions. Stir their imagination and make them feel that by backing your campaign they are part of something bigger.
  • Appreciate how much work it actually is: crowdfunding isn’t just about putting your campaign online and money rolling in. You need to be prepared to hustle and hustle some more. Once your campaign is live, it becomes a full-time job of managing social media campaigns and direct contact with people. You will need to contact everyone you’ve ever met whether personally or professionally.
  • Figure out how to start strong: most crowdfunding campaigns that don’t raise 30% in
    the first couple of days fail so make sure you have a plan to achieve that. You should have backers/investors lined up to contribute as soon as it’s live. Create a sense of urgency, maybe an incentive for people to contribute early on (like a limited amount of rewards, a raffle they’ll be entered to, the chance to win something special…). It’s worth doing some basic calculations around how many people you need to approach in order to reach your target.
  • Build relationships: try to foster a personal relationship with as many backers as you can. Backers believe in you so much they’ve invested in something that doesn’t exist yet. Show them appreciation they deserve. If these relationships are managed well, it’s likely these people will be spending more money with you in the future.
  • Learn from others: look at successful campaigns and get inspiration. We’ve picked a couple to get you started.

Entrepreneur testimonials on crowdfunding

“We did it because we saw it as opportunity to share our mission and our success with our customer. For not much more than the price of ordering our product, people could invest in the vision to take things to the next scale. People were excited about that and it was really successful. We now have an army of people who not only believe in what we’re doing but are also emotionally invested in what we’re doing. And that’s an incredible connection that is also very unique to crowdfunding. However, it’s also
a pain in the a**. There’s a lot that goes into it. Especially on the equity crowdfunding – legal aspect of things…. it’s expensive to set up.”

-Dan Kurzrock, Co-Founder and Chief Grain Officer at Regrained

“I strongly recommend crowdfunding. But not as a way to raise funds, but to build a community. It is a great way to get the word out, reach media and bind people to your brand. But it takes a lot of time and effort. Only do this if you have the marketing power in your team.”

-Chantal Engelen, Co-Founder at Kromkommer

Rewards-based crowdfunding Case Study: Toast Ale

  • Platform: Crowdfunder
    (https://www.crowdfunder.co.uk/raiseatoast#start)
  • Target: £20,000
  • Result: £29,452 with 449 supporters in 28 days

Why it worked? Toast Ale took a serious issue (food waste) and turned it into something enjoyable and popular (beer).

  • Got a serious message across positively with humour and gave backers a sense of providing real value (tackling food waste) by explaining tangible impact (how many slices of bread saved with each pledge).
  • Clear explanation of what money would be used for.
  • Smart and creative rewards to fit many different budgets.

Equity crowdfunding Case Study: Oppo Ice-cream

  • Platform: Seedrs (https://www.seedrs.com/oppo-ice-cream)
  • Target: £100,000
  • Result: £353,811

In 2015, Oppo became the “most overfunded” offer ever through its initiative on Seedrs. They set out to raise £100,000 but secured more that £300 000. When they returned to Seedrs for a follow-up round in 2016, Oppo reached its £150,000 target in about 6 hours.

Why it worked? They didn’t just sell a product but told a story of how Oppo came to be. We as humans tend to feel first and think second, so it pays off to capture people’s imagination and play on emotion.

“Crowdfunding is the BEST marketing tool! Where else can you promote yourself, get your story out there, get your product into people’s hands, get their feedback on the product, build brand ambassadors, and raise money at the same time?”

-Cheryl Clements, Founder & CEO of food + beverage crowdfunding site PieShell

Debt

Borrowing money at different stages of your startup can be an effective way of raising capital and maintaining as much control of your business as possible. Debt can be raised from banks though this is rare at the startup stage, startup focused debt lenders are much more likely. There are government schemes that provide debt facilities as well. The downside of raising debt is that you have to pay it back with interest (unlike crowdfunding, equity or grant money). Some startup loans may even require a personal guarantee meaning you are personally liable to pay the money back if the business fails.

Increasingly popular with startups are convertible notes. These are also loans, though instead of being paid back in cash, they are paid back in equity. These notes allow you to delay valuing your business (an often-tricky operation for startups) and do not require you to pay the money back. Through this mechanism, investors do not receive equity immediately but receive a share of your business in your next round of equity investment (see below). Sounds like a good deal? It certainly is, though remember the hard work of valuing your business and setting up all the proper legal frameworks for investments still need to happen, just further down the road. Have a look at this crash course on convertible notes for more detail on how to make them work for you. 

Equity

This is the practice of raising capital from investors for a share* of your business. Equity investment takes many forms – you can raise money from private individuals (often known as “angel investors”), from groups of investors, venture capitals, from funds… There are categories of investors like sector specific investors (in this case look out for the ones focusing on food & agri-tech!), impact investors (who focus on environmental and social impact as much as a financial return). Equity investment is a great way of raising larger amounts of capital and finding people who can be instrumental to the growth of your business. Consider whether you want investors who invest and don’t get too involved (generalist investors), or ones who take a bigger role in your business by acting as advisors and helping open doors (strategic investors). It’s key you raise capital from the right investors. Finding people who align with what you want to do and how you want to do it means you’ll have a more collaborative relationship. People with relevant experience will help you speed up your growth by providing key introductions and by helping you avoid mistakes they will have made already.

When building and running a sustainable business, there are advantages to working with impact investors. If you find people who believe in your mission, they will value the wider impact you’re creating as much, if not more, than financial gains. This means they’ll be less likely to push for returns and extracting value from the business early on.

There are different types of shares you can issue. Investopedia provides a good overview of these but we highly recommend getting legal and financial advice to decide which will best suit your business. 

Steps to raise equity investment

  • Identify your funding needs: you should have an idea of how much money you need to raise now and in the future (investors will ask you how much you plan to raise at a later stage).
  • Figure out your business valuation: this refers to how much your business is worth and will determine what percentage of your business you’ll need to give away in exchange for investment. See more on this as the end of the chapter.
  • Nail your elevator pitch: you should be able to explain your business in one sentence.
  • Create a pitch deck + an investment teaser: see below for more detail on both.
  • Find opportunities to pitch to investors: find investor networks (perhaps begin with the EIT Food Investor Community), pitching evenings, build on your personal network, ask friends & other startups if they have tips/can recommend people.