Many thanks to Paul Grant for writing this blog. If you'd like to learn more about crowd funding, take a look at our topic hub for The Exchange 2012
In June www.escapethecity.org raised £600k on the crowd funding platform www.crowdcube.com . If that was not enough they broke a new crowd funding record by raising it in just eight days - 394 investors putting in an average of £1,522. They made it look easy, and have encouraged many more early stage businesses to give crowd funding a closer look.
Crowd funding is on the rise and will continue to be so for at least the next few years.
Excluding debt funding there are two main types of crowdfunding platforms:
Gifting crowd funding sites such as www.kickstarter.com or www.indiegogo.com where no equity is involved. The “donations” can be as small as £10 and can involve rewards such as tee-shirts, invites to launch parties and products that have been produced post funding. Often this type of platform suits creative industries and social enterprise.
Equity crowd funding, such as www.crowdcube.com and www.seedrs.com where in return for cash a person can play Dragons Den and take a tiny stake in a company that potentially could produce a healthy return on investment. The individual investor or crowd will have no say in the company but often there can be many other fringe benefits to being an investor similar to the gifting sites above.
With both types of crowd funding you upload a pitch and then have typically 60 days to secure the full amount of capital you require. If you fall short of the target funding all the capital raised gets returned. The costs are usually 5-7% of capital raised. For the benefit of this blog post I will focus on equity crowdfunding
So why were Escape the city so successful? The short answer is that they were simply a good match for equity crowd funding. Could you say that about your business?
Let's take a look at five critical success factors for Escape the city when raising equity crowd funding:
1. Escape had an active and responsive database of 70,000 registered users, built up over three years that had already bought into the concept, ethos and mission. Although many crowd funding sites have over ten thousand registered investors, if they do not know you it will take a lot of convincing to get them to buy into what you are doing. The Start-ups that secure crowd funding usually already have a good following before they even ask for the money.
2. They primed this base of supporters before releasing the deal onto Crowd Cube to make sure they got off to a quick start and could build an unstoppable momentum.
Not only is it important to have your own database but you need a strong pre-launch campaign through email, face to face and social media over at least two weeks before you release the deal on a crowd funding site.
3. Their pitch was outstanding in clarity of vision and being able to describe the past, present and future. People could buy into the compelling narrative emotionally, and want to be a part of it. Also important was the fact that they sold as a team, not just a corporate entity.
The business plan is less important than the emotional impact you can make through video, pictures and graphics. Spend most of your time on a one-two minute elevator pitch; without an excellent pitch you will never gain enough interest to get your deal funded.
4. They demonstrated a clear business opportunity through credible visuals and financials that showed how investors could make a healthy return. The team made no promises of huge pay-outs, although there was a strong indication of a scalable business that would be able to find a buyer in 3-5 years’ time. There is no need for a 100 page business plan – they will not read it. Instead offer a clear business case on no more than 6 pages.
5. The concept is clear and easy for a large crowd to 'get'. It is easy to understand that “Escape the City” is an online platform offering jobs, adventures and other opportunities to people stuck in city cubicles. People need to be able to understand your big idea within 10 seconds, and then be able to tell other people about your business with ease. If your venture has a high degree of complexity it may not be for the crowd but for more specialist investors.
Crowd funding will continue to gather hype. This is good news for entrepreneurs, as it means high valuations, a much quicker route to capital, and access to a large base of enthusiastic investors spreading the word about your business. Should this option not suit your business however, it is important to remember that crowd funding is just one of many alternative routes to funding. But if you think it might be suitable, how do you know equity crowd funding is right for you? If you can tick off all the five points above for your business – then go for it.
Paul Grant is an experienced entrepreneur who founded and ran a London-wide catering business for corporate and retail markets for seven years and now assists many companies at early and growth stages. A former director of Capital Partners, heading up the business angel division, and more recently an associate director of BA Capital Ltd. and Bergstrom Capital, Paul is also the founder of The Funding Game, which aims to offer entrepreneurs a clear understanding of how to get their businesses funded.
Throughout his career Paul has been a passionate advocate for the small business owner. He offers a range of services to new companies, including coaching on topics such as securing investment, crowd funding, pitching, business plans, strategy, negotiation and marketing advice.
Paul is a also frequent speaker on the subject of business funding at many public professional development events. He is based in London, England.
For the latest Funding Game news and events visit www.thefundinggame.co.uk