Similar to angel investment, crowdfunding is a way of raising finances by selling part of your equity. The main difference between the two being, that instead of there being just one investor, you sell your investment idea to a crowd.
For those considering this alternative way of investment, based on my experience and knowledge, I have compiled my top three tips to help you get the most from crowdfunding:
Currently the Financial Services Authority (FSA) perceives crowdfunding as a derivative of raising money for funding from the public, which in the UK is currently illegalunless approved by the FSA. The FSA only recognises and approves of one crowdfunding model within the UK – Seedrs.com.
It’s absolutely essential that you investigate your chosen crowdfunding platform and/or website that complies with the Collective Investment Scheme rules set out by the Financial Services Authority (FSA).
It is imperative that the letter of the law is followed, if not then you could be putting your business idea and indeed yourself in danger.
By its nature, crowdfunding is ideally suited for political campaigns, musicians and charities as this can be supported by fans. However, the exposure of your business idea to a collective group of individuals or investors without any form of NDA (non-disclosure agreement), can leave you and your idea vulnerable and open to being plagiarised.
When drafting your business pitch to present to potential investors, make sure to provide enough information to attract interest, without giving any vital information away. Then, when potential investor(s) step forward, ask them to sign a NDA before you divulge any further information, so you’re protected from the outset. Only then will you be able to fully explain the idea without running the risk of it being stolen.
Ask for more than you need
When an entrepreneur is seeking additional investment, they often try and ‘window-dress’ their opportunity, making their potential investment seem a lot more attractive by asking for less. Yet, when the finance is agreed and provided, the entrepreneur may find that they need more capital, not only will this leave the entrepreneur short of funds, it will also affect the relationship with the investor as they may be reluctant to offering additional finance.
My advice is to always ask for more than you actually need and always have a reserve to avoid the awkward and potentially damaging conversation of asking for more.
If implemented correctly, crowdfunding can be more successful than attempting to source the full investment required from a single individual or organization. But before crowdfunding becomes your prefered channel of finance, make sure you have done your research and carried out the necessary precautions to protect your business and yourself.