Crowdfunding is a popular way for start-ups and entrepreneurs to raise capital, but the would-be investor should consider several factors before putting their money where their mouth is.
Nadeem Siam, founder and CEO of Welendus, a fintech consumer peer-to-peer lending platform, says investors must ensure that a company has a distinct USP, a concise and detailed pitch, and a clear strategy for channeling investments.
— Nadeem Siam, founder and CEO of Welendus
Chartered financial planner Martin Bamford, also the MD of financial planning firm Informed Choice, says crowdfunding an entrepreneurial business is high risk for investors.
— Martin Bamford, Chartered financial planner
However, he adds that when a business is successful, the returns can be substantial. “One success is often enough to compensate investors for multiple failures. Spreading risk across several crowdfunding opportunities is a good way to manage your exposure.”
So what are the red flags to look for when choosing a business to support? Siam warns that a brief pitch, coupled with generic statements and a lack of media – such as videos or images – would be a warning sign.
“Investors should be looking for a company that’s crowdfunding because it has a genuine belief in the scalability of its offering and has the figures and plans to back this up,” he observes. “Crowdfunding represents a huge opportunity for any start-up to gain investment, and any pitch offering less than total engagement on the company’s part should be approached with caution.”
Bamford says investors should assess each crowdfunding pitch on its own merits. Those most likely to fail, he says, tend to overstretch and launch an untested product or service.
“I also get very nervous when I see entrepreneurs attempting to enter a market in which they have no previous experience,” he adds.
“Entrepreneurs who have extensive personal networks tend to do better. Look for schemes where your money is only taken if a minimum total investment level is reached, as this prevents a business from attempting to launch with only part of their target funding.”
Paul Lajszczak, MD of Crowdfunding Place, says would-be investors must understand a business’s expectations and approach to risk.
“Always ask as many questions as you can to understand the business in which you wish to invest,” he urges.
From the entrepreneur’s point of view, good communication between funder and business is a priority.
— Nadeem Siam, founder and CEO, Welendus
Gavin Sewell, CEO and founder of Honcho, a reverse auction market for financial services, says, “We make sure the relationship with our funders is always open, transparent and supportive.”
Honcho receives investments of between £10 and £150,000. For those investing at the lower end of the scale, all that’s expected is their investment and general support; higher-end investors are expected to be closer to the business and more involved.
“We might benefit from their experience and networks,” says Sewell. “A great high-value funder is someone who has experience and contacts in a specific area or industry, who can help open doors for the business as well as validate the business’s proposition.”
Phil Neale, CEO of Snoozle, an app that allows users to record messages that replace a traditional alarm tone, recalls how his company set a target of £100,000, raised via crowdfunding platform Seedrs. The target was reached within nine hours.
Like Sewell, he says some funders watch from a distance while others are more active. One of his investors joined the board as a non-executive director and another advises at board meetings and manages the accounts.
— says Neale.
Graeme Risby, co-founder of car sharing app, Hiyacar, raised more than £300,000 in 11 days in 2015 and did a second fundraising drive a year later, raising £1.25m.
For Hiyacar, crowdfunding has been invaluable for the firm’s profile and growth. The company is on track to have the biggest fleet of keyless vehicles by the end of the year, having invested £2m in QuickStart technology so cars can be unlocked via a smartphone.
Risby believes that if an entrepreneur possesses genuine passion and has an idea that solves a problem, they will strive to make that business a success. And, he acknowledges: “While enthusiasm is useful, having a thoroughly researched idea and competitive marketplace is key as well as a strong business plan and the ability to demonstrate how the idea will achieve success.”
Juliet Eccleston, co-founder of peer-to-peer recruitment platform AnyGood?, says building a community of investors who are passionate about a product gives people the chance to influence the growth of the product and, subsequently, the return on their investment.
“For our platform, we asked members of our network if they wanted to invest before anyone else had the opportunity to – because they had first-hand experience of the proposition, they chose to do so,” she says.