Crowdfunding explained
Crowdfunding explained

Crowd-funding relies on a business placing their proposition to launch a new product or creative project up online and anticipating how much is needed to get the project off the ground.

Those who invest on crowd-funding websites tend to be people who are passionate about the project and although there tends to be a high level of investment - the amounts invested tend to be lower. As a result the average investment raised on crowd-funding platforms such as Kickstarter and Crowdcube equates to £3,766.

How successful can crowd-funding be?

Despite the fact that the average pot raised at the end of a crowd-funding cycle is a lot lower than other forms of investments, there have been a number of incidents where the product is so strong that millions have been raised.

An example of this is independent beer company BrewDog who earlier this year managed to raise £5 million to expand the production of their product within three weeks of launching a crowd-funding campaign on its own crowd-funding platform Equity for Punks. Their aim is to raise £25 million over the course of the year.

BrewDog co-founder James Watt said: “Many questioned our target of raising £25 million, but we’ve passed the record we set in 2013 in a fraction of the time.”

“It’s a proof that there is a thirst for alternative finance out there and that people are sick and tired of the fat cats controlling every-one’s money.”

In 2013, BrewDog secured £4.5 million in funding to expand its product into pubs.

Benefits of crowd-funding

There are number of benefits to securing finance from crowd-funding websites, the first of which being that it already opens businesses and products to a wide range of consumers who are interested in engaging with the brand.

Financiers willing to invest their personal income into projects, do so predominantly because the product is something that they feel will benefit them and as such they desire to see it made. As a result some of the risk associated with producing something new and unique is limited.

An additional benefit is that business owners aren’t obliged to give away shares in their company. Crowd-funding works on a rewards system and although shares can be offered as rewards, smaller businesses can offer their financial backers a wide range of incentives such as launch invitations, newsletters and a free sample of the product as a way of communicating their gratitude.

Being successful

“Those who are successful on platforms such as Kickstarter tend to be the companies that are highly social and are raising funds for an incredibly unique concept,” says Kickstarter’s Justin Kazmark. “It’s important to have strong social media campaign to get the message about your product out there and brands with a strong social media presence are very much more likely to be successful when doing this as they are able to communicate directly with those who may potentially benefit from and therefore back the project.”

In tomorrow’s instalment of the alternative finance series, we take a look at asset financing…