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Options for finance: is crowdfunding a viable route for SMEs?

Author: ICAEW Insights

Published: 06 Dec 2022

With the economy in choppy waters, crowdfunding continues to be a funding method for businesses that want to swim against the tide, but it’s by no means an easy fundraising option.

Amid current economic strains, pressure is mounting on SME owners to hunt around for every potential avenue for finance. In the non-traditional bracket, one route that provides a useful means for thinking about the problem in a different, innovative way is crowdfunding. But what should SMEs consider before they attempt to use it?

“For me, the main benefit of crowdfunding is that it opens the way for a quick market test case,” says ACA-qualified portfolio CFO and fundraising expert Matthew Grimsdale. “You can reach out to your prospective audience and get a good steer on whether your product or service appeals to its target market. So, it allows you to dip your toe in the water before you’ve committed resources to finalisation and launch.”

In Grimsdale’s assessment, crowdfunding is best suited to backing business-to-consumer ventures – such as a new board game or piece of wearable tech – along with community causes or innovative projects with the capacity to seize people’s imaginations. For those purposes, there are three main types of crowdfunding for entrepreneurs to plug into:

  • Equity: Open to large numbers of backers among the general public, each of whom will claim a proportional stake in the venture.
  • Peer-to-peer: A similar model that may also include a form of debt, but tends to be restricted to smaller groups of wealthy individuals.
  • Reward: Provides backers with exclusive discounts or perks in relation to the product when it finally emerges – for example, Brewdog’s Equity for Punks scheme.

Leading platforms on the scene include Kickstarter, SeedInvest, Fundable, Crowdcube and Indiegogo. Rules for how – or indeed whether – the finance becomes available once your funding round hits its deadline vary. “If your target was £50k and you only managed to reach £30k,” Grimsdale says, “some platforms will require you to cancel those pledges. Others will allow you to collect.”

Not a panacea

Thanks to the user-friendly nature of personal crowdfunding efforts on platforms such as GoFundMe and JustGiving – where users can set up campaigns very quickly – there may be a perception that harnessing crowdfunds for business uses is an easy option. It’s an assumption that’s wide of the mark, Grimsdale warns. 

“Crowdfunding is a great way to build a profile around your offering,” he says. “But you have to put in the groundwork first. Any credible platform will require you to put together a professional listing document or proposal, which could run to around 60 pages and must be underpinned by a detailed business plan, a budget and notes on use of funds. That would typically be available as a download from your chosen platform, via your campaign’s landing page. The amount of work that document involves should not be underestimated.”

As that proposal will be publicly available, it could open a gaping pitfall for entrepreneurs who are looking to fund particularly innovative ventures: loss of intellectual property (IP). “It would be relatively easy for bad-faith site visitors to lift your ideas,” Grimsdale warns, highlighting a flipside to the buzz that crowdfunding can build. With that in mind, business owners must ensure that appropriate legal protections around their proposals are airtight.

However, that potential danger area pales by comparison to what could be the biggest bear trap of all. “If you are a business in distress,” Grimsdale says, “and you have the notion that using crowdfunding would be a handy way to raise working capital, I urge you to reconsider. Crowdfunding is not a panacea for systemic business problems – and you could end up in even more trouble than you’re already in.”

He notes: “At the moment, there’s a crowdfund underway to rescue the 265-year-old City diner Simpson’s Tavern, which has already closed its doors and is in a last-ditch effort to reopen. That establishment has a fond customer base in City circles and some high-profile admirers, but has so far raised only a third of the sum that would ensure its survival.”

Viable option

Ben Patten, founder of refillable groceries vendor Dizzie, says that crowdfunding campaigns have enabled his business to find institutional investors, employees, customers, press and partners alike. On that basis, he says: “It’s a great way to build your profile.”

However there can be downsides, he warns: “It can be quite time consuming. First, there's the compliance, and then there’s the crowd's participation and questions.” Occasionally, that interaction may flag up mismatched expectations. “This happens very rarely,” Patten says, “but I once had two meetings and a call with a guy who subsequently said, ‘We're all good, Ben – I’m going to invest.’ The next day, £150 went on the board.”

In Patten’s view, crowdfunding is “absolutely” a viable option for SMEs. “As current market volatility and higher interest rates bring other forms of investment back into focus, there will be more competition,” he says. “But crowd investors are instinctive: they sense the opportunities in businesses that change entire industries.”

Dizzie carried out its fundraising drives on Crowdcube. While Patten had some early, third-party guidance, he says, the platform “is generally very good at holding your hand and making things work. You must also think tactically and strategically around your raise: mobilise your community, create compelling materials and provide a clear plan.”

Giving something back

Josh Wood is founder and CEO of events and networking app Bloc. “We used Indiegogo as a crowdsourcing tool to be able to afford Version-1 of Bloc on iOS,” he says. “It was a successful experience and we raised more than £8,000.”

“One pro of taking that route,” he explains, “was that we didn’t have to part with any equity at that point. We were able to get support from friends and family, but were still able to give something back to them – just not equity. We gave funders T-shirts, caps, exclusive updates and lifetime access to any of our events. So, it was fun, relevant and engaging.”

That said, he notes: “It definitely isn’t a case of, ‘Build the campaign on Indiegogo and they will come.’ Super-successful crowdfunds actually spend a fortune on marketing, but we didn’t have the budget at that stage to be able to do that.”

For Grimsdale, it all comes down to what individual business owners or entrepreneurs feel is right for them. “Sometimes, monetary value shouldn’t be the overriding factor,” he says. “If you need, say, £10K and have a successful meeting with an angel investor who knows your niche, those funds could be in your bank account within a week – but more importantly, you will also have a partner on your side with a vested interest in the business.”

Plus, he notes: “While the open nature of crowdfunding is great for lauding success, it can also make failure a public event if something goes wrong.”

ICAEW’s Business Finance guide provides entrepreneurs, SMEs and growing businesses with information on the finance options available to them, drawing on finance industry and business community expertise.

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