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Crowdfunding: the good, the bad and the ugly

13-year-old Jordan Daykin had an idea. He went to his garden shed in West Ashton, Wiltshire, with his grandfather by his side. Six hours later they emerged with a prototype. This prototype was tweaked and added to over weeks and months – blood sweat and tears went into this thing to ensure it was the best it could be. To make it, as Jordan had dreamed, a game changer.

A year later and this prototype was no more. In fact, it was on its way to Manchester to be pitched to the Dragons; a potentially life-changing moment for Jordan. And his grandfather, who was still by his side by the way. To cut a long story short, the product was a hit – requiring very little persuasion, Deborah Meaden invested £80,000 in what was now a fully-formed business with products stocked in 500 stores across the UK.

Time passed and Jordan’s profile (supported by PHA Media) grew rapidly. But that £80k wouldn’t last forever. In fact, it disappeared pretty quickly, such was Jordan’s ambition to grow and move quickly in a saturated market. More funds were required, but this time Jordan turned to the public. He wanted to give something back, he wanted to involve them in his business journey and allow them to join him in his success. This was 29th February 2016. By 7th March, just a week later, the business had raised £2m on Crowdcube, overfunding by £500k. It was clear that people saw something in this unassuming plasterboard fixing.

Today’s date is 3rd May 2017. And GripIt – the business founded in a garden shed in Melksham – has just closed its second round of crowdfunding, raising £2.14m from over 1,400 investors via Crowdcube. What does this mean for the bigger picture? GripIt’s valuation has doubled in less than a year (£10m in 2016, £20m as of today).

This is a crowdfunding success story. And of course, there are many more where that came from. But the very fact you are ultimately putting the success of your business in the hands of the public makes it an unpredictable way of raising funds, to say the least.

So you do have a tricky decision to make. But to help, we’ve outlined the good and the bad in the hope it will guide you as to the best approach for your business.

When is it good?

It’s efficient: Ultimately, it’s a quick way of raising funds. Sourcing traditional finance can be a tiresome process, especially when you’re a young business and simply don’t have the resource to jump through hoops and avoid tripping up on red tape. A basic page takes literally hours to set up – and it’s a perfectly suitable platform for getting all your key messages across.

It proves the concept: I’m not calling you a sheep, but are you more likely to take a taster from that man on the street outside that new pizza restaurant if other people are doing so? Of course you are. The same goes for crowdfunding. Those wonderful early adopters, bless them, set trends for others to follow. As humans, nothing provides more validation than someone else doing something and benefitting from it. Play on this concept of validation.

It provides marketing collateral: If you believe your business is worth people investing in, then chances are it’s also a business worthy of press coverage. Combine the two and you have yourself a good story to shout about. Perhaps you’re disrupting a market with a new product, or solving a social problem. We have weaved many crowdfunding campaigns into existing PR strategies for our clients, and they really help to show ambition, growth potential and a nice success story afterwards if all goes well.

It improves your product or service: One of the joys of crowdfunding is that it lets you get very close to those backing you; you can interact on your page and be in constant dialogue for ultimate transparency. A platform like this gives you a chance to engage your audience and field questions, complaints, feedback, and ideas.

When is it bad?

It doesn’t happen overnight: You can’t realistically expect to launch a Crowdfunding campaign on the Monday and start receiving backing by the Tuesday. The reason Jordan Daykin’s campaign worked so well, so quickly, was because he already had a media profile; he had the credibility required to convince people to invest. That’s not to say you need a profile in the national media, but you do need a way of promoting the campaign and raising awareness ahead of your launch date. If done wrong (expensive advertising, irrelevant advertorials) this can be a costly process. This is when a cost-effective PR campaign can be beneficial.

Reaching your target isn’t guaranteed: If you don’t reach your funding target by the time your campaign runs out, the money is returned to your investors and you don’t keep a penny. So you need to bear this in mind when setting your target; although it’s nice to be ambitious (and this can excite people), don’t be unrealistic, else you risk disappointing yourself and those who backed you.

Failed projects can be damaging: To build on the above point, a failed crowdfunding campaign doesn’t look good in the public eye. Pursuits of traditional funding take place behind closed doors, and if for whatever reason they fall through, no one will ever know. However, a failed crowdfunding project on a public platform can suggest there isn’t an appetite for your product.

Copyright is key: Another fall-back of a public crowdfunding campaign is it makes your concept vulnerable to copyright infringement. It’s so important to ensure your product or service is patented, to avoid someone simply coming across your idea – when funding is gathering momentum – stealing it, and consequently competing for your customers.

You can be too generous: The rewards element to crowdfunding is something that’s often overlooked. The idea is to give backers some immediate return on their investment, in the form of exclusive products, free gifts, a share of the company, or similar. Get this approach wrong, and you could end up giving away too much of your business to investors, leaving yourself short. Once your terms & conditions are on the site and people buy into them, that’s it, you can’t go back – so get it right from the start.

So…Should you do it?

In its best form, crowdfunding is an excellent way for entrepreneurs and young businesses to secure efficient funding, validate their concept, develop marketing collateral and ultimately improve their business. But only the very best campaigns tick all these boxes. Self-awareness is absolutely key, and you shouldn’t pursue crowdfunding unless you are willing to be patient, have alternate sources of finance if required, a secure patent and a structured rewards policy in place.

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