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Crowdfunding myths – issues and implications

6 September 2019 No Comment

By Scott Haughton, COO at Envestors

When companies decide to use crowdfunding what would you expect their main motivation to be?  Raising funds sounds like the obvious answer.  However, in a recent survey of UK start-ups who have used equity crowdfunding in the past three years the answer to this question was surprising.  The report reveals that over half of all businesses undertaking a crowdfunding campaign within the past three years did not rank raising capital as their key motivator.

The findings reflect issues with perceptions among growth businesses as to what crowdfunding can do for them. Ultimately, perceptions are out of sync with the realities.

Let’s look at the myths that abound and implications for the future of crowdfunding.

The ‘free marketing’ myth

Fifty-two per cent of respondents in the survey of 200 said that ‘brand exposure/customer acquisition/PR’ was a primary reason they decided to crowdfund with 24% giving it top ranking. However, when asked what they liked about crowdfunding after having run a campaign this drops dramatically with only 12% giving it a rank of number one. This indicates that expectations of ‘free marketing’ and swathes of new customers aren’t being met.

Going beyond initial expectations, brand exposure through a crowdfunding website isn’t free for companies. They’ll be paying upfront fees and/or success fees.

In addition, the cost of internal resources on running the campaign are significant.  On top of that, if you consider that the average raise in this sample was £332,300 and the average success fee in the market is 3 – 7%, cash-strapped companies would be paying £9,969 to over £23,000 in untargeted marketing spend.

Only 27% of respondents listed access to investors as their primary motive.  This means it was in 5th position after: a perceived high success rate, the ability to provide their community with a stake in the business, the reputation of the crowdfunding site and it being a quick way to raise funds.

The ‘no need to network’ myth

The myth of ‘free marketing’ was only one of many misconceptions uncovered by the survey. The data clearly show that start-ups are still unaware of what is required to succeed at crowdfunding.  When asked what companies liked about working with crowdfunding site, the ability to raise money through family and friends, received a low ranking for 60% of respondents. However, the reality is that most crowdfunding websites require companies to be a percentage funded before they gain access to the site’s investors and ‘go live’, so this is a critical part of every fundraise. It’s clear that this is not well understood by entrepreneurs.

The ‘it all gets done for you’ myth

Most companies don’t understand just how difficult it is to raise equity.  The perception, that you can approach a crowdfunding website and just sit back and watch the investment pour in, still persists. We need to educate start-ups that this is not the case. Naturally crowdfunding sites offer many advantages and there are some great success stories; however, the survey data shows that companies are still not aware of just how much planning and legwork, including networking, that they have to do themselves.

Crowdfunding needs to evolve

Despite the challenges of the process 71% of those who’d successfully raised funds indicating they would use the method again and 44% of those who didn’t meet with success saying that they would give it another try.

However, companies cited issues with the current model, namely; lack of control over who views business documents (42%), the inability to communicate directly with investors (38%), paying success fees for investment generated independently from my own sources (28%) and investors being charged to invest (28%).

Crowdfunding started in 2011 and it’s a great concept. However, companies have grown in maturity and it is time for crowdfunding to evolve.  80% of successful companies indicated they were ready for new approach, for example, an off-the-shelf website that they could brand and control themselves in order to fundraise.  The idea of crowdfunding is clearly here to stay, and it will continue to evolve.

The survey was conducted on our behalf by independent research specialist Coleman Parks in April 2019. The participants were two hundred businesses who had used crowdfunding as a method to raise equity finance within the past three years. If you’d like to read more you can access the report here: http://casestudies.envestors.co.uk.pages.services/Envestors-Crowdfunding-Survey/?ts=1563954577806

 

ABOUT THE AUTHOR

Scott Haughton is COO of Envestors, a fintech company that connects investors and scale-up companies.  With its fundraising platform Envestry for Scale-ups, companies get a personalised site to promote deals, raise finance and engage with their investors 24 hours a day, 365 days a year.

Envestry has raised £100m+ for over 200 companies through its own private investor network.

Founded in 2004, Envestors is regulated by the FCA and has offices in the UK, the Channel Islands, the UAE and strategic partners across China.

 

Web: https://www.envestors.co.uk/

LinkedIn: https://www.linkedin.com/company/envestors-llp/

Twitter: @EnvestorsLondon

Facebook: https://www.facebook.com/pg/envestorslondon/posts/

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