The Jacksons may well have sung ‘ABC – easy as one, two, three’, but growing a business is never quite so linear or uncomplicated. You might have the most brilliant idea in the world or your venture could be at the stage where it needs that extra splash of investment but if the traditional means of raising finance are either blocked off or prohibitively expensive, what do you do?
That’s exactly the type of problem that faces numerous businesses and particularly so in the years following the great financial crisis. Balance sheets were prioritised over risk, innovation had to fight that bit harder to be noticed and caution was the mantra.
It was under such circumstances that the equity crowdfunding industry was spawned. Since 2012/13 it has proliferated. The UK has led the way in Europe where the likes of Seedrs and Crowdcube have cornered the market and their success has been emulated elsewhere with Companisto and Seedmatch flying the flag for Germany, Finland’s Invesdor, with whom Nordea has a fruitful partnership, thriving and WiSEED in France also emerging as a big local player.
And these are just the tip of the iceberg. Bubbling away beneath the surface are a whole host of other crowdfunding platforms that either use an equity crowdfunding model or combine that with other models such as those based on rewards to fund businesses. It’s also evident that this has been accompanied by growing professionalism within the sector.
“Almost half of the growth in equity-based crowdfunding in the UK has come from professional and institutional investors,” says Nordea’s crowdfunding expert Klaus Westerlund. “Professional investor involvement is also increasing in the Nordics.”
It’s not surprising then that The World Bank has predicted that investment crowdfunding will be worth $96 billion/year by 2025, and a Goldman Sachs report on the socialization of finance uncovered shifting behaviours in millennials of whom 33% said they would not need a bank in five years and less than half said they owned a credit card.
Analysts Technavio meanwhile predicted compound annual growth rates in the global crowdfunding industry at 17%/year from 2017-22 with incremental growth of $89.72 bn.
This is clearly not pie in the sky then. The industry is here, it’s growing, and there is a constituency that ardently believe in and want alternative methods of finance. And yet you’re still not sure? Here’s five reasons why you ought to consider using it as a vehicle for your business.
The World Bank has predicted that investment crowdfunding will be worth $96 billion/year by 2025
- Stamp of approval
Like any idea, you have to know whether it’s viable. The potential of some are more obvious than others of course, but even if your idea is a bit left of field, that doesn’t mean it doesn’t have legs.
Who after all would have predicted in 1997 that a book about a boy wizard would go on to be a global phenomenon reaping its author J.K: Rowling riches and rewards beyond her comprehension as well as a series of films and spin offs that show little signs of running out of steam?
Certainly those publishers in the UK who rejected her time and again didn’t see its potential. They’ve probably regretted it ever since.
But the Harry Potter journey is instructive in that it shows any great idea is worth persevering with. While in the equity crowdfunding space, there might be a more pragmatic bent to the worth or otherwise of any given venture, that should not mean you give up on a good idea.
And of course, if one of the big platforms does decide to take your idea on board, just as Bloomsbury did with the Potter books, or try to help with your next wave of capital for a project that’s already gone through the start-up phase, that is a significant stamp of approval.
There are caveats here, as Westerlund is keen to emphasise. Even when a well-respected crowdfunding platform decides to back your idea, that doesn’t mean you can automatically assume the professional investors are also on board.
“In many cases, crowdfunding has not been the first choice for founders when they are looking for new funding,” says the chief sales manager, adding such platforms were maybe seen as a second option if approaches to venture capitalists and angel investors failed to result in the necessary backing. “Previously a large diversified ownership, as an example, had been a red flag for smaller companies but this has been changing due to digital ownership registers and tools making it easy for even smaller companies to handle different corporate actions with a large investor base.
“There was also a risk they chose crowdfunding where they knew it would be easier to get the funding because most of the investors were normal retail investors with less interest and capability to conduct their own due diligence,” he says. “But this is changing as we see from the statistics.
“More and more professional investors are involved and for many founders, it could [now] be their first choice when they are seeking funding.”
Westerlund points out that the industry is still relatively young and fragile, highlighting a University of Cambridge study that focused on the dangers of platform collapse and malpractice, but with investors motivated by more than just the bottom line, there are real feelgood stories potentially developing as the industry matures.
And the more respected crowdfunding platforms are looking for more than just their success fee these days, with credibility and reputation powerful motivators. Like those publishers eating humble pie in the UK, they really don’t want to look silly when they approach investors, do they?
2. We’re open – come take a look
Those of us of a certain vintage will remember how coca-cola won the battle for hearts and minds more than 50 years ago with its ‘teach the world to sing’ adverts, how Nike’s ‘just do it’ slug elevated it above competitors and Fiat’s Nicole et papa campaign running from 1991-98 remains firmly established in the UK psyche.
But such campaigns of course cost money. A lot of money. Startups or ventures looking for the next wave of investment in their growth journey often struggle just to manage their operational costs.
Budget for a marketing push? You can forget it. While you might be able to pull in a few favours from your network, start a blog or get an article in the trade press, the reality is that these will amount to no more than drops in that vast marketing ocean. You should of course utilise these avenues but on that alone, your chances of being seen are not that much better than nil.
“Equity-based crowdfunding really started to emerge as businesses sought a cost-effective way of raising money, coupled with a need to publicise their business,” says Westerlund. “Cost effectiveness means a well prepared funding round with required documentation, a marketing campaign and usually better valuation and terms from a founder point of view than in the case of venture capitalists or angel investors.
“Crowdfunding requires social media visibility and it’s that kind of visibility that helps increase sales.”
And that of course is one of the big draws of getting on a crowdfunding platform. They’ll do your marketing for you in tandem with your own marketing efforts. It’s in their interests that you succeed after all as their success fee is predicated on ticking off the box.
Just ask Finnish café brand POWAU which has just under two weeks of its round with Nordea-partner Invesdor to go. “We were bringing something new to the market,” says POWAU founder Svante Spiik, who has seen his original vision for a health-based, sugar-free cake venture grow into a seven-strong café chain in Finland that has since branched out into a “lifestyle brand” that also encompasses yoga, healthy juices and coffee.
“There’s a lot of expense involved in the process, and it’s difficult to educate people,” says Spiik. “Crowdfunding provides us with the marketing and it’s helping us in our plan of creating a brand that makes our customers part of the story.”
With POWAU’s Invesdor-sponsored marketing push in collaboration with Nordea entering its fourth week, the company is closing in on its minimum target of €200,000. Even if the round fails, and with 79% of the target already in place that looks unlikely, the marketing impact is significant.
“We’ve become the most-followed café brand on social media bringing something unique and new to the market,” says Spiik.
Crowdfunding requires social media visibility and it’s that kind of visibility that helps increase sales
3. We are you
This, as Spiik alludes to, is not far removed from the idea that the customer is part of your story. In this case, it’s the investor who becomes a marketing tool for your idea. In other words, having bought into the idea, literally, you have a brand ambassador on your hands. And that’s a potentially awesome weapon at your disposal.
“There are a lot of investors involved who just want to support an important case or local entrepreneurs and in these cases, motives and goals are something different than just achieving financial goals,” says Westerlund.
Altruistic motives for investment are of course legion. There is little doubt, for example, that part of POWAU’s appeal lies in the sustainability ethic that underpins the whole venture. Likewise the previously successful Nordea-sponsored crowdfund raiser Naava, which is revolutionising offices with its smart-air purifying office furniture green walls.
Naava was oversubscribed to the tune of 204% in its bid to raise a minimum €1 million on the Invesdor platform and, while some investors were no doubt drawn in by the potential return, it’s also reasonable to presume the venture’s overwhelming green credentials helped attract the kind of investor with a more holistic attitude towards investment in a world that is increasingly conscious of the damage inflicted on the environment and of each individual’s footprint in that harmful process.
Naava’s mission is to reconnect humanity with nature in the built environment,” says Naava, in its mission statement on the Invesdor platform. “We do it by accelerating millions of years of natural innovation with future technology and Scandinavian design.
“As urbanization continues we want to enable 1 billion people to breathe nature’s air across the world’s megacities, with the help of Naava’s technology,” the statement says. “Poor indoor air is having a serious and damaging health impact on millions of people, daily.
“Naava believes that healthy air should be a human right,” it adds. “The air we breathe will be the next global health trend, after food and water.”
What’s not to like there? And what’s not to like in being an investor in a company like that and being on the right side of the sustainability argument?
Where to tread carefully
Here are some dos and don’ts when it comes to crowdfunding. Get these right and you could be on to winner.
- Do choose your platform carefully when you conduct your own due diligence. Like all industries, some platforms are better than others or will suit your product more.
- Don’t rely on the platform to do all your marketing. You need to utilise your network too.
- Do make sure your idea is ready. A failed round can damage reputations.
- Don’t set unrealistic targets for your round.
- Do make your idea clear, understandable and finite in your business plan.
- Don’t ignore the risk someone might copy your idea. If you’re already ahead in the game, this is less of an issue but a failed round could open the door for someone else to come in.
4. You’ve got a friend
Crowdfunding platforms most obviously provide funds of course and are of particular importance during the marketing campaign for any given crowdfunding round. But it doesn’t necessarily stop there.
Instead, like a trusted friend sharing a pint in the Dog & Duck around the corner from the office, they can provide ongoing support to your venture long after the round has stopped.
The likes of Seedrs, for example, has its Seedrs Alumni Club which offers business support, know-how and access to deals through exclusive partnerships. Some have even entered further rounds of crowdfunding when the business has developed to the next stage.
“For ambitious companies, there’s rarely a single fundraising round,” says the Seedrs Alumni Club website. “Seedrs provides flexible, cost-effective campaign solutions designed to cater to your strategic business needs as you grow.”
And they’ll probably tell you if you’re going wrong too. It is after all what you’d expect of that friend down the pub, isn’t it? Sound, solid and, on occasion, harsh advice where necessary. Even if you don’t want to hear it.
5. Shall we dance?
There’s another excellent reason to get in on a crowdfunding round. If you’re idea is appealing enough, you just might attract a strategic partner or buyer down the line with the muscle to ensure you can achieve what you set out to do.
That might seem the stuff of fantasy but then, try telling that to the founders of Oculus VR who went from raising $2.4 million in 2012 on the global crowdfunding platform Kickstarter (which primarily targets creative projects through a rewards/discount model), to a $3bn sale to Facebook just two years later.
Not everyone wants to take that route of course. You started the business after all and its your prerogative as to how that business develops. It’s nice to have the option though!
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