Why bother crowdfunding?
Compared to traditional angel or VC finance the crowdfunding process is more streamlined and quicker, taking advantage of online communication technology so that investors of all sizes can access a pitch and decide to back a company in a simple way, involving standardised contractual documentation which saves time on the sometimes tortuous legal negotiations.
As a result of this more competitive and fluid procedure, crowdfunding campaigns achieve better valuations, at least 25% higher than what would have been achieved from angel investment and sometimes deals will get funded when otherwise they wouldn’t.
Entrepreneurs can keep more control of their own company as startups are better able to generate interest in their company and investors have less ability to negotiate and influence a deal. The competition created between investors also means that startups are less likely to have to agree to an investor sitting on their board of directors and can also issue non voting B shares that will have a pure financial return but no ability to influence decision making at a shareholder level.
Crowdfunding is also a marketing process and an effective campaign is great for generating awareness, sales and traction even if finance is not successfully raised at the end of it. When a company does successfully complete a fundraising round then the new shareholder base will become a great tribe of loyal and passionate fans who will want to promote and help the company grow.
How to carry out a successful campaign
The most important thing to get right for any crowdfunding campaign is a great video pitch that will make an impact on anyone who views it. Startups will need to have a very clear story of where they’ve come from and how their project and business is going to change the world. Entrepreneurs ideally need a well developed social media presence with lots of fans and followers to back the company at the outset and also help spread the campaign. Such startup founders are usually likeable characters who have a plethora of relationships to call on.
Its imperative to get off zero funded as quickly as possible in order to start trending and get other people interested. Successful crowdfunding is a lot to do with social proof and psychology and the wider investment community won’t be interested if you can’t get your own network involved in the first place.
SilkFred case study
Emma Watkinson, the founder of SilkFred, a new luxury retail platform for independent brands and emerging designers, gave a really insightful account of her recent experience of successfully raising £180,000 on Crowdcube. Now that the fundraising round is complete she said it feels great to not only have finance in place but also a mix of useful investors to help the business grow. Emma estimated that she interacted with about 6,000 people both online and offline during the campaign as she was constantly trying to open new leads and drive momentum. While not all successful campaigns will contact quite so many people Emma was keen to stress how important it is to really drive interest in your pitch for people to feel compelled to back your business.
Emma emphasised that offline networking is key. You can’t rely on phone calls and emails alone, but need to get out, meet and present to potential investors, while being careful to flush out those that are not interested as soon as possible. She said that if she had to go through the process again she would hand pick influential people in her network right at the start and be sure to get their critical feedback, support and direction before the pitch actually goes live on the crowdfunding site so that when it launches you have a better chance of it spreading and getting good early traction.
When engaging investors always presume its a no until you get a yes, but bear in mind that people can smell desperation and make sure you position yourself as the thing of value so that potential backers are fearful of missing out if they don’t decide to invest. The best way of getting a meeting in the first place is by being introduced by a third party as this adds validation and avoids the difficulty of contacting people cold when they are far more unlikely to want to engage or respond. Also, doing pitch events is a great way to get introductions to angel investors, even if nobody directly relevant happens to be there at the time. Avoid the angel groups that make you pay to pitch as these don’t tend to be good value for money.
Once you have gone out and and generated a good level of interest and a few verbal commitments then you need to continually update people to keep up their enthusiasm. From the beginning you need to generate some press coverage, even if just in the blogosphere, as this will help give you credibility and will be good material to update your network with as the campaign progresses.
Finally, Emma said that she found the blog posts ‘Hacking Kickstarter: How to Raise $100,000 in 10 Days’ and ‘How to Raise Money’ by Y Combinator’s Paul Graham to be particularly useful resources that she followed closely and kept referencing during the campaign.
As already mentioned, it is essential to have an effective video as part of your pitch. Stefano Marrone from Nucco Brain, a visual storytelling studio that specialises in producing short explanatory videos that narrate startup stories in an appealing way, gave an overview of the key aspect of producing a great video.
The most important thing to see in the video is the founder and the team speaking to camera so that their passion for the business really comes across. The other important points to make are to describe the product or service well, sell the ROI and then have a convincing call to action at the end. The length needs to be no more than two minutes with a maximum of 120 words used so that the video is really concise and impactful.
In order to tell a powerful story the usual pattern is to first present a problem, then introduce a character, describe how the character struggles and grows to solve the problem, get to a climax and then have a ‘happily ever after’ ending when the investment goal is reached. The investor and people using the service also need to be made an active and essential part of the story. Stefano recommends the book Storytelling for User Experience as the best read for learning how to craft an engaging narrative.
Other aspects to include are to show your achievements and add a little humour and fun. Don’t focus on the technical features too much, just sell the benefits, don’t have an unclear audio and don’t have just a talking head.
The cost should be less than £500 for a DIY or Indie production. £500 to £2,000 will get you a middle of the range production by small video production specialists or film school graduates that will still look and feel professional. £5,000 plus will get you an agency production which will look great. The spend should be focused on visualising the idea/product, good editing (to save the empty seconds), clear audio, and perfecting the logo bumper and branding.
When drafting the business plan’s executive summary make the USP and hook really obvious at the start. Then deal with the problem, explain what is going wrong and how bad it is and how many people have it, then talk about the opportunity and explain how big it is, how your way of dealing with the problem is better (the competitive advantage), what the business model is, how you are going to make money and where sales will be made.
Also, milestones need to be detailed and it explained what has been done so far to reach each milestone. Talk about the team and how credible they are so it sounds like they will really make things happen. At the end you need to set out what you are seeking and what you are offering in return. Other points are to include a picture not a logo, highlight the hook, use no more than two colours, break text up and ensure the summary is between one and two pages long.
Finally a few points about your pitch deck (I had to leave the workshop early at this point) – you need to follow the 10-20-30 rule in that there should be no more than 10 slides, the presentation should be no more than 20 minutes long and no font should be smaller than 30 points. For each slide take the main headings from your executive summary.