If you are a small business looking for investment, navigating the wild waters of start-up financing can be tricky. Last week we spoke to Simply Wall St, who chose angel funding as their option, as well as several small businesses who thought pension-led funding was the best route for them. With so many different forms of alternative finance, it can be hard to figure out which one to choose for your business. This week, we’re focussing on the benefits of crowdfunding. Crowdfunding has expanded exponentially over the past three years, going from something relatively unknown and used by individuals to a very viable form of business financing. We have spoken to two very different businesses who have completed rounds on online platforms to raise the money needed; both had extremely successful campaigns, and used different platforms to do so. Stuart Black is the Director of Cromwell Hospital in Kensington, and CEO of Brain Train UK. Brain Train UK uses applied neuroscience to resolve mental health disorders and, in the long term, essentially aims to ‘train’ the brain to work better. Nikolay Piriankov is the founder and CEO of Rare Pink, an online retailer of bespoke engagement rings and fine diamond jewellery. Rare Pink is unique in that it offers a bespoke design service, offering over 100,000 ethically sourced diamonds and the ability for customers to design their own ring. Why did you choose crowdfunding over other financing options? Stuart: At the time I didn’t know much about crowdfunding, but banks wanted security or would be willing to finance capital investment secured against the investment, but I wanted to use this as working capital to make ‘softer’ investments such as marketing and further practitioners. The idea of democratising finance also appealed to me. Nikolay: We chose crowd-funding for several reasons. Of course we first considered raising investment through the traditional routes taught at university – approach your bank, speak to angel investors, but in reality, these methods either don’t work anymore (with regards to banks for start-ups) and finding angel investors without previous investor contacts is not as easy when this is your first business. Nikolay cites several benefits that crowdfunding has over other forms of finance, including the ability to reach out to customers and validate your business idea; if the crowd likes what you do and invests, then it is a good sign to continue and grow the business. He also noted the PR potential of crowdfunding: “It is quite topical at the moment it is also a great source of PR, as we saw through features in the Guardian and other online publications.” What made you pick the crowdfunding platform you used, rather than any of the others? Stuart: Funding Circle attracted me because it was a loan model and not an equity sale; I didn’t want to dilute my equity at that stage. I preferred the arms-length relationship with lenders rather than the more intimate relationship with shareholders. Funding Circle also seemed straight forward to deal with that others. Nikolay: We chose Seedrs over its biggest rival Crowdcube for a few reasons. They have a nominee structure which means that while we have 150 investors, Seedrs ensures we treat them as a single investor, which makes any future investment rounds or important decisions easy to make. We don’t have to consult with each and every single one – instead we just speak to Seedrs. Interestingly, both Nikolay and Stuart had different methods of promoting the campaign once it went live. Whilst Stuart took a more laissez-faire approach, Nikolay’s was more targeted. Why do you think your campaign was so successful? Do you have any ‘crowdfunding secrets’? Stuart: My marketing strategy for the campaign was really no more than the way we described the business Funding Circle. I think that perhaps what we do – offering a drug-free approach to mental health issues and peak performance – interested people and ‘brain’ technologies seem to be in vogue at the moment. After the campaign went live, I nipped out for 20 minutes and when I returned 20 minutes later we had raised 33% of the request! I also saw that you could load up an audio file to “sell” your proposition. I did a couple of takes on the audio file and by the time I was happy with it and uploaded it we were at 80%. Nikolay: To be successful at crowd-funding, 80% of the work is done before the launch of the campaign. You need to create an inspiring video that sells the business and the team. Also, and perhaps most importantly, any investment round needs a leader. A good investment leader commits between 25-50% of the investment round. This gives your valuation and proposition credibility and helps bring the smaller investors on board. This means, to have a successful crowd-funding round first it is important to first identify a few larger potential investors and only launch your campaign once they have committed to your round. Curiously, whilst crowdfunding is seen a great way to promote the business and interest more customers, Stuart noted that whilst they had 626 people investing with them no new clients have yet mentioned a Funding Circle connection. However, Nikolay had a different experience: “50 investors is also 150 brand ambassadors. In our case we know our investors, large and small, proudly tell their friends they are shareholders in a diamond business and many have since purchased from us.” Either way, both businesses are extremely pleased with the results from crowdfunding. Traditional routes such as bank loans are now seen as outdated – not to mention far more difficult to obtain – and using crowdfunding is a great way to use the internet and technology to reach out to a greater pool of potential investors.      

Miranda Wadham on 03/09/2015