Why do start-ups use crowdfunding? You might think the answer is obvious but a recent survey we commissioned found some surprising answers. Our 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 market perception among growth businesses as to what crowdfunding can do for them. It seems that the perceptions in the market are out of sync with the realities of what is actually happening. What is the next effect? Estimates of success rates indicate that they are as low as 45-55%.
Crowdfunding and ‘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.
Beyond expectations, brand exposure through a crowdfunding website isn’t free for companies who are paying upfront fees and/or success fees.
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; putting it 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.
Why you need your own network
The myth of ‘free marketing’ was only one of many misconceptions uncovered by the survey. The data also 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. 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 in the market.
Most companies don’t understand just how difficult it is to raise equity. The market perception, that you can approach a crowdfunding website and just sit back and watch the investment pour in, 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 us that companies are still not aware at just how much planning and legwork they themselves have to do.
Start-ups say crowdfunding needs to evolve
Despite the challenges, the idea of crowdfunding is here to stay with 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%).
With these frustrations, 80% of successful companies indicated they were ready for new approach – namely an off-the-shelf website that they could brand and control themselves in order to fundraise.
Crowdfunding is an excellent idea, but it hasn’t evolved since its start in 2011. Companies have grown in maturity since then and this is exactly why we developed Envestry for Scale-ups, our white-label, FCA regulated fundraising platform that empowers our companies – not the facilitators – to control their fundraise.
The survey was undertaken for us, In April 2019, by independent research specialist Coleman Parks. The participants who took part were two hundred businesses who’d used crowdfunding for equity financing 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.