How to… source crowdfunding
If you have a good pitch, crowdfunding can be a lucrative option for small businesses, says Simon Wallwork
Throughout the recession the leisure sector has remained fairly resilient, but the news that the Government will extend its Funding for Lending scheme will undoubtedly be music to the ears for many smaller businesses in the sector still struggling to secure funding.
Earlier this year (4 March), the Bank of England reported that 39 commercial banks were taking part in the scheme, drawing down nearly £14b. However the CBI has in the past warned that firms may not want to borrow much more at the moment and that Funding for Lending is only one piece of the jigsaw - making companies aware of the options available to them and ensuring they have confidence in the scheme is also key.
However, for some smaller businesses, the economic downturn coupled with the bank's perhaps unwillingness to lend in the past may well have put traditional lending out of company's minds completely.
Crowdfunding is the latest form of funding to enter the mix and it has been met with open arms - especially by businesses in the hospitality sector. With two types of crowdfunding available businesses can pick the type to suit their needs, depending on how much money they are looking to raise. Donation based crowdfunding means perks for investors could include a free meal. But another option is equity crowdfunding - where shares in the business are offered up.
In London for example, The Clove Club has opened in trendy Shoreditch after being partly funded through a crowdfunding website. The private investors were made up of mostly friends, family and customers of the restaurants the Clove Club's founders had previously worked at.
Another example of a great success is London's first cat café, Lady Dinah's Cat Emporium. Modelled on the Japanese cat cafes where patrons can have a coffee amongst cats. This establishment is set to open in Old Street this month thanks to a crowdfunding campaign which raised a massive £108,000.
Trends and fashions have always been a huge part of the leisure sector, but now with the advent of social media and the internet, everyone wants to know what the next big thing will be. The emergence of pop-up restaurants, artisan ale and American style diners up and down the country are proof that word of mouth and the ‘cool' factor can be huge money makers.
Crowdfunding complements this - people want to see great restaurants in their area and if an idea for an establishment is different or of the moment like the cat cafe, private investors may well be more willing to contribute to make it a reality.
For businesses looking to use crowdfunding to help fund a new venture, it's not any less work than securing traditional funding - research and a strong business plan are essential to sell the idea to potential investors and make sure the crowdfunding platform used is right for the business model.
The do's and don't of crowdfunding So what next if you think crowdfunding sounds like it might be ideal for your business? Here are some basic dos and don'ts to get you started.
Don't discount other alternatives It's easy to see crowdfunding as a magic solution, especially when reading the success stories, but crowdfunding is not suitable for all businesses. Make sure you also consider more traditional routes to funding (bank, VC, angel investment) alongside or in place of crowdfunded equity.
Do your research If you do decide that crowdfunding is something you want to try the next step is to decide which site to use. There are now several sites offering access to equity crowdfunding in the UK, the key players (and the most established) being Crowd Cube (www.crowdcube.com) and Seedrs (www.seedrs.com).
Don't rush into anything Spend time comparing what the sites offer before deciding to proceed. Check their terms and conditions. Make sure you know what's expected if you decide to pitch.
Do spend time on the pitch An obvious one really, but this is how you will sell the opportunity to invest. A good pitch will require time and money. And you'll need a good, solid business plan, much the same as if you were going to the bank for funding.
Do be prepared for questions, do your due diligence in advance Investors will want to understand what they're putting their money into. Expect follow up questions after they've reviewed your pitch. As with any form of funding, they're likely to ask questions about your financials, legal contracts, employees, property and IP. If you're on top of all these areas before your start the pitch process you'll save yourself both time and money and, more importantly, investors will get the impression of a well run business.
Don't fall foul of the law The legal background to equity crowdfunding is particularly complex. Whilst this is more of a concern for the site operators than you, it is worth having a basic understanding of the law. Particularly given that failure to comply could lead to heavy fines or even imprisonment.
Do plan for the future Consider how the company will be run post a successful crowd funding. How will you deal with your new shareholders? Further down the line, what happens if you seek further funding? Or decide to sell?
Don't do it alone Successful crowdfunding requires you to create a buzz around your business. You'll need held from family, friends and your wider social network to do this. You would also be well advised to speak to your lawyers or accountants early on. It's tempting to try to do it alone but a good adviser can save you time, money and a lot of worry.
Simon Wallwork is a partner at national law firm Weightmans LLP