So you have decided you need to raise capital and equity crowdfunding is the way to do it. Job done? Well, no, actually.
Every week the team at Harper Macleod talk to companies who have concluded they are going to raise money from the crowd yet the number who actually go on to launch a crowdfund is significantly less. Given the companies in question still have their primary goal of raising funds, why is there such a drop-off rate?
Crowdfunding is sometimes given a hard time by people entrenched in traditional funding methods, but the reality is that it's a serious business and anyone treating it frivolously won't get very far. As professional advisers we make sure that the companies in question are well aware of what lies ahead, and go into the process with their eyes very much open – as we would for any form of investment. If crowdfunding is not right for your business at that moment, then you shouldn't pursue it.
In that spirit, here I take a look at some of the biggest pitfalls for would-be crowdfunders, which can lead to them deciding that crowdfunding isn't for them after all.
1. Knowledge gap
Success stories such as BrewDog have really helped increase awareness of crowdfunding in Scotland but practical knowledge of what equity crowdfunding actually means and involves remains low. As such, when the founder finds out more about what equity crowdfunding entails they sometime decide it is not for them.
HM run regular equity crowdfunding events. To sign up to receive information from us, including on upcoming events, please follow this link.
2. Need for hard work
Crowdfunding is hard work and requires a whole lot of time, commitment and energy. When you are crowdfunding you are effectively running a marketing campaign and an investment at the same time. Without exception, every client that we have worked with who has successfully raised funds from the crowd has put an enormous amount of effort into the raise.
Hard work is something that all founders are well accustomed too, however, the difficulty is when the founder realises that they simply don't have the time or the team to put in the hours that the crowdfund will need.
To help with this there are a growing number of organisations who can help with the raise and take a lot of the pressure off.
3. Lack of a crowd
It stands to reason that in order to crowdfund, you need a crowd. We have partnered with Crowdcube, as it is a platform that has one of the biggest crowds. However, no platform is there to do all the work and the successful campaigns are those where the founder has worked their network to bring investors to the raise.
The lack of a personal network acts as a deterrent to some from launching the crowdfund as they don't have anyone to effectively kick start the raise by investing money.
4. Bad timing
When you start to drill into the detail of an equity crowdfund it can turn out it is simply the wrong time for the business. There are any number of reasons for timing to be wrong for a crowdfund, and crucially, you must realise that the need for cash alone will not make the timing correct.
5. Fear of failure
A successful equity crowdfund will put money in the bank, increase brand awareness and provide a host of brand advocates – what's not to like about that? However, given equity crowdfunding works on an all-or-nothing model (meaning if the company does not reach its target it cannot keep any of the money raised) there is the potential for the company to publicly not succeed.
This fear of failure is sometimes in itself enough of a reason for a founder not to proceed, particularly, when they realise that an unsuccessful crowdfund will have cost time and money for no tangible benefit.
However, as the crowdfunding market continues to mature and get ever more sophisticated there are a number of ways to increase the chances of success. In our next blog, we will look at the key component for having a successful raise – the team working on it!
Get in touch
If you are thinking of an equity crowdfund, and a few of the factors highlighted above resonate with you, please contact Jo Nisbet to find out how you can mitigate the obstacles to a successful campaign.