"There is always a new way of doing things, raising funds for your business or project has definitely taken a new turn in the 21st century"
Fashion designer or film director? Why not crowd fund your business idea?
More and more entrepreneurs, like fashion designer Jane Bowler and indie film director Henry Scriven, are crowd funding their business projects. Could you?
Been turned down for a small business loan? Had your firm’s overdraft withdrawn by the bank? Then you’re not alone. Many small business owners are still finding it tough to get funding as banks are less willing to lend following the credit crunch and because new banking regulations dictate that they have to hoard more cash on their balance sheets.
Although the latest Bank of England figures show lending to small firms rose slightly between May and June this year, year-on-year borrowing by small and medium-sized businesses is still down by 3.3% on last year.
The Federation of Small Businesses reckons three in 10 small businesses are refused finance each quarter and last week it was revealed that Britain had slipped from eighth to tenth place in a survey of the best places in the world to do business, purely because of the lack of access to finance for smaller firms.
So where else can entrepreneurs turn to for financing when the traditional routes have dried up? One alternative which is rising in popularity right now is crowd-funding. Social media savvy business owners are increasingly turning to it to fund their projects.
According to website Crowdsourcing.org, $1.5bn was raised via crowd-funding in 2011 and the area is flourishing. A range of different websites, including Kickstarter.com, Wefund.com andCrowdcube.com provide platforms for entrepreneurs looking to raise money for projects as diverse as a new gentleman’s card game, A Duel Betwixt Us, which raised $50,000 more than its $9,500 target, to film projects.
Crowd funding works by enabling website users to pledge or invest a small amount which could be as little as £10 or as much as £500 towards a project.
There are a number of different funding models – on some sites, like Kickstarter.com, users effectively donate money, receiving a non-cash gift in return, such as tickets to a play or a copy of an album, while on other sites, such as Fundingcircle.com and Trillionfund.com, website users lend money to new companies with the aim of receiving a return on their cash.
On other sites, such as SyndicateRoom.com, investors receive a share of the firms’ equity in exchange for their money. As a rule, in crowdfunding, entrepreneurs or project owners have a fixed period in which to raise the cash they need – which could be three months or less - and if the project doesn’t hit its target amount then the money is returned to the investors or donors.
Fashion designer Jane Bowler used Kickstarter to raise the funds for her show at Somerset House which opens at London Fashion Week this week. “I’m an emerging fashion designer – I’ve only been going a couple of years,” she said. “This is my second showing at Somerset House. I trained as a textile designer so my work is quite different. I do clothes and accessories as well but the clothes are quite unusual. There are some pieces that are show pieces and other accessories that are a bit more wearable.”
However, it can be tough for new designers to find the cash to fund their own shows at London Fashion Week.
“It’s really hard for new designers to be able to do things like this,” she said. “It’s really expensive – the space is £1,000 for the week, then you have to pay for the plinth and the models cost £500. It’s never ending spending for me.”
“It gives the illusion that it’s really glamorous in the fashion industry, but nobody knows what it’s like. It’s like any business but there’s no funding. I teach, I run workshops – I don’t think people realise how hard it is.”
Jane turned to crowd funding after using it successfully last year. “Crowd funding worked so well for me last season that I thought I’d do it again,” she said. “Kickstarter worked really well for me because I’ve gots lots of followers on Twitter. As well as them helping me, I can give something back to them. People can get hold of different collections.”
Her pledges have also increased compared to last year. “Last season pledges were averaging at £15-£20, but this season it’s £30-£40,” she said. “I’ve had a few people return again from last year to help the cause but I’ve also had different pledges this year.”
The model also helps in providing feedback on products. “You can see what people are liking in terms of product,” she explained. “It helps to build the brand awareness.”
Film director and writer Henry Scriven turned to the same website to fund his film project How to Become a Criminal Mastermind which premiered in London this week. The comedy, starring Sam Massey and Phillip Weddell, centres around a desperate man who hires a criminal coach to help him become the perfect crook.
“We shot the film a couple of years ago and initially raised £12,000 from private investors to fund it,” he said. “But when we got to the post-production stage we needed money for DVDs and marketing and we hadn’t got any money left. There’s been a lot of publicity about Kickstarter – Spike Lee and Zach Braff have both raised money through it – so we thought this was one way of raising some money.”
Zach Braff, star of TV show Scrubs turned film director raised $2m in three days via the site for his film Garden State. Meanwhile, in July legendary film maker Spike Lee raised $1m for a yet untitled new film, saying that current climate in Hollywood, which is focused on big budget “superhero” productions that spawn sequel after sequel, was not “encouraging” for independent film directors.
Henry’s target was to raise £1,250 over 30 days, but he was “overwhelmed” by how many people were interested in the project and in the end raised £3,700. “It’s not just the money,” he said. “It’s like free PR and marketing. It’s very easy for people to see what we’re doing.”The site enabled Henry, who directed, co-produced and co-wrote the film, to post film trailers and behind the scenes footage for potential donors to watch. After raising the funds, he and his team have also decided to distribute the film themselves.
As well as ‘donating’ money to entrepreneurs and projects in exchange for non-financial gifts, some high net worth individuals and private investors are also investing in companies via crowd funding sites.
SyndicateRoom calls itself a ‘next-generation’ crowd-funding platform which enables private investors to invest alongside professional business angels. The company claims it is different from competing websites because the businesses it promotes have already been thoroughly vetted by investors.
“Crowd funding is very much geared up for entrepreneurs, but this doesn’t mean it’s good for investors,” said Gonçalo de Vasconcelos, founder and CEO. “And until it’s great for investors, it won’t grow.”
Due diligence – the vetting process that professional investors put companies through before parting with their money – is key, says Gonçalo, as is the mentoring support that business angels can provide entrepreneurs.
“If someone is putting in £100,000 then they will carry out more due diligence than someone investing £10,” he said. “The crowd doesn’t have the people to dig really deep [and investigate companies before investing]. Crowd funding platforms will tend to ask a few questions online but businesses angels will help companies for a few months before they go onto our platform. They do a lot of due diligence on their ambition and the markets side, calling potential customers.”
The business angels involved with the site also invest their own money in the companies. “This gives people great peace of mind,” said Gonçalo. Firms funded so far include biotech data firm Eagle Genomics, which raised £1m in a fundraising supported by angel investors Cambridge Capital Group, and Psonar, which raised £250,000 to develop its music streaming service.
However, Gonçalo believes one area of crowd funding that needs more attention is regulation, pointing out that on some equity-based crowd funding sites investors do not always receive voting rights with their shares or preemption rights, meaning that their shareholdings could be diluted if a firm issues more shares in the future.
“I think what people are really overlooking is the regulation,” he said. “People are not always aware that protection is not in place. That’s what regulators need to be looking at.”
- YahooFinance
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