Crowdfunding as an Alternative Source of Funding

Raising funds for a new venture can be both exciting and overwhelming, but with an extensive support infrastructure in Northern Ireland and an ever increasing choice of alternative funding options available, there is more support than ever for local businesses, whether at start-up or growth stage.

A bank loan may still be considered as the most obvious way to raise funds for your business, but it is not always a viable, or even the best, option. While the traditional banks are starting to lend more, there has been a notable increase in availability of alternative funding options in recent years. One such alternative is equity finance (raising capital through the sale of a share of your business) which includes finance from, among others, venture capitalist firms, business angel investors and more recently, crowdfunding.

While venture capital funding and business angel investments are now recognised sources of funding among start-ups, crowdfunding would not have the same recognition, but we have seen this start to change in the last year.

Crowdfunding is the process by which a number of people each invest in a business or idea in return for a share in the business (equity crowdfunding), a return on their investment (debt crowdfunding) or another benefit, such as a discount on products or services (reward crowdfunding). Typically, a company seeking funds will set up a crowdfunding campaign through a crowdfunding platform (such as Crowdcube or SyndicateRoom). The campaign is then promoted through social media and other channels in order to attract investors.

A crowdfunding campaign can be a quick, low cost way to raise funds for a business and it carries the added benefit of simultaneously acting as a marketing exercise. Additionally, it allows an entrepreneur to gauge the public’s reaction to their business and receive consumer feedback. A successful crowdfunding campaign will demonstrate appetite for what is being offered, which may help in securing further investment from those venture capital or angel investors.

While crowdfunding has many advantages, there are a number of risks which should be considered before choosing this route as your preferred method of fund raising.

Crowdfunding is not as simple as a snappy video sales pitch. A successful campaign will invariably require significant time to be spent promoting the venture and generating interest before the campaign goes live.

Such fundraisings are often set up on an ‘all or nothing basis’ whereby if a funding target is not met, any investments which have been pledged may be returned to the investors. As well as being a bitter pill to swallow, an unsuccessful crowdfunding campaign may damage the reputation of a business and discourage future potential investors.

The success of many start-up companies, in particular product based start-ups, leans heavily on their intellectual property (IP). Businesses should seek advice in respect of appropriately protecting their IP before going live with a crowdfunding campaign. Appropriate protection will mitigate the risks of a concept being copied when revealed publicly in the campaign. In addition to protecting IP, a business must also be sure that it is not infringing IP belonging to others. Publicity is a key element to a successful crowdfunding campaign and a change of name or logo after the campaign has been launched may undo the recognition and goodwill generated up to that point.

Our corporate team has seen a number of start-up companies in Northern Ireland successfully achieve their fund raising targets through crowdfunding campaigns in the last year.

A research study by Ulster University Business School, Kent Business School and the London Institute of Banking and Finance has recently been released exploring the impact of crowdfunding at the start-up stage, click here to read the full report.

While great care has been taken in the preparation of the content of this article, it does not purport to be a comprehensive statement of the relevant law and full professional advice should be taken before any action is taken in reliance on any item covered.