In 2010, BrewDog, Scotland’s largest independent brewery, “tore up convention.”
Rather than cede financial control to banks, the beer makers launched a full-scale crowdfunding scheme. Selling shares online to “people who really care about our beer” – indeed a revolutionary act – its founders have raised millions of pounds to grow their business. But is the brewery’s model feasible for other companies, including cash-strapped startups?
The Solution to Cash and Capital Challenges?
BrewDog co-founder James Watt says, “To grow BrewDog whilst being true to our values, we had to build a whole new generation of business model.” And an attractive one, it seems. In 2013, Watt and Co. raised £5 this year – in just 20 days.
In this “new” model of equity crowdfunding, entrepreneurs pitch their idea to the public. If people buy in, they receive shares in the business.
With high-profile success stories, such as BrewDog, Seedrs and Hab Housing, it is little wonder why other startups and businesses are jumping on the crowdfunding bandwagon.
And given the difficulty (particularly for startups and digital-based companies) in obtaining business funding, the enticement is even greater. Global entrepreneur and startup investor Rishi Khosla says, “What has happened in the UK is banks will lend to businesses as long as they have property as collateral.” This is an asset many of these aforementioned small enterprises lack. Crowdfunding, they hope, will fill this financial gap.
Julia Graves of the UK Crowdfunding Association says, “Crowdfunding is really coming of age; it’s not a niche proposition anymore. Not when you have nine million people in the UK participating, 650,000 projects funded.” That number is growing by the day: should it include your business?
Going Along with the Crowd?
When members of the public opt to invest in a crowdfunded project, they ought to be well aware of the risks. Half of new ventures fail within five years, and that prospect is no different for crowdfunded businesses. The Financial Conduct Authority warns, “It is very likely that you will lose all your money.” But what about the risks to businesses themselves?
Failure to Meet Goals
- One of the primary risks, of course, is that you won’t meet your fundraising goal. Take a look at the following statistics gleaned from mega-crowdfunding, Kickstarter: 56% of projects fail to reach their fundraising goal.
- Of these failures, nine out of ten do not even reach 30% of their goal. (In other words, if your goal was £15,000, you would raise less than £5000.)
- About 12% of projects do not receive a single pledge.
Further, some crowdfunding sites are “all or nothing.” That is, if you do not meet your fundraising goal, you receive no funding. As for those who pledged to invest? Their credit cards are not charged. The experience is, essentially, all for nought. Other sites allow you to keep what you raise.
Before settling on a crowdfunding platform, explore their policy for failed projects – and for successful ones. Many assess a fee on projects that hit their targets.
Theft of Intellectual Property
Traditionally, business owners had to disclose their business model or idea to very few people. The point of crowdfunding, though, is the crowd! You must share your ideas so they can make informed choices to invest. The problem, however, is that this leaves you vulnerable to intellectual property theft. It is possible for unscrupulous people to steal your ideas and launch them as their own.
To protect yourself, always copyright or patent your ideas/concepts before you join a crowdfunding platform.
On the flip side of this issue: what about the intellectual property of the investors? Say your idea involves building a new and improved smartwatch. A potential investor makes a comment about a feature you should add. Is it then their idea? It depends on the crowdfunding platform.
Indiegogo, for example, stipulates that all comments and “submitted materials” belong to the project/business owner. Kickstarter, on the other hand, does not define ownership.
Again, protect yourself, your ideas, and your business from liability by checking – and double-checking and having your solicitor double-check – the platform’s policy on submitted materials, including comments.
This is murky territory; a case of technology outpacing the law. The law is attempting to catch up, and this can make it tricky for entrepreneurs to keep track of tax obligations. Money raised is taxable, and the EU is considering imposing VAT on businesses as well.
To ensure that you meet your tax obligations, consult a tax attorney or accountant.
Crowdfunding may be the solution that your business has been seeking – but it is by no means a panacea. Remember, success stories like BrewDog garner heavy attention – because they are the exceptions. Use caution and enter into a campaign fully armed with information and advice from trusted counsellors – as well as reasonable and realistic expectations.
If however, you are in need of more traditional, yet still alternative finance model why not check out invoice finance to see if it is right for you.