Who should consider crowdfunding – and when is it right for your startup?

Before you consider crowdfunding, you need to think about the strategic benefits you want to achieve. Above all else, you need to be doing it for a reason besides the need to access capital. That may sound counterintuitive, but the most successful crowdfunding rounds are from companies who buy into the idea of being funded by their community, and growing the company’s community of advocates in the process. 

As a general rule, companies tend to optimise for two specific outcomes:

1. Converting existing customers into investors, deepening the existing relationship with your community

2. Capturing the imagination of new investors (and customers) while building wider brand recognition:

Some companies have such fanatical user bases that they could fill a crowdfunding round with existing users alone. Companies like Monzo led this trend back in 2016 when they offered £1m of their £6m seed round to their customers, a tactic designed to get as many “Monzoite” advocates as possible vested in the success of their cool new challenger bank. In doing so, they managed to secure funds from more than 1200 individual investors alongside VCs like Passion Capital, who led the round. In 2018, Monzo raised £20m from 36,000 of its customers in just 2 days—nearly £18m of which were raised in just 2 hours and 45 minutes.

Strictly speaking, Monzo didn’t need to crowdfund. They pursued it as part of their overall strategy, espousing values of transparency and customer-centricity. In doing so, they aimed to make their first customers fanatical and passionate about their crusade. Besides receiving their investor debit cards, backers were invited to meetups to learn and feed-in to the product roadmap, as well as mingle with the Monzo team. 

This, of course, is an extreme example. A more typical example, perhaps, is Mindful Chef: before crowdfunding, they had already established a following of 3,000 happy and dedicated customers. Mindful Chef had been sure to cultivate this relationship through personalised notes in their subscription boxes, regular events, and a strong email strategy. In a competitive market where other players were also raising to acquire new customers, they wanted to prevent those 3,000 customers from churning. They also hoped to make them even more indelible to the brand—so they launched a crowdfunding round that was accessible to their existing customers as well as lead investors, with the hope of raising £1m.

Their strategy was a huge success: backed by the likes of former athletes Victoria Pendleton and Will Greenwood, Mindful Chef reached the target within 24 hours. They went on to raise a total of £1.92m from 638 investors and closed at over 190% funded. 

Giles Humphries, co-founder of Mindful Chef, told Crowdcube: “I’m so glad we crowdfunded. We got more than 600 investors, those investors became brand ambassadors and customers. You wouldn’t have got that going down an institutional route.”

It’s also worth considering that customers increasingly seek out ethical businesses. 61% of consumers are making more environmentally friendly, sustainable, or ethical purchases, with 89% likely to continue post-COVID. 

People like David Baldwin and Simon Sinek have written at length about the belief economy, and how brands need to use their values (or “authentic belief systems”) to connect with their audiences. But it needs to be genuine and earnest in order to succeed. 

It’s quite easy to spot which companies are genuine and which ones aren’t. Some startups might try to market themselves as ethically-driven and community-based, but in reality, they’re backed by huge VCs and/or their own families. 

From a marketing point of view, crowdfunding is a great way to bridge that gap. Built on the values of transparency and inclusivity, it can be an effective way to build an engaged community, promote diversity of access to your business, and become more transparent with your customers. 

Here are some Founders Factory companies who have successfully crowdfunded:

• LuckyTrip (£1m raised with a £200k target)

• Black Ballad (£338k raised with a £250k target)

• envoPAP (£381k raised with a £150k target)

• Entale (£300k raised)

• Shine ($500k raised with $20k target)

Pushing your campaign live

Putting time and effort into the pre-registration phase will increase your chances of success when it comes to launching the campaign, and going live should come in different stages, which are outlined below.

1. Private launch: This is a period (usually up to 48hrs) where the campaign page is live as a private link, available only to your pre-arranged investor and pre-registered community. Ideally, by the end of this period, you should have at least 50% of the round already in place.

2. Public launch: This is where you go live on your chosen platform for all the world to see, ideally with most of the funding on the progress bar (at least 50%) as you go public-live.

With this three-tiered strategy (a pre-registrant campaign, a private launch followed by a public launch), you can really utilise “investor FOMO” [fear of missing out]. After all, people want to back something that they know is definitely going to close—on Kickstarter, most investments come in after 70%. 

Dan Murray Serter, founder of Heights, explains how he had already closed £900k of their £1m raise privately before taking his crowdfund campaign public - a strategy set up so they could get to “over-funded” very quickly (in 20 minutes to be precise).

Dan has shared a detailed and very helpful campaign plan we recommend checking out here.

After you’ve crowdfunded

To build a community of people who are invested in your brand, you need to build a platform to communicate with them—especially after the campaign has ended.

It’s all too easy to launch a crowdfunding campaign, raise the money, and never speak to your investors again. Lots of companies don’t even send quarterly updates. But the ones who go above and beyond to engage their investors are also the ones who really reap the rewards of crowdfunding, over the medium and long term. 

One successful example is BrewDog. The craft beer company launched their crowdfunding campaign, “Equity for Punks”, back in 2009. In 2018, they broke the world record for equity crowdfunding, closing their fifth round at over £126m; and this year, they are well on the way to hitting their £25m target. 

Over the past 12 years, BrewDog have hosted roadshows for their investors, known as “Equity Punks”, across the UK, including their popular “rock ‘n’ roll AGM”. Some people might see this as an extreme strategy, but in order to get people to invest in your company—both financially and emotionally—they need something to hold onto. And that’s a much bigger endeavour than just running a campaign.

A note on valuation

Valuation is obviously a key consideration for founders and investors when it comes to raising capital. It’s fair to say that over the last number of years, crowdfunding has earned somewhat of a reputation for companies raising at higher than ‘normal’ valuations. This is only partly true, however. 

As with the above guide: the first money committed is often from VCs or professional angels, who effectively price the round. This helps hugely when it comes to ridding the room of argument when it comes to the investors discussing your valuation publicly on the  forums of your chosen platform. If it’s seen as a fair price by VC or angels who are investing a real amount of money into the business, this is a generally a strong enough validating signal.

The main thing to avoid is relying on your crowd (your community & customers) to be the first investors in and to price the round. Over the years, we’ve seen some mid stage businesses which don’t have a cornerstone ‘lead’ investor, and because their customers love the brand so much, they’ll pile in with less scrutiny for what they’re investing in and at what valuation. Valuation needs to reflect the risk an investor is taking and, as such, having a sophisticated investor committed before you go live is the best scenario to be in when it comes to having your customers and community invest.

Pros and cons of crowdfunding

One often-cited disadvantage of crowdfunding is that you’re “airing your laundry in public”, so to speak. Personally, I don’t subscribe to that. In reality, you have full control of what you do and don’t disclose.

What I have seen first-hand, however, is startups following a less optimised strategic approach—namely crowdfunding because they had no access to capital elsewhere, with big investors and the general public in the same round. This puts you at a disadvantage, because it might trigger the perception that you need to crowdfund because you’re unable to raise the money elsewhere; especially if you don’t have lead angels in the crowdfunding round.

To clearly outline the pros and cons, we spoke to Wil Harris, who successfully crowdfunded his startup, Entale (born in Founders Factory's Venture Studio), via Seedrs. Below, he shares his experiences, the challenges he faced, and what he learned along the way.

Getting VCs onboard with your crowdfunding campaign

There’s still a sect of the VC market that see crowdfunding as “dumb money”, a means of raising capital when all other avenues have failed you. This is certainly a perception among some investors—possibly a hangover from the advent of crowdfunding and angel networks, which started to “take away’ equity from VCs.

But a lot of Tier 1 VCs now understand the value of crowdfunding. The savvy, customer-centric ones are not averse to crowdfunding—they’re actually champions of it.

I believe we’re seeing a revolution in how Tier 1 companies and VCs view crowdfunding. It’s no longer seen as a “last resort”, or a quirky new means of fundraising: crowdfunding is now used by many revered entrepreneurs.

Over the past few years, I have seen the trend move beyond startups. Deliveroo recently launched a campaign through PrimaryBid, allowing customers to invest alongside VCs. Like Monzo, they didn’t strictly need to crowdfund—but it’s an excellent strategy in engaging their customers.

In my experience, crowdfunding is best done as a part of a round that’s being funded by an established player, such as an angel network or VC firm. As an investor myself, I’ve found that I become more captivated and have more confidence when there’s an existing funder that has priced the round, passed due diligence, and validated the business. 

The bottom-line is that—whether you’re crowdfunding or pursuing other avenues—you’re more likely to get backing if you’re crowdfunding for the right reasons, and not just the need for capital.

You can read more about strategies and approaches to general fundraising in our Fundraising Guide.