Investment-based or “equity”-based: people invest directly or indirectly in new or established businesses by buying shares in that business. This is how Rare Pink, an online retailer of custom designed diamond jewellery, raised a total of £120,590 for 12.42% of the company on crowdfunding platform Seedrs, Here investors don’t receive a product, but rather a share of the company.
The risks of investment based crowdfunding for a company depends on the crowdfunding platform, and therefore the legal structure, used to raise finance. Seedrs uses a nominee structure which allows it to manage the investment for investors while still giving them an economic interest in your business. Whilst this arguably protects the investors (and means Seedrs is acting akin to a venture capital firm or angel investor), it does provide a potentially powerful voting block of investors in your business (particularly if they have a blocking minority of over 25% of your company).
On the flipside, Crowd cube allows investors to hold shares in your business directly. Whilst this may provide you with more control over your business, you would have to deal with the administrative burdens of having a significant number of (potentially) geographically-dispersed shareholders, and in turn each of them would have to deal with the various obligations and hassles of being a legal shareholder.
Through investment-based crowdfunding, a company can gain not just investors, but also an army of brand ambassadors and potential customers. Encouraging those investors to take to social media to send out your message is potentially more powerful than a traditional marketing campaign.
Pre-payment or rewards-based: people give money to receive a reward, service or product, such as tickets for an event or an innovative product. This is the method of crowdfunding employed by Maple Jeans, who produce Kevlar-lined protective jeans for motorcyclists. They raised over £90,000 on crowdfunding platform Kick-starter, well above their initial aim of £30,000. The concept is simple: customers pre-order and pay for a pair of jeans and then Maple Jeans produces and ships them.
Another example is the website, Before the Label. This is the first fashion based crowdfunding platform that lets consumers decide what should be “in fashion.” How it works is simple: you like a product, you back it by pledging to buy it, and if it meets its production goal it gets made and ships off to be in your closet. If it doesn’t, then the design is not meant to be!
There is little downside to a fashion company in using pre-payment or rewards-based crowdfunding – it can create both a healthy order book and the cash necessary to produce those orders. However, it is not suitable for raising money to expand your business, which is where the next method of crowdfunding comes in …