Crowdfunding is growing at a huge rate. To find out more about the sector, we spoke with Julia Groves, managing director of the UK Crowdfunding Association.
"The UK Crowdfunding Association is a trade association formed in 2012 by 12 of the leading UK crowdfunding platforms," Groves explained. "Our mission is to promote crowdfunding as a viable and valuable way for UK businesses, projects and ventures to raise funds from the contributions of the people… At present, we have 24 members who are operating UK platforms, and 10 affiliated members, which are pre-operational."
As we spoke, she explained that crowdfunding is very much an umbrella term for four key types of cash-generating approaches. The first, she told us, is referred to as the donation model.
Here, supporters simply give cash to a start-up and don't have any expectation of a return. Just Giving's Yimby.com is a prime example of this style of working.
Next up, we have reward-based crowdfunding, where givers donate with the expectation of receiving something in return.
This style of funding was embraced by David Braben, a man famous in computer gaming circles as the comaker of the 1980s classic space-trading game, Elite. In an effort to fund a remake of the game – Elite: Dangerous – Braben launched a Kickstarter campaign.
A donation of £10 bought you a regular newsletter and updates on the project. If you gave £30, you'd receive a digital copy of the finished game. Contribute more and you'd get bigger and better returns. In all, the project pulled in over £1.5 million in donations, and Elite: Dangerous is now on sale, with several expansion packs available too.
If you're interested in this kind of funding, Groves pointed to Crowdfunder and Indiegogo as firms that you could explore.
Next up is the loan or debt model. Here a business borrows its funding and promises to repay the money with interest. Abundance Investment, Funding Circle, Funding Empire, Money&Co and Trillion Fund offer start-ups access to this kind of funding.
The fourth type of crowdfunding is equity funding. Here, Groves told us, "Support is provided in return for an equity stake [or share] in the business." Funding platforms such as Crowdcube, Seedrs, Angels Den and Syndicate Room embrace this kind of model.
Picking the right crowdfunding platform
Choosing the correct crowdfunding platform can appear daunting, particularly when you add in another type of platform: hybrid. Here a funding platform might offer a mix of donation, gift, debt and equity based deals.
So, how do you pick the right fund for your business? Groves explained: "One of the real beauties of crowdfunding is that not only can you raise money but you can galvanise an army of ambassadors who will feel connected and part of your project.
If you plan to operate your business in the UK, then having such a supporter base here in the UK will probably better serve your needs than a US platform." Beyond patriotism and convenience, there are also legal considerations to bear in mind. Groves told us: "Also, you need to be aware that in terms of equity crowdfunding, the UK is the world leader and this is largely down to supportive regulation. The US does not currently allow equity crowdfunding by ordinary investors, so you really need to consider where you intend to be based and, indeed, where your future customers will be based, who may well turn out to be your biggest investor fans."
It's also worth considering how the individual crowdfunding platforms make their cash, too. Most of them charge commission. Rates typically vary from around 3.5% to 8%. So, when looking for a funding platform, you'll need to choose between donation, gift, equity, debt and hybrid crowdfunding platforms. Which one is right for your business comes down to your personal ethics, ambition and the type of project you're planning.
