This article was originally posted on the Tech North website.
After raising £150,000 for a 10 percent equity share in its online tuition marketplace in April last year, Sheffield’s Tutorful is now returning to Crowdcube. Here’s why the company feels so strongly about the potential of crowdfunding.
Tech North is holding a series of equity crowdfunding roadshow events in Liverpool, Manchester, Wakefield and Newcastle on the 8th and 9th of February 2017, where you can find out more about this way of raising finance for your business. Sign up now!
They say never go back. Now, I’m not sure they (and I never know who ‘they’ are) say that about crowdfunding, but either way, we’re ignoring the advice! Today, we’ve gone live on Crowdcube once more, with the aim of securing £350,000 of investment.
We can’t wait to get going with the raise, but we’re also conscious of the risk we’re taking – that if we don’t hit our target, we won’t gain the investment… and in a very public way. So why take that risk when there are other routes to investment available?
Unlike sites like Kickstarter, which help businesses raise funds from crowds in exchange for a good or product, Crowdcube is an equity crowdfunding site. This is a very different proposition, as the premise of the investment is the business itself, and the level of investment can be substantially higher. Companies like Brewdog and Monzo, have recently raised large rounds, which would previously have been secured through institutional investment.
So why are businesses turning, and in our case returning, to crowdfunding? I think the interest lies in two main factors – one, the crowd, and two, the simplicity.
The power of the crowd
Firstly, by raising funds through a crowd, rather than an institution, companies can not only secure the funding they are seeking, but also bring on board a large amount of new clients. This does mean, however, that the approach is best suited to businesses that are both relatively simple and applicable to a mass market. If you’re releasing a complicated new engineering mechanism designed for only a handful of people, crowdfunding probably isn’t right for you.
One drawback of crowdfunding for some organisations is the necessity to make public your financials and business plan. Again, while this isn’t a huge factor for some – the success of most businesses is based on execution. If your advantage comes from doing things in a very new, untried manner, releasing any secret sauce might be the last thing you’d like to do. Obviously, in most cases you won’t be required to dig too deep, but it can be a factor.
Potential clients aren’t limited to those who eventually invest, and while having so many investors as brand ambassadors is a huge benefit, crowdfunding also places you in front of a huge amount of people who may not invest but still ultimately use your services. Similarly, it’s a great way to shout about what you do to industry experts and journalists – raising a good chunk of money tends to get people’s attention.
The Tutorful team
Secondly, the simplicity offered really is very attractive. Crowdfunding allows you to bring together a large amount of investors in one place. The terms are written, the legals handled for you, and, importantly, the costs are fixed. For anyone who has been through any form of investment, they’ll know how much better that can make life.
Investment should, in my view, be fair for both parties, both in valuation and terms. If we compare crowdfunding to the venture capital (VC) route, which might traditionally have been the more natural second stage for a business like ours, the terms of crowdfunding are very favourable for founders. This doesn’t mean that they’re unfavourable to investors, they’re just fairer.
Founders retain control of the direction of the business, and are not subject to the potential of investors withdrawing their support if growth slows, or a change in direction is required. No-one hopes this will be necessary, but most businesses won’t continually grow exponentially and in those moments VCs have been known to get twitchy, and with preferential shares, that can put founders in an awkward position. While many VCs are great, crowdfunding generally affords more equity, in the layman sense, between investors and founders.
No quick wins, but it’s worth the effort
There are certainly advantages lost when crowdfunding – there isn’t the potential of immediate follow-on investment (if needed) that institutions can offer. Similarly, many institutions will have fantastic connections who can add a lot of value to the business, as well as individuals who have much experience in relation to exits or acquisitions. Some of these benefits can be found in crowdfunding, if you seek out the right angels.
This is an important point – crowdfunding isn’t a quick process. You need to put in the leg work, reaching out to potential investors and the individuals you’d love to have on board. There’s a lot of time needed to engage with the crowd, after all… it’s a crowd!
In all, for us, the benefits afforded by crowdfunding outweigh the drawbacks and we’re excited about the prospect of welcoming new investors on to the team. We’ve achieved 700 percent growth since our initial raise, and have also been finalists of Tech North’s Northern Stars competition, so we’re hopeful that all will go well, but there are no guarantees – fingers crossed!
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