We’re also aware that crowdfunding can be a confusing term if you’re unfamiliar with it. Sounding similar to a GoFundMe, or general fundraising page, crowdfunding is in fact very different. So, wanting to avoid any crowdfunding based confusion, we’ve smashed together a short guide to get you fundraising savvy.
But gang, before we dive head first into investing 101, let’s lay the groundwork and look at why a business would want to crowdfund in the first place (and we apologise if we’re teaching you to suck eggs here). In short, there are broadly two ways a business can expand and grow:
- Reinvest your profits over time, gradually expanding outwards (emphasis on the word gradual)
- Raise external funds to aid expansion. In exchange for funds, the business gives away equity (shares)
We're going for the second option because we're hungry to get our service out to riders everywhere and we think what we're doing is the best way to support the growth of cycling and sustainable travel in the UK.
As a business grows, it may seek further investment to support new ventures or expansion. For example, in our case, we received backing to create a network of bike repair workshops in London. We always knew that to follow our plans of expanding outside the capital we’d have to seek further investment. If you’re not gripped already(!), we’ll look at why a business may choose to crowdfund over the many other ways it could generate the funds.
Crowdfunding isn’t a charity collection
As you may have gathered by now, Crowdfunding is very different to a whip round. The confusion can come from the word ‘fundraising’ which makes it sound like a business is asking you to lob in a tenner to keep them afloat. The key difference with crowdfunding is that it’s a financial investment. You become a shareholder (regardless of if you invest £10 or £100,000), and will hopefully make a profit on your investment.
Getting a return on your investment
Whilst you may agree with a company’s vision, what they stand for, and what they’re hoping to achieve, let’s not beat around the bush here. The whole point of an investment is to get a healthy return on your money. So, how does that happen?
You can either:
- Sell your shares when their market value has increased, thus making a profit. It's important to note that there may be restrictions around when this is possible.
- Get a proportion of the sale when the business is sold
- Get a payout when the business is floated on the stock market
- Get a payout in the form of a dividend
Potential investors always want to know how they will see a return in their investment and in what timeframe. For example, can they expect a dividend in 5 years? Is the plan to continue expanding and eventually be floated on the stock market? Or will they continue to grow the business over the next few years before selling it on?
What are the risks?
The biggest risk is that the company flops and you lose your investment. Even with a realistic 5 year plan and the greatest successes under their belt, external factors may throw a business off-course. There’s also the risk that exiting takes longer than planned.
However, the UK government and HMRC has a brilliant scheme which helps small companies to receive investment whilst helping to offset the risks to individuals. EIS relief allows investors to claim 30% income tax relief on investments of up to £1million per tax year. Investors are also exempt from paying Capital Gains Tax where the shares are held for 3 years or more. There is loss relief meaning that investors can elect that the amount of the loss, less the income tax relief given, is set against income of the year in which they were disposed. We know it may sound complicated but you can read some more about the generous scheme here.
The benefits of crowdfunding
For those keen to build an investment portfolio, crowdfunding requires little effort. All campaigns are available online with a few clicks, whilst it’s easy to reach out to companies you’re interested in should questions arise. Investment is no longer exclusive, with opportunities offered to everyone, regardless of income level.
For the business, they receive a crowd of ambassadors ready to support their brand and refer them to friends and family. Investors will come armed with ideas, opinions and experiences that will help the company grow, whilst anyone who has invested is almost guaranteed to continue using that business over competitors.
If you’re interested in getting stuck into crowdfunding, or just want to find out more, we’d recommend exploring the wealth of crowdfunding campaigns out there. Whilst we are using Crowdcube, Seedrs is another very popular platform. From sustainability apps to smart containers, there is a wide variety of potential businesses to invest in. But, before you do anything, make sure you fully understand the process, the business and the risks involved in investment.
*Investments of this nature carry risk to your capital. Please invest aware*.