Crowdfunding gets a kick up the starter

"It was unquestionably the most stressful 30 days of my life." That was Paul Canavan's assessment of Invizbox's crowdfunding campaigns, the latest of which raised just over €101,000 to make the company's second product, the Invizbox Go.

It was a close finish; if Canavan and his co-founders had failed to hit the €100,000 they had set themselves within the campaign’s time frame, they would have walked away with nothing. A final push and some publicity was enough to tip Invizbox over the line – just.

Crowdfunding is the fashionable way to fund your project, and it’s not difficult to see why: it provides small, capital-lite companies with an instant pool of funding to develop projects, leapfrogging banks and the more traditional route of seed funds and venture capital backers.

“We had no cash,” said Canavan. “We’ve turned a company out of nothing – no money at all.”

Companies such as Pebble have built a buzz on crowdfunding sites by raising huge amounts of money. Since the first Pebble smartwatch raised $10 million in 2012, the company has returned time and again to the site. The Pebble Time raised $20 million last year. The most recent, for the Pebble 2, Time 2 and Pebble Core, raised $1 million in under an hour when the project opened for funding in May.

With such professional approaches now being taken to the campaigns, competition has become is fierce. However, Canavan says companies that want a successful crowdfunding campaign need to be presenting their best face. Which means investing in a little bit of promotion.

It is essential that companies know what they are up against when it comes to securing funds. Those such as Pebble put together slick presentations that help hook in potential backers.

“Two years ago you could roll out a Kickstarter with a good idea and a few pictures and make a lot of money,” said Canavan. “Those days are gone, unfortunately.”

Publicity potential

For some companies, the value of crowdfunding may lie more in its PR potential than in actually needing any cash it will raise. When Sony announced on stage at last year’s E3 that it was running a crowdfunding campaign for Shenmue 3, the reaction was staggering – it blitzed past the €2 million mark in less than nine hours. To date, it has raised more than $6.3 million.

If Sony’s main goal was to create a buzz and test the market appetite for a new Shenmue title, it certainly found a willing audience.

Some crowdfunding projects offer a chance to donate money that won’t be enough to get you a product, but will help the project creators’ advance towards their goal. It could be as little as a dollar or euro, and will usually earn you nothing but gratitude in return.

It essentially amounts to a charitable donation. But instead of a worthy cause, the few quid you throw at the start-up will inch them closer to their goal. Looking at some of the more successful projects, the option appears to be taken up by only a fraction of the backers, which raises questions about its usefulness to projects as a fund-raising measure.

If it’s purely a PR exercise for the site – by showing people that they, too, can get involved for less than they’d spend on a sandwich – you would probably have to question its efficacy there as well.

Having established companies on crowdfunding sites, it is crucial that the firms deliver.

Cycling technology company See.Sense is a veteran of the crowdfunding scene, having run two successful campaigns on Kickstarter. Co-founder Philip McAleese says proving the company was good on its word contributed to the conversion rate it saw from one campaign to the other: “We showed we can deliver once, so we derisked it for a lot of people.”

Validation was also key, allowing See.Sense to show retailers that there was a market waiting for its product.

Previous failure

As it turned out, See.Sense was not the first out of the crowdfunding gate with a connected bicycle light on Kickstarter: a previous project failed to deliver.

“Everyone remembers the first man on the moon, and can probably name the second, the third if you’re lucky,” McAleese says. “By the time you get to the fourth, forget it.”

Running the second campaign meant See.Sense was now one among a crowd, and as such found it more difficult to get coverage among media for its product.

There are other ways of crowdfunding without going down the Kickstarter or Indiegogo route.

UK-regulated Crowdcube is a platform that uses the crowdfunding model to raise funding for companies.

Crowdcube was set up in 2010 by Luke Lang and Darren Westlake, both entrepreneurs, who were frustrated at their inability to raise needed finance for their early- stage companies.

"They'd gone to the angel investors," says Michael Wilkinson, Crowdcube's head of equity investment. "Both of them had angel investments drop out three or four months down the line and just wasted all their time. The banks weren't lending – in 2011, you couldn't get money from the banks because you were too risky, and then you were too early for VC money."

“Entrepreneurs with good ideas weren’t able to raise capital,” he adds. “One side of our business, our marketplace, was born out of this frustration that they weren’t able to raise finance. The other side of it, the investor side, was born out the understanding that if you were a small investor, there’s no real way to do it that’s seamless and easy.”

Backed by Balderton Capital, Numis and Draper Esperit, Crowdcube opens up the investment world to people with smaller amounts of cash to back companies that they like.

“Investing five years ago was an elitist activity,” said Wilkinson. “You had to have capital and you had to know people. So democratising it we felt was right for the market. It was opening up a bank of capital that previously hadn’t been leveraged. It was bringing investment into a marketplace, funding entrepreneurs who hadn’t previously been able to be funded, and driving early-stage business success.”

And it’s not just about capturing the £10 or £100 investors either. Increasingly, Wilkinson says, venture capital companies are using Crowdcube as a platform. In that scenario, the venture capital firm may come in as a cornerstone investor.

That works well for companies seeking to add not just money but expertise. Investors often bring more than just money to the table, such as taking a seat on the board if it is offered. And there are plenty of angel investors out there who have turned to Crowdcube for investment opportunities.

It may seem like investing with a venture capital firm is easier because you deal with a single entity, but Wilkinson said the Crowdcube platform essentially operates like that single investor. You might have 3,000 small investors, but you don’t have to deal with each individual one. And because the money is locked in, you don’t have to deal with the risk that two of the 3,000 will pull their money out on a whim.

The projects seeking funding through the site are varied, from companies making nutritional supplements and bakeries seeking to expand, to running apps and solar power schemes.

See.Sense is one of the latest companies to sign up with Crowdcube. It is going after £500,000, and a few days in had already raised more than three quarters of its total. It joins Sugru, the mouldable glue company founded by Kilkenny native Jane Ní Dhulchaointigh and one of the platforms most widely touted success stories.

3 times the goal

Sugru was looking to raise £1 million (€1.2 million) when it turned to Crowdcube last year; by the time the round closed, it had raised more than three times that – nearly £3.4 million.

But Crowdcube isn’t simply facilitating other companies in finding alternative means of investment: it is also using the platform to raise money of its own. The company is set to publish a prospectus shortly, giving its pool of investors the chance to put money into the very platform they have been using.

In other words, Crowdcube is putting its money where its mouth is, which is the ultimate test of a product or service.

To date, it has helped raise more than £171 million for British companies, with 424 successful raises under its belt. Which proves that for some at least, the crowdfunding platform is a viable alternative to traditional method of raising finance.

For Invizbox and others, the crowdfunding route mitigates one risk that is ever present for startups: failure.

“If you’re going to fail, it’s a really cheap way to do it,” says Invizbox’s Canavan. “You’ll find out a few days in if you’ve got a terrible idea.”