Crowdsourcing for startup success

10/06/2014
If banks aren't an option, peer-to-peer investment could offer an attractive avenue for would-be entrepreneurs looking to bring a new idea to market
Widespread job cuts and stricter banking terms have driven aspiring entrepreneurs into the arms of online investment communities in recent months, to the point that crowdfunding has become a mainstream means of accessing money for anyone with a great idea.
Of course it's not quite as easy as that, but compared to established channels for raising finance, it is repeatedly proving to be a more viable model – certainly for more left-field ventures.
Crowdfunding is a peer-to-peer investment model, typically orchestrated online, where people are invited to put up a very small amount of money (as little as £10 if they like) to help realise an inventor's dream.

The typical scenario, a bit like on Dragons' Den, is that unless a candidate attracts 100% of the amount needed within the designated time period, they walk away with nothing. The phenomenon has become so popular that the FCA, the financial services industry regulator, has begun introducing controls to protect private investors.
There are no guarantees for those trying to raise the finance, but at least those testing an idea are able to get a foot through the door. And when the money comes, it can flow. Kickstarter, one of the biggest crowdsourcing platforms internationally, has brokered investment pledges exceeding $1 billion since it was founded five years ago.
Edinburgh-based Ryan O'Rorke recently generated more than £150,000 in funding via the Angel's Den crowdfunding platform. His business, Flavourly, delivers gourmet food (Flavour Boxes) and niche beer on a monthly subscription model. The business became one of the fastest ever to be equity crowdfunded in the UK, reaching its target within 24 hours of appealing to investors. The young startup business is now taking up a stretch-funding option to use surplus funds to drive sales.
Angel's Den's crowdfunding platform represents a pool of 6,000 business angels with funds to invest. It was a route O'Rorke only tried this year, having started up with £500 of his own money, winnings from a Scottish business competition, and some seed funding from two private investors.
Flavourly's ambitions are far from modest. By the end of 2013, after only six months in business, the company had achieved sales of £170,000. With the crowdfunding, O'Rorke hopes to tip £1m in sales within the next few months, and have 10,000 active subscribers by the end of this year.
"2014 is supposed to be the year for crowdfunding, and it's a good option," O'Rorke says. "I can't think of any reason not to go down this route. We chose Angel's Den because of the Scottish connection and they're very professional. By going down the crowd route we've gained access to a pool of 12 investors who together bring financial, marketing and customer acquisition skills to the table. For a young company like ours, that's invaluable."
O'Rorke, who is just 25, has never considered going to a bank. "We wanted the added value, the connections, the help with marketing," he says. "The risk of seeking investment is that the due-diligence process can take months and investors could still say no at the end of it. And if you go down the crowdsourcing route you need to be ready to act once you've raised the funds. But this is a channel that's worked well for us."
Another fledgling business that has done well from crowdfunding is Bike Systems in Staffordshire. The company is a spin-off from a construction firm, the only connection being the founder's passion for motorbikes. Dave Vout registered the new company in July 2012, but the new business lay dormant for a year while he juggled his day job with research for the new venture. His idea was ambitious and, as he later found, ahead of its time. The first product is a 'head-up' display for motorcyclists which projects information into the rider's helmet. The unit is a small display that sits just under the rider's eye line so they can see their speed, revs, speed camera alerts and more in their peripheral vision.
Bringing such a radical creation to market involved a lot of groundwork, and Vout spent the first 18 months looking into the legalities of the product and doing feasibility studies. He drew heavily on his own resources and the original business to bring in the necessary expertise, and acquired a 3D printer on which to build a prototype.
By the time Bike Systems went down the crowdfunding path, Vout had spent £40,000, having been turned down for funding twice by the Technology Strategy Board (TSB) and again by business angels. The learning curve was a steep one, but a mentor recommended by TSB suggested crowdfunding through Seedrs and set Vout on the right track to getting his application together.
"Putting everything together was a lot of work, as we had to prove all our claims," he says. "It was September before we started our campaign, and again we were naïve. We expected our pitch would go up and we'd get the £90,000 we were asking for. But the reality is that you get £10 here and £20 there, unless you get a big hitter. We were lucky that someone pledged £30,000, but that wasn't until towards the end of our campaign so we could have gone away empty-handed."
Vout then applied for a second smaller round of funding, raising a further £30,000. Some 180 small investors account for the final total. "If I was raising more funds, I'd definitely go the crowd route first," Vout says. "Otherwise it's a case of who you know rather than the strength of your idea, and that's very frustrating."
From here, Bike Systems needs to get the Bike HUD into production, which it will do with help from the Manufacturing Advisory Service, a government initiative. The project is slightly behind schedule, but Vout hopes to be shipping products by the summer.
The next challenge will be converting interest to actual sales, a challenge Vout didn't anticipate. "We're at the early-adopter stage of a new market, so it's a case of education and awareness-building," he says. "We probably have a six-month lead time before the competition comes along."

Fonte: theguardian.com

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