Key Crowdfunding Terms Explained

by Startacus Admin

Crowdfunding is fast becoming one of the most favoured routes to funding for UK Startups- but it is much more than just a way to raise capital.  If delivered effectively a crowdfunding campaign can raise the profile of your business, generate publicity, and encourage valuable feedback, so it’s no surprise that its popularity as an alternative means of investment continues to grow year on year.  

But as is the case with any route to funding, confidence in your ability to achieve success is crucial in determining whether or not it will work for you, and key in ensuring that your put across a positive case, is understanding and being able to use the lexicon that goes along with it.

Here are brief explanations of some of the most common terms and phrases connected to crowdfunding that you will come across and need to understand.

Crowdfunding- Crowdfunding is the process of raising investment for a business venture, or indeed a project, by encouraging many individual sums of money from a number of individuals.  In the vast majority of cases this takes place on the internet via an increasing number of facilitation services called crowdfunding platforms.

Crowdfunding Platforms- These are social network style websites which provide startups and other businesses with a forum on which to pitch their business to prospective investors. Campaigns give the organisers the opportunity to share vital information about the business, its plans for growth, and most include a video which will become a key element of the appeal to investors.  Some of the most well known and well used crowdfunding platforms include Seedrs, Kickstarter, Crowdcude, and Indiegogo.   

Equity Crowdfunding- In this type of crowdfunding contributors are offered a share in the business equity as an incentive to invest.  

Rewards Crowdfunding- Here no equity is offered, but instead investors are given certain ‘rewards’ as thanks for their financial input.  These rewards usually take the form of products and / or services which are directly associated with the business being funded.  For example, if a rewards-based crowdfunding campaign were created to raise investment for a new line of smartwatches, a £100 investment might guarantee the user a unit from the first production.  In the case of very small investments, the reward might include tokens of gratitude including being mentioned in newsletters or social media posts.

Target- When first appearing in the industry, crowdfunding platforms operated under an ‘all or nothing’ model, whereby a financial target was set by the campaign organiser and unless this was reached the business would not receive any funding and money would be refunded to investors.  Most platforms still operate a version of this model, however the conditions and provisos of funding have relaxed considerably.

Funding Deadline- This is point by which the target sum of money must be raised if the campaign is to be considered a successful one.  In the case of most platforms, unless the specified amount is raised by this date, no funds will be released and all investments will become void.

Continuous funding / Forever funding- This is a new type of crowdfunding which adds a level of permanency to campaigns, allowing projects to be funded on an ongoing basis, rather than within a tightly controlled time-frame.  Startups and other businesses are not usually funded in this way as it is more suited to artistic and cultural projects which require ongoing support rather than a one-time cash injection.  Most often, this funding option only becomes available to a campaign once it has set and reached a target within a set period of time and gives project organisers the opportunity to continue raising capital even after the deadline has passed.

Crowdfunding Fees- Of course, crowdfunding platforms don’t do all of this for the good of their health, and the way that most make money is by charging a fee for the service they provide.  In most instances, this fee is only payable on the successful completion of a campaign and is usually worked out as a percentage of the total amount raised.  For example, a platform may charge 5% on all money raised up to £150,000, which would result in a fee of £7,500 on a successfully funded campaign reaching £150K.  Quite often, the higher the level of funding achieved, the lower the percentage required by the platform.  

Over funding- It was the case for a long time that if your campaign managed to reach its target within the stipulated period of time the investment was immediately suspended and you received your cash shortly thereafter.  However this model has adapted with increased demand, and most platforms now allow you to exceed your target, allowing for a technically infinite level of funding to be achieved.  There is no doubt that this was an excellent idea both for startups and the crowdfunding platforms themselves, with many campaigns reaching well in excess of 1000% funding.

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Published on: 5th July 2016