4 Lessons I Learned From A Crowd-Funded Startup
"While companies such as KickStarter and, more recently, PledgeMusic have proved remarkably successful for artists, their “gift-giving” model hasn’t always been ideal for young creative companies – particularly those offering a service."
Guest Post by Niels Footman on MusicTank
In less than a decade, crowdfunding has gone from being completely unknown to becoming part of the creative world’s furniture.
But while companies such as KickStarter and, more recently, PledgeMusic have proved remarkably successful for artists, their “gift-giving” model hasn’t always been ideal for young creative companies – particularly those offering a service. Also, when certain products have gone stratospheric via incentive-based crowdfunding, some backers have felt a little peeved that their initial investment generated the company vast amounts of money, but the investor – financially, at least – nothing.
What, then, of the relative newcomer, equity crowdfunding?
Before I continue, let me offer a brief introduction to us. Living Indie is a platform that streams concerts live to any connected devices. Our aim is to create a new social experience, either by bringing people together physically, in pubs, cinemas or their own living room, or connecting them with other music fans worldwide via our social streams. In our 18 months or so of operations in the UK, we’ve streamed acts including John Grant and Nile Rodgers, and built up a subscriber base in excess of 12,000.
Until late last year, we had followed a fairly well-trodden path for young startups in London. We had won a place on an accelerator – in our case, Telefonica affiliate Wayra. We would frequently pitch at industry events and we had several review panels in front of angel investors. The response we had was frequently similar: exciting idea, not sure if it’s quite right for us at this stage.
The uncertainty over investing in us generally broke down into two areas: “regular” investors, typically angels or VCs, would often be unfamiliar with the music business and uncertain about its future. Among potential investors from a music background, the bigger issue was finding someone willing to take the initial plunge, the pioneer who would open the gates to (we hoped) the flood of excited investors to follow.
With our time at Wayra nearing an end, we opted to try equity crowdfunding. It wasn’t a decision we took lightly. We’d heard tell of Herculean workloads, particularly in terms of marketing. We also knew that short of appearing on Dragons’ Den, it would be the ultimate public validation (or humiliation) of our baby. If we openly advertised ourselves as looking for investment, and still no one bit, what then?
We elected to use Crowdcube, one of the biggest and most established firms in what is a very young industry. It was, we’d have to say, an excellent decision. Crowdcube was scrupulously thorough from the outset, sending us back more than 50 queries about our initial application. Besides some points on specific numerical claims, no marketing speak escaped the laser-like glare of our counterparts at Crowdcube. “This service will be irresistible to music lovers worldwide”, we said. “Prove it!” replied our interrogators.
As time-consuming as it was, Crowdcube’s attention to detail was ultimately very reassuring to us, and will presumably be so to prospective investors, too.
Once we’d completed the application, we had the tortured decision of when to launch. Crowdfunding blogs urged many months of preparation, with a relentless focus on wooing journalists and rekindling old friendships. We’d spent a halting few months on that. Most important was securing the initial bit of funding that would show the beginnings of interest in Living Indie. This we did with money from one of our partners, who in effect served as the lead investor. As we discovered, this would be perhaps the single most important development in our campaign.
We launched the campaign privately in mid-February, approaching various investors and friends who’d previously expressed a flicker of interest in the idea. Here, we said: we’ve already attained 15% of our target. You can invest as much or as little as you like. And to top it all off, investments are eligible for very favourable tax arrangements (under a scheme called SEIS), which effectively writes off 50% of your investment against your income tax. By the time we went public, we’d raised £65,000 of our £150,000 target.
With three weeks of our campaign to go, we have raised almost 110% of our target. So what lessons could we draw that would be of interest to other music companies looking for funding?
- There is frequently a difference of emphasis between “conventional” investors and many of the people looking around the likes of Crowdcube. So while crowdfunding can, and does, draw big institutional investors, it also attracts people keen to get involved in businesses like music because it's their passion. Make no mistake: we are utterly determined to grow and make money for ourselves and everyone who's backed us. At the same time, using crowdfunding has allowed us to generate support from out-and-out music lovers who would dearly like to see a service like ours succeed. This has been crucial.
- There may never be as good a time to consider crowdfunding as right now. The UK has one of the world’s most favourable regulatory frameworks for equity crowdfunding, including the tax arrangements that do so much to induce investors to back higher-risk, early-stage companies like ours. Whether equity crowdfunding will work long term as an investment vehicle for everyday investors remains to be seen. But for now, it’s proving a highly attractive forum for people looking to get involved either for strictly financial reasons, personal interest, or a mix of the two.
- You might assume that crowdfunding is a matter of putting your business plan together, posting your pitch on a platform, and sitting back as the money pours in. Nothing could be further from the truth. To succeed, crowdfunding requires a major, coordinated push to let absolutely everyone know what you’re doing, and then keep it at the forefront of their minds throughout the campaign. Export your entire email contact list. Go to every networking event you can. Nag every academic or professional group you’re connected to. Push, push, push. The good news is that as a music business, we had a ready-made supply of excellent content to hang our crowdfunding efforts from. Indeed, this is yet another reason why, despite the challenges, creative enterprises can be very well-suited to equity crowdfunding.
- It is impossible to overstate the importance of gaining some investment prior to (or very soon after) taking your campaign public. If you have any doubts about that, head over to Seedrs or Crowdcube and have a browse through the businesses there. Without knowing what they do or how they plan to make money, see which ones grab your interest. Nothing sends a more compelling message than knowing other people have invested first.
Our crowdfunding campaign is ongoing, so we’d be delighted if you’d head over to take a look for yourself (or just as importantly, help spread the word). Should you have any questions, feel free to drop me a line:
Niels Footman, co-founder, Living Indie niels(A)livingindietv.com
So, this is a relevant conversation now that the JOBS act has become more of a reality, however it should be noted that Venture Capital within the US, UK and EU are very different beasts.
There are some similarities, however the regulatory bodies themselves as well as how entities are taxed has a huge effect on how people speculate invest across the board (and pond).
Another thing to consider when looking at crowdsourcing VC is that though it might get you off the ground in a a seed stage or even A series, when it comes to enterprise and growth stages it’s doubtful that more powerful firms and syndicates will want to work within an already crowded cap table and board.
While this will work for some in the US, there are bigger overarching risks inherent to the entire VC and entrepreneur ecosystem, not too dissimilar to high highs and low lows of the original dot com boom here.