Can you raise through crowdfunding when you are pre-revenue?

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It is most certainly possible to successfully crowdfund for a pre-revenue business but there are some important considerations which can help you determine your likelihood of success and whether crowdfunding is the best fundraising strategy for the stage of your business.

One of the most important determining factors when considering if your pre-revenue business can crowdfund successfully is your industry and business model.

Naturally investors understand that if you’re a B2B technology or infrastructure company that it may take a lot longer to get your business in the market and generating revenue. For example, Celtic Renewables raised £3.7m on a £28.2m pre-money valuation in late 2020. As a biotech company, the main focus for investors wasn’t whether they were already generating revenue, but the future potential of their revenue streams once the business was in the market. As a result, investors placed a lot more emphasis on the letters of intent Celtic Renewables had in place, the IP they had secured and how close they were to being in the market once their round of investment had closed.

On the other hand, if you’re a direct-to-consumer business, investors, and the crowd more broadly, want to know that you have already gained some customer traction. They want to see proof of sales, and ideally proof that customers are engaged and return. Acquiring customers online is difficult, but if you have built a community and cracked digital acquisition, ideally organic acquisition, then getting buy-in from the crowd is much easier.

The second most important determining factor when looking at whether you can raise through crowdfunding for a pre-revenue business, is the valuation you’re placing on the round.

Again, it’s important that you consider valuation based on industry. A B2B technology company with significant IP coverage in a growing market will be able to command a much higher valuation at a pre-revenue stage than a pre-revenue e-commerce marketplace. By pricing your round to reflect the stage of your business and industry you can pique the interest of early-stage investors with whom equity and future potential for sales are more important than immediate traction to date. Find out how to value your company here.

How much investment you’re seeking is another important consideration for a successful pre-revenue campaign and goes hand-in-hand with your valuation.

First and foremost, how much you raise should be viewed through a number of lenses:

  • How much money your financial model requires you to raise to achieve your growth plans in the next 6-12 months?
  • How much money you need to raise in order to get to your next point of inflection in growth and therefore valuation? I.e. How much money do you need to raise in order to become revenue generating?
  • How much money you can realistically raise given the valuation you can command at this stage and the dilutive effect?
  • How much money you can realistically raise when considering your network, community and connections to investors? Sure raising £1,000,000 might be optimum, but consider how long it will take you to raise this money when you could raise £200,000-£300,000 and get to that all-important revenue mark much quicker.

Finally, it’s important to consider the community you have built around your business.

Communities are at the centre of any successful crowdfunding campaign and this is where business-to-consumer brands really come into their own. Companies who have cultivated an authentic and engaged community, often via social media, find it much easier to build momentum behind a crowdfunding campaign.

The importance then falls on how well you communicate with that audience and get them to invest in your business. If you’re a pre-revenue business or have very early stage revenues, you have the potential to focus your campaign communication strategy on why you want your audience to be part of your success story from the very beginning and own shares in your business. Companies like Monzo, Chip, and GoHenry are shining examples of how businesses can raise money from the crowd at a pre-revenue stage.

Crowdfunding has been an integral part of their fundraising strategy from day one and they have returned to the crowd in every subsequent campaign.

Ultimately, there’s no one-size fits all strategy when it comes to crowdfunding, and raising investment more broadly.

To find out what might be the best fit for you, why not apply to our to chat all things fundraising with one of our investment experts.