Lead investment or cornerstone investment can often be overlooked when it comes to crowdfunding. It’s tempting to see large campaigns on the major UK platforms Seedrs and Crowdcube and conclude that money came from the investor networks the respective platforms have as registered users.
The reality is that these campaigns have a team of people working away in the background, often for months in advance of the live campaign, to raise the ‘lead investment’.
Before we get into the nitty gritty of how much you need to raise before you publicly launch your crowdfunding campaign, we first need to look at the dynamics of a round overall.
It’s important to remember that crowdfunding is part of an overall fundraising campaign. Crowdfunding first and foremost is an equity investment – you need to work just as hard to ensure your round is successful as you would with any other form of fundraising. It’s most definitely not a case of putting together a pitch and hoping that the investment will come flooding in.
…crowdfunding is all about building and maintaining momentum…
Crowdfunding is all about building and maintaining momentum and that starts from the moment you announce your plans to crowdfund. Whether it’s customers, investors, the press or even your friends and family, we’re all humans and as a result we’re all subject to basic human psychological principles.
The bandwagon effect is a cognitive bias which causes people to behave in a certain way if they think everyone is doing it. This effect is amplified in a crowdfunding context as there is a clear visual representation of the number of investors and investment raised so far. Without a doubt, leveraging this bandwagon effect has a significant impact on the success of a campaign and it’s critical that you get it right.
The first step in building this momentum is raising lead investment. This is the cornerstone investment that you raise ‘offline’ in advance of the campaign. Where this money comes from largely depends on your business, whether you’ve raised money before and the stage you’re at. Often, it’s a mix of personal and professional networks as well as professional angel investors and funds. Reminding us that even though crowdfunding might be a relatively new form of raising capital, it doesn’t negate you needing to go through a conventional fundraising process.
Historically it’s been widely thought that you could launch an equity crowdfunding campaign with 30-40% of your minimum target secured as lead investment. However in our experience this is no longer the case. With more and more businesses choosing to crowdfund, investors have the pick of the crop, also being mindful that they can always choose not to invest at all(!), making the need to leverage the bandwagon effect even more pertinent.
In our experience, we recommend raising at least 75-80% of your minimum target before publicly launching your crowdfunding campaign. Not only does this build that all important FOMO and momentum behind the campaign, it also ensures that you have a greater chance of reaching your minimum target, which if you fail to meet you don’t get any of the money!
The reason for this is that equity crowdfunding campaigns are financially regulated promotions and the crowdfunding platforms in the UK are held to account by the Financial Conduct Authority (FCA) for the claims their pitches make and to ensure that investors are presented with information that is clear, fair and not misleading.
We recommend raising at least 75-80% of your minimum target before publicly launching your crowdfunding campaign.
If you’re presenting a pitch that requires £300,000 in equity investment to execute on your growth plans but you reach 50% of your target and raise £150,000 and the platform allowed you to accept this investment, those investors would be much more ‘at risk’ because you’ve only raised half of the money you said you needed. Likewise, it would be unethical to present a plan to investors that requires £500,000 and set a minimum target at £300,000 to ensure that you at least get some of the money you need, whilst knowing that your capital requirement is significantly higher.
Sign up now to receive actionable insight to help scale your business.