The crowdfunding phenomenon has snowballed over the last few years, having been successfully harnessed by a range of industries to fund everything from beer to smart watches. What started as a social experiment has now been validated as a viable tool for entrepreneurs and would-be investors. With interest in this novel funding method growing, Scotland has seen a clutch of home-grown investment platforms emerge, with Bloom VC and Squareknot already raising funds and ShareIn due to launch this Autumn. But despite the buzz, crowdfunding has yet to hit the mainstream in Scotland. Why is this, when over half of Scottish SMEs are actively seeking finance? And with a booming tech scene, is crowdfunding a viable option for tech startups?
Certainly there is precedent for technology companies using crowdfunding successfully to develop products and platforms: a sensor that turns an iPad into a mobile 3d scanner, virtual reality headsets and a low cost robotic hand. Closer to home, Edinburgh based software house, RunRev has successfully raised investment for a new App Building platform. Added to that, the tech giants are already being influenced by crowdfunded projects, with Samsung launching a competitor to the Pebble soon after the release of the crowdfunded smart watch. While crowdfunding is clearly an effective route for companies looking to fund consumer technologies, it remains to be seen whether crowdfunding is the right choice for the broader technology industry including the likes of electronics, software and med-tech solutions.Traditionally, most technology startups raise initial seed investment from friends and family, perhaps banks or grants if they can get them, before progressing to Angels for second round and VCs for growth. Crowdfunding could be seen as an extension of the early-stage friends and family round.
At Alba and Hillington Innovation Centres the message we hear consistently from funders is the need for proof of commercialisation and market acceptance in some form and crowdfunding can be useful in demonstrating this. It forces entrepreneurs to go to the market early and is a good way to gauge user reaction and analyse the market in order to decide whether to pursue or, in lean startup lingo, to ‘pivot’ on a given concept.One of the biggest benefits of crowdfunding for technology is that the process allows the entrepreneur to build a loyal customer base of ‘early adopters’ from the outset. This is particularly valuable for technologies with no existing market, where businesses need to educate people about a new concept and create the evangelists who will go out and spread the word. Critically, the crowdfunding approach can create noise and momentum around a launch, which can attract new investment from traditional channels and attention from media outlets. The actual process of fund raising is also far quicker than traditional investment routes which can take months. Many companies find themselves stuck in an endless cycle of raising funds and unable to focus on improving the technology, acquiring customers and growing a business.However, Angels, equity investors and VCs come with more than just money and is currently the preferred route to raising investment for tech companies. They bring a wealth of experience, contacts, skills and business acumen. Very often they are technology entrepreneurs in their own right and have seen it (and done it) all before.
Their counsel is particularly valuable for technology businesses, many of which are headed up by the person who came up with the idea. Quite often this person is not commercially focused and so needs help to ‘productize’ and commercialise the technology to ensure there is clear value in the intellectual property. It is critical for this traditional funding model that investors buy into the business and help steer them in the right direction. With the crowdfunding model, you don’t necessarily know your investors, they don’t get involved in your business and there are normally too many of them to get to know, so they won’t offer that help or steer to ensure your tech is right for market. Some of the technologies being developed are complicated and difficult to describe to buyers, so the crowdfunding model which companies use to gain initial buy-in of the product/service from the crowd before it is mass-marketed, won’t always work and could be detrimental to the business. Another difficulty lies around sweat equity, dilution of shares and the tax implications of crowdfunding. If the bulk of equity is given away in the seed round, Angel and VC investors are not going to be interested in growth investment further down the line.
Moreover, managing the investors via a crowdfunding model is a time consuming process, something most tech inventors don’t have when starting their business and trying to get their technology working and out into the market via the best channel.Crowdfunding is a unique route to verify demand and to open the door to other forms of business funding. It can be used to validate the product, service or market and help reassure funders that there is a potential demand for their product or service. The crowd is acting as an extension of ‘friends’ and ‘family’ so offer enthusiasm, confidence and belief in the concept. They don’t offer business advice but they help get the company off the ground. And as start up costs decrease and funders want more commercialisation from startups, crowdfunding fills an obvious gap. But crowdfunding will not be suitable for every business and there are many things to consider when looking at funding for your business.Anna Marie Taylor is marketing manager for Innovation Centres Scotland, which manages the Alba Innovation Centre and Incubation Service, a Scottish Enterprise initiative. Alba Innovation Centre is running an event on the 26 November in partnership with Edinburgh Science Triangle looking at the crowdfunding opportunities for technology companies.