A qualitative analysis of the factors required for a successful crowdfunding campaign

for United Kingdom based start-up Companies

Adekorede Olufolaji and Robert A. Phillips*

Manchester Enterprise Centre, Manchester Business School, University of Manchester,

Manchester, M13 9PL, United Kingdom. Robert.phillips@manchester.ac.uk

*To whom correspondence should be addressed

Abstract

This study set out to understand some of the key issues involved in a successful
crowdfunding campaign based on interviews with founders of several United Kingdom based
businesses that had been successful at obtaining funds via different crowdfunding models.

The results showed that, contrary to previous research, not all companies thought their
personal social media presence was important for reaching investors and it seems that many
investors go direct to the crowdfunding platform to browse for opportunities. The successful
companies were able to match what they had to offer in terms of benefit for investors and
what help and support they thought they needed with a suitable crowdfunding model. The
location of the campaign was clearly a factor for some companies who were seeking to
launch their campaign near what they felt to be suitable investors, although the default was to
launch a campaign locally to where the company was based to appeal to local investors.

Introduction

Start-up ventures have traditionally found difficulties in obtaining sufficient capital to get
started in the U.K. as elsewhere (Cowling et al., (2012), Fielden et al., (2000), Cassar (2004))
from the lack of positive cash flow for repayment and lack of collateral for securing debt
finance, to information asymmetry with equity investors (Berger and Udell, 1998, Cosh et al.,
2009). Ueda (2004) suggests that previously for many start-ups, venture capital funding was
the most likely option despite its scarcity. However, start-up funding has gone through a
period of recent change with crowdfunding now accounting for an increasing percentage of
start-up funding in the U.K., having opened up an opportunity to connect projects with many
individual small investors with differing criteria, including philanthropic or early adopters,
each of whom is taking a relatively small risk. It is often quicker and easier to use this
method rather than apply to traditional equity investors as projects are advertised on internet
platforms which can easily be browsed by a large number of potential investors.

Crowdfunding, derived in name from Crowdsourcing (Kleeman et al., 2008), is a rapidly

growing method for funding start-ups and existing businesses with new projects (Tomczak
and Brem, 2013). Lambert and Schwienbacher (2010) defined crowdfunding as “an open call,
essentially through the internet for provision of financial resources either in the form of
donation or in exchange for some reward or voting right in order to support initiatives for
specific purposes” The growth of crowdfunding as an alternative means to raising funds has
been rapid, in part due to easing of governmental financial regulations for both equity and
debt models (Tomzac and Brem, 2013). The total funds reportedly raised in 2011 was
$1.5billion, which rose to $2.7billion in 2012 and $5.1billion in 2013 (Crowdfunding
Industry Report 2013). This equates to an amount raised in 2013 for business and
entrepreneurship categories of 16.9%, with social causes accounting for 30% of total funds
raised.

Funding calls are advertised on an internet platform for a stated amount of money and
investors can chose to invest small amounts via this platform which usually takes a
percentage of the money obtained. In order to publicise the investor opportunity, social media
is a strong component of any fund raising activity to bring the opportunity to the attention of
as many people as possible. Of all crowdfunding projects data suggests that there is almost a
90 % success rate in North America, almost double to that of Europe which is around 42%
(Crowdfunding Industry Report, 2013), however, if the funding target is not achieved then
often under the terms and conditions the fundraiser receives nothing.

The main advantage for those looking for funding is that you can appeal to a very large
number of people with differing motivations and acceptance of different types of reward
compared to the strict criteria needed for traditional venture capital funding which many
start-up companies, especially those with a more social or philanthropic aim, will not possess.
Traditional equity investors will have strict criteria and are looking for specific projects in
their field (Shamenov and Phillips, 2013) and finding these investors is time consuming and
extensive networking is required (Jia and Phillips, 2014). The time saved on these activities
could be better spent on other issues within the business increasing chances of success.

Crowdfunding has also to a degree reduced the geographical constraints imposed by the need
for funders to be close to monitor the project, (Agrawal et al., 2011) found that the average
distance between project and funders was much greater with crowdfunding. Mollick (2014)
though found a strong geographic component to the investing but Agrawal et al., 2011 did not
find proximity to be important except that local investors tended to do so earlier. It has been
suggested that those early investors in the entrepreneurs network are likely to be friends and
family who are geographically close anyway.

Crowdfunding models

The equity model exists where investors can buy an equity stake in a company. The median
pledged campaign size of equity crowdfunding was in 2012, $190,000, however, the success
rate in raising capital is only just above 40 % for equity crowdfunding projects. (Stemler,
2013, Crowdfunding Industry Report, 2014). This model has been the subject of an ease of
regulations recently and ease of access to both capital and investors (Sherman and Brunsdale,
2013). The mechanics behind equity crowdfunding can be complex (Hemer, 2011), in
particular, it is very difficult to get an accurate estimate of the companies value pre-call
making it difficult for investors to make an informed decision. By ensuring that only
campaigns that have a fair chance of success receive financing the crowd funding platform
initiate some pre-screening in an attempt to protect investors. Entrepreneurs have to hit their
targeted minimum financing level in order to receive funds and the investors are refunded if
the set levels are not reached. Furthermore, the platforms business model is to charge each
campaign with a fee, usually below 10 % (Fundedbyme, 2014; Crowdcube, 2014).

Lending (Debt) based crowdfunding allows entrepreneurs raise funds as loans that they pay
back to lenders over a set time with fixed rate of interest and often tend to take a shorter time
span of around five weeks (fundable, 2014). This lending model works well for entrepreneurs
who do not want to give up equity in their start up immediately and has also been eased by a
relaxing of regulations in this area to allow peer to peer lending.
Donation based crowdfunding is where the philanthropic nature of investors is appealed to
which is suited to charitable and social enterprises (e.g. Lehner, 2013) where no reward is
expected. According to Lambert and Schwienbacher (2010), 22% of a sample of
crowdfunding initiatives is based on the donation model. Although donation is primarily an
altruistic act, the donors in this model crowdfunding still often get something in return such
as public recognition by way of acknowledgements (Joachim, 2011). Campaigns adopting
this model are typically 1-3 months and work well for amounts under $10,000 (Fundable,
2014).

The Reward based model is where investors get a reward such as an early version of the
product which might appeal to early adopters or band tickets or music etc in return for
funding. Reward based is the most common type of crowdfunding model available and
usually involves setting varying levels of rewards that correspond with pledge amounts and
often tends to work well for novel products that require less than $100,000 in funding and
typically last 1-3 months (Fundable, 2014). This can be divided into crowd sponsoring or
crowd pre-selling (Joachim, 2011). In the case of sponsoring, the project initiator and the
sponsor agree on a defined reward which the initiator is expected to honour. This often takes
the form of services like marketing for the sponsor. In the case of pre-selling or pre-ordering,
the donation is often toward production and the promised reward is the delivery of an early
version of the product. Examples of this can be pre-ordering privileges or limited edition
products. The size of the rewards usually differs along with the amount invested.

In terms of problems arising during crowdfunding, in addition to the difficulty in company

valuation when deciding how to offer equity in the company, the biggest issue is needing to
gain the full value of the funding call or you have wasted time and effort. Investor fatigue
may also arise with many calls in the same area, lack of trust and reputational damage where
investors give to many failed projects which produce no rewards. The need for transparency
in pitches gives a vulnerability to copying and intellectual property issues. New FCA
(Financial Conduct Authority) rules say sites must mention risks associated with each
investment for example the possibility of your equity stake being diluted from future rounds
of equity financing.

Motivation of crowdfunding investors and entrepreneurs

Previous research has focussed on the motivation of the individual investors and
entrepreneurs in crowdfunding (Gerber et al., 2012, Zhang, 2012, Ahlers et al., 2012,
Mollick, 2014, Belleflamme et al., 2014), however, less research has been done into the
understanding of the effectiveness of the four main crowdfunding models.

The Crowdfunding Industry Report (2013) states that crowdfunding first gained popularity as
a way to fund social endeavours, something that still prevails as the top crowdfunding
activity is social causes (27 %). Furthermore, people with greater social networks are more
likely to perform successful crowdfunding campaigns (Buraschi & Cornelli, 2014), which
can be linked to the motivational factor of belongingness (Gerber et al., 2012) that the web
2.0 enables (Kleemann et al., 2008).
The majority of the backers, regardless of their financial capacity, will benchmark pledges
verses the value placed on the rewards they would potentially receive (Sandlund, 2013). On
the other hand, he suggested that if the same project and same application was introduced to
equity or investment based model, with a campaign set up on appbacker promising a share of
profit through a simple revenue-share agreement, the result might turn out differently.
Sandlund (2013) concluded that not all backers will care about the financial upside as many
will simply want to be consumers of the application and participate in its creation.

Lambert and Schwienbacher (2010) found that for the entrepreneurs, whilst raising funds was
the main motivation other motivations included getting public attention and getting feedback
for the product or service. This agrees with the work of Gerber et al., (2012) who also
suggested building awareness, receiving validation and establishing relationships, confirming
value of the project were significant reasons. Bellaflamme et al., (2014) found that the
entrepreneur preferred using the pre-ordering (reward) based model if a small amount of
capital was required compared to market size, and preferred profit sharing otherwise.

What makes a successful crowdfunding campaign

Mollick (2014) suggested that increasing funding size is negatively associated with success,
as is the duration of campaign. For social media, he suggested while a high presence
predicted success, having no presence was better than just a few connections shown on the
crowdfunding platform. Videos also were a predictor of success, however, errors in pitches
significantly reduced chance of success. Spelling errors reduced chances by 13%, no video
reduced chances by 26%, lack of regular updates reduced by 13%, although Frydrych et al.,
2014 found little difference in successful and failed projects (90% to 81%) and concluded this
was because visual pitches have now become a must –have.

Others have found that business legitimacy is a major indicator and is linked to lower funding
targets and a campaign of around 30 days (which encourages confidence and urgency
compared to longer campaigns) as well as a coherent reward structure (Frydrych et al., 2014
and Kickstarter, 2014) and organisational legitimacy Tonikoski and Newbert (2007).
Frydrych et al., (2014) also found that pairs or teams of entrepreneurs were more likely to be
successful than individuals suggesting investors looked at the team behind the idea as a
traditional equity investor would. Kuppuswamy and Bayus (2014) also found quality of idea
and credibility of bid was important.

Success was also found to be more achievable by setting realistic expectations such as lower
funding targets and shorter campaign duration for example by Sievers et al., (2013) who
found the mean successful funding target was approximately $9K, whilst failed projects mean
was $30K. The mean actually raised for successful projects was $12K with successful
projects often tending to be overfunded. Sievers et al., (2013) also suggested crowdfunding
and traditional venture financing both associate success with higher business planning but
also necessary justification of uses of funds. It has also been suggested that the highest
amount of funding came in the first and last week of a campaign (Kuppuswamy and Bayus
(2014). Schwienbacher and Larralde (2010) suggested that in order for a venture to
successfully obtain crowdfunding, they need to ask for a relatively low amount of capital in
the funding call, have an interesting project, be willing to extend their skillset and need to
have the skills to manage a project through the internet.

Since there is a lack of data due to the recent nature of crowdfunding we decided to try to
understand the nuances of what makes a successful campaign within the U.K.

Method

The aim of this research was to examine what was needed for a successful funding campaign
and which types of project suit which funding model. A qualitative method was employed for
the purpose of this research. According to Patton (2002), qualitative approach is used when
the aim of a research is to understand how a community or individuals perceive a particular
issue. Neville (2007) stated that qualitative research is more subject in nature and it involves
examining and reflecting on less tangible aspects of a research, such as values, attitudes and
perception. Other features of qualitative research making it an appropriate methodology for
this study includes the fact that it seeks to answer questions and supports increased awareness
of the view of the participant, it collects evidence and is sensitive to the impact of context
(Weiss, 1998). It also produces findings that were not determined in advance and the
capability to support dynamic development in a process as it unfolds. Semi structured
interviews are conducted on the basis of a loose structure, made up of open ended questions
defining areas to be explored (Patton, 2002). Semi structured interviews work well where the
nature of the research is exploratory and a defined areas were explored giving flexibility to
allow respondents to explain the views in more depth.
Six founders or owners of businesses that had successfully obtained crowdfunding using
different models (companies labelled A-F) were interviewed about what they though
contributed to their successful campaign. The key areas focussed on were the importance of
social media presence, a realistic funding target, personal story, preparedness and location of
campaign.

Results and Discussion

The results from the interviews are briefly summarised in Table 1. What has been suggested
is social media campaign to raise awareness, choice of model, funding target, preparedness of
campaign and location of backers.

Table 1: Summary of responses by businesses labelled A-F to criteria for a successful

crowdfunding campaign.

A B C D E F

Business IT Coffee Home Internet Jewellery Grocery

Type Technolog Company Rental Art and Shop
y Business Business Fashion Franchise

Location Manchester Mancheste Mancheste London London London

r r

Location U.S. U.S/U.K London London London London

of
 Campaig
n

Stage of Product Start-up Early Stage Early Establishe Establishe

Business Testing Stage d d

Amount Low Low £75000 Low High Low

Needed compared compared compare compared compared
to platform to platform d to to platform to platform
average average platform average average
average

Novelty New Existing Existing Existing New Existing

of product idea with idea with idea with product service
Business new new new
business business business
model model model

Video in Yes Yes Yes Yes Yes No

Pitch

Personal Yes Yes Yes Yes Yes Yes

Story

Large Yes Yes No No No No

Social
Media
Presence

Model Reward Reward Equity Equity Debt Donation

Used

Social media presence

This had been identified as a key factor in previous research but opinion varied on whether
their own or the platforms social media presence was most important. Some had a large social
media presence but most others were reliant on visitors to the platform noticing and engaging
with their project, for example;

A- “The main things that interesting is that we analysed where the backers came from and
most of the backers did not come from the Kickstarter website so they did not arrive on the
website and then look for who to back”

B “Kickstarter has its own reach and we got a good share backers from them, but Uncles,
family and friends…I’ve got a friend who owns a touring company in Malaysia, and there’s
people who want to take advantage, My partner owns a blog on twitter and he wanted some
advertising so he chipped in a fair amount and his blog went on to bring in more backers”
C “Literarily Crowdcube gets the traffic. We just kind of said on social media what we were
doing, but again we are a small company we don’t have a huge following, so yeah it’s
relying on them”

D “They did all the heavy lifting as far as social media is concerned”

E “There was no extra social media activity involved in our funding; it all came from
Funding circle”

Previous research has shown that a large personal social network is necessary, but many of
those interviewed said that the network mostly came from the platform. Perhaps more
recently, many platforms are now so well known amongst the general public and with
crowdfunding becoming more understood that potential investors now go straight to these
crowdfunding platforms and browse potential opportunities independently.

Funding Target

All the businesses interviewed stressed the need to be realistic when setting a funding target,
but also a project shown to be successful could have the additional bonus of attracting more
investors, raising considerably more than the initial asking amount.

A said “To me the target does really matter. It matters in the sense that you want something
that is definitely reachable. Because when you reach the target, it creates additional demand
as people want to get on something successful” Business A set a target fund of $11,000 and
eventually raised $384,000.

B said “A realistic funding target is evident from asking about why a target amount of
£10,000 was set. Well we evaluated what we needed to set up the shop and buy equipment
and that was what we asked for on the campaign”.

E also chose to be realistic using existing figures to justify the amount needed “After
calculating and forecasting how much was going to be needed based on the track record of
our two current stores, we came to a conclusion that about £100,000 will cut it. So we were
quite specific in setting that target”.

C however, who used the equity model, had problems matching the funding target with the
amount of equity they were prepared to give away “We changed it, it was quite complicated
but we changed it, it was about £100,000 at first for 15% and then we changed it because of
feedback to £75,000 for 22.5%”
This illustrates the key difficulty of company valuation when releasing equity which has been
found by others. This also agrees with Frydrych et al.,(2014) who suggested lower funding
targets and shorter campaign duration added to the legitimacy and likely success of a
crowdfunding campaign.

Location of company/backers

The views about the location of campaign were mixed. Whilst most of the companies chose
the U.K. to base their campaign with several choosing to base in London due to the perceived
opportunities for investors in that City (65% of UK crowdfunding investment comes from
London according to Crowdcube, with 45% of the remainder coming from the nearby South-
East England) with the hi-tech company deciding the USA was a good option on a platform
with a good record of tech investments. Many chose their local area by default as it seemed
natural for them to do so and they thought it might be easier the achieve empathy from
investors.

A “Our business is here in Manchester but based on the fact that we were working on a tech
based product, we made the choice float the campaign on a platform prominent in USA”.

B “The shop was planned to be set up in the heart of Manchester and we simply approached
Kickstarter to try and get the funding we need. We spoke to family and friends but funds
came from all over”

E decided to base their campaign in London as “We run a bespoke jewellery store based in
London and are looking to expand to other major cities”

This agrees in part with existing research that location can be less important for
crowdfunding campaigns as it is for traditional equity investors who prefer to invest on
average nearer to their operations. Whilst friends and family often contribute, funding is often
varied in terms of location during crowdfunding campaigns.

Choice of Crowdfunding model

All the businesses had clearly given thought to what they had to offer potential investors and
what extra help they could obtain from them when deciding on the best model to use.

For example, D went for equity to gain extra help from experienced investors “we needed
backers who will take the business quite seriously after investment and who can share their
experiences to take the business further and we thought the best form of investors who fit that
profile are equity investors”

This fits well with data from Crowdcube which suggests that many investors on their equity
based platform wanted to take a greater role in the company they were investing in - 54% of
the 29-48 year old investor range wanted to take an advisory or non executive director role in
the business they were funding suggesting wanting an increased involvement over and above
simply a return (Crowdcube, 2014).

A were interested in early customer feedback so used the reward based model “I think what
Kickstarter have done is basically pull in a different type of market of early adopters in to the
area and for most of them its about status and getting their hands on a product or the first to
notice something cool”

Reward favours pre-start up (Mollick, 2014) such as creative industries who might have
something of interest to offer by way of reward to investors but would be high risk for equity
or debt investors.
F also had a realistic understanding of what they had to offer, but didn’t really need any extra
help as the business was already established “We had to go with donation as we hadn’t any
reward of that nature to give back and I thought we were quite small for serious lending
platforms so we took our chances with donation”

This is slightly surprising as for the donation model almost all businesses listed are not for
profit, apart from a very few which were billed as being a social enterprise.

Company E was already trading successfully and chose the debt funding model which would
mean not giving away any equity and would be considered a fairly safe option for debt
investors.

These successful businesses had been very careful about the selection of the crowdfunding
model to suit their situation and needs and they had generally followed existing thinking
whereby the early stage tech company went with reward based as they were high risk for
equity/debt investors and were hoping for some early adopters to provide feedback and
champion their product, those going for equity were also looking for experienced investors to
help them take the business forward, debt was used by an existing business where risk was
minimised and the donation model was used where the owner felt there was a
social/community angle but had little to offer in the way of rewards or returns.

Preparedness

This aspect included the personal story and the need to fully explain and put everything out
there in order to overcome any truth issues that have been reported, by using a video or any
other means of explaining the business project.

Many of those interviewed put their own personal story in the pitch – previous research
suggested this is a good way to connect with the investors and generate empathy, for
example, A “So the campaign was a lot better planned out, there were regular updates and
there was a prototype that we could show to the crowd to see how it works. There were
personal stories of the owners”

B “We explained our goals on our campaign, both on the video and pitch page on
Kickstarter along with background stories of the cofounders”

C “I think the key to success is making sure your financial forecasting is well done, making
sure you know all the questions that will come from forecasting , because in Crowdcube or
any site like this, you are out in the open. You need to tighten up everything, so you clear the
financial forecast and your business model and youre confident about your business model
etc, a good video”

D“I believe that we had a good pitch on Crowdcube, almost put everything out there for
investors to see, business model as we had to be convincing”

E “I would say our pitch gave investors a chance to really see how genuine we are. We tried
to put together a good video”
One business however seemed to buck this trend and simply relied on a written description

F “I only put what I had in mind in written format. There was no video in the pitch. I only
tried to explain the situation as best as I could”

Essentially the equity model businesses focussed on the financial forecasts and goals whilst
the successful reward/donation models emphasised the backstory and the rewards on offer
rather than financial return to generate empathy from the investor. All the businesses realised
the need to be clear and transparent when explaining the details of the deal on offer to
investors.

Conclusions

Whilst many of our conclusions for these U.K. based companies agreed in general with the
existing literature, one of the main conclusions from the data suggest that personal social
media is becoming less important as the funding platforms themselves gain public attention
and the crowdfunding model becomes more accepted. Investors often seem to visit the site
and browse for opportunities rather than be directed there by social media from an individual
business. It seems to be important especially for equity funding that there is a transparent
business model to allow investors to make an informed decision, and there seemed to be
some difficulty about choosing a funding target based on equity share to be given away due
to inexperience. This ties in with what other researchers have found regarding the difficulty
in valuing early stage businesses on crowdfunding platforms. There is some clear mirroring
with equity and debt models with their traditional counterparts e.g. debt was used for
expansion of established companies and debt for earlier stage higher risk businesses.

The data for the reward based model reflects previous research in that it is inclined to funding
start-up creative SMEs in the pre-revenue stage of growth. It agrees with the view of Mollick
(2014) who argued that in the case of the reward based model, entrepreneurs are
characterized as creators and project founders and project backers represent early customers
or co-creators rather than simply investors. He suggested that the reward based model is more
biased to funding start-up enterprises, creating a novel product or starting a novel business. In
addition, often those with the reward based model feel that they don’t have a strong case
regarding returns for equity investors (i.e. risky) and again too risky for the relatively low
returns that debt funders may accept.

Findings show a link between physical location of business and location of backers and
investors in relation to the success of the funding campaign. Businesses in general were
expecting more local investment due to the increased likelihood of creating empathy with
local investors, however all had thought about where to place their funding call with the hi-
tech business choosing the U.S., irrespective of the fact that crowdfunding mainly based on
the use of the internet reduces geographical constraints there was an apparent need for the
technology based company to float its campaign on a platform with higher proximity to
required backers; early adopters and tech savvy individuals.
Secondary data from Crowdcube showed for the Equity based model, findings show a direct
link between location of investors and location of successfully funded businesses. Findings
reveal that 65% of all equity funding originated from London and half of the remaining 45%
is provided by investors in the Southeast region. Findings from data on location of
successfully funded businesses show that 50% of total businesses are located in the Southeast
region of the United Kingdom. This could have encouraged some of the businesses to base
their campaign in London. Based on findings from primary data, the debt based model show
similar links between location of business and investors. This is supported by findings from
Fundingcircle.com, which stated that the region with the most number of businesses taking
out loans was in the Southeast region of the United Kingdom, followed by the Midlands.

All the businesses gave careful justification of the amount they wanted to raise, asking simply
for what they needed and no more. According to Frydrych et al (2014) a high funding target
means more effort is required by the entrepreneur to legitimise the requested funding. This is
in line with findings from secondary data showing that 89% of successfully funded
businesses from observed data have target funding below £50,000. This suggests that a lower
amount of set target fund is associated with a higher chance of a successful campaign. This
view supports the conclusion of Siervers et al (2013) who associated lower funding targets
with a higher level of legitimacy and hence a higher chance of campaign success. They
concluded that crowdfunding and venture capital funding both detailed business plans to
achieve legitimacy, however high funding targets decreases the enterprise’s legitimacy
regardless, without any convincing justification of source and use of funds. It also agrees with
the view of (Belleflame et al., 2012) who argued that based on differences between relative
performance and community benefits received by the entrepreneur, entrepreneurs adopt the
reward based model as the best form of crowdfunding, provided they are sourcing a small
amount of initial capital. Equity model becomes preferable if entrepreneurs are seeking larger
amounts of capital as investment. With the donation model, for the business in the research
that used this model, it was accepted that there would need to be some considerable social or
charitable angle in order to ask for money with no expectation of return, even if the business
itself was for-profit. In this case the business described itself as a community resource event
hough it was a profit making entity.

Findings indicate the presence of a high level of preparation across all campaigns under all
models. The research agrees with the view of Frydrych (2014) who argued that visual
elements in crowdfunding pitches have developed into a standard and cannot be used as a
strong indication towards success or failure of a campaign.

The recommendations which arise from this research is that while businesses are becoming
more aware of the funding platforms and the choice of crowdfunding model is fairly
straightforward, careful thought is needed to establish the realistic optimum amount to be
raised which suggests legitimacy to investors. A balance needs to be made in deciding on
where to base the campaign from attracting local investors with empathy for the project with
areas where more specific investors are likely to be based, in the example of the U.K. London
or for high-tech businesses the U.S. The number of younger people (68% under 49 according
to Crowdcube) who are investing via Crowdfunding platforms means potential entrepreneurs
even at University level could be educated in how to conduct a successful campaign as part of
a wider programme of entrepreneurship education (Phillips, 2010).

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