Love it or hate it, equity crowdfunding has had a big impact on the entrepreneurial ecosystem in the UK since it first emerged in 2013.
In 2020 alone, even during the global pandemic the UK’s leading crowdfunding platforms, Crowdcube and Seedrs, saw close to £450m of investment into companies that went down the crowdfunding route.
At its most basic level, equity crowdfunding is the process whereby people (i.e. the ‘crowd’) invest in an early-stage unlisted company (a company that is not listed on a stock market) in exchange for shares in that company. Essentially, crowdfunding platforms provide companies with a way to raise equity investment from lots of people in a way that is fully regulated by the FCA.
Many have described equity crowdfunding as the democratisation of investment. And to a certain extent this is absolutely true. Traditionally, access to investments in early-stage companies was the preserve of the wealthy and institutional investors (e.g. private equity firms and venture capital firms), but now everyday people can invest in the companies they love from as little as £10.
Over the years, crowdfunding has evolved from a pure fundraising tool to an incredibly powerful user engagement and acquisition tool for consumer-facing companies, namely tech start-ups like those listed above. And so today, crowdfunding represents a viable funding option for companies of all shapes and sizes, from those raising their 1st or 2nd round to those who want to open up a tranche of their £50m series D round to their customers.
Crowdfunding is all about herding mentality. In the same way that you might avoid an empty restaurant in favour of the busy, buzzing restaurant next door, investors on crowdfunding platforms only want to invest in what everyone else is investing in. The likes of Crowdcube and Seedrs will always advise companies to launch their campaigns with at least 70-80% of their targets already secured. This is so that a campaign can launch with a certain amount of momentum which the company can leverage to then attract other investors into the campaign.
As such, the single most important contributing factor to a successful campaign is lead investment. This is the ‘anchor’ investment that a company has already raised offline before launching their online campaign. The platform then reflects this offline investment on the campaign so that investors can see how much has already been raised and feel more confident in investing themselves. This is why most successful crowdfunding campaigns are somewhere between 125% and 200% funded when they close. The more lead investment you have, the better.
At Raising Partners, we always advise any founders considering taking the crowdfunding plunge to view it as a top-up; a way to raise additional capital on top of what you have already raised offline from your cornerstone investors. If you approach crowdfunding and are relying on it as the primary source of capital for your round, you’ll most likely end up falling short of your target.
SEIS and EIS tax reliefs are huge incentives for investors on crowdfunding platforms; if your company is eligible to offer these reliefs, then you should absolutely ensure that you have it.
Platforms operate an all or nothing model which means that if you don’t reach your target by the end of your campaign, then it will be pulled off the platform and you won’t receive any of the money that has come from the crowd.
Just because you raise money from 500+ investors, that doesn’t mean you will have 500 new shareholders on your CAP Table. The platforms operate a nominee shareholder structure which means that all of your crowd investors that invest below a pre-agreed threshold (usually £20,000) will sit on your CAP Table under one additional shareholder, represented by the platform. Post-raise, the platforms will disseminate information to investors on your behalf.
You get out of crowdfunding what you put into it. Many crowdfunding investors are investing not just with their head, but also their heart. They are your brand advocates and your champions: if you engage with them, provide regular, comprehensive updates, invite them to beta testing groups, give them certain discounts, they will be more likely to reinvest and refer your company to a friend. This can only be a good thing.
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