The biggest asset class is property. Developers create individual companies for each development project, and decide whether to offer investors opportunities to buy equity or lend money.
Equity crowdfunding investments in US real estate on reputable platforms, with terms of 5 or more years, have an average annual return of over 17%. Shorter-term real estate crowdfunding investments have average returns in the 10% to 12% range.
I have made one modest equity crowdfunding investment in property and received a 28% gross return after two years.
The UK property loan platform Kuflink is currently offering annual gross returns of up to 7.44%. CrowdProperty is a much larger UK property crowdfunding platform (it has raised over £500 million in total) and is offering up to 8% p.a. for investments held in an IFISA.
A newer format of property crowdfunding allows retail investors to acquire fractional ownership of property that is leased or rented, and offers a regular income from it. Buy-to-let crowdfunding platform InRento, licensed by the Bank of Lithuania, has earned a historic average 19.49% ROI for its investors. It recently became the largest licensed crowdfunding platform in the EU by the number of investors, providing an opportunity to invest in rental projects. Projects currently listed on the platform offer an average 7.96% annual return.
Non-property luxury assets
Other platforms offer crowd investment opportunities in non-property, luxury item assets including fine wines, art, watches and cars.
Konvi is a European crowdfunding platform for people to invest through shared ownership of such luxury items. A holding company is created for every asset that is going to be funded. This holding company’s purpose is to own, manage, and sell that one particular asset. When a person invests in an asset, they become a shareholder in the relevant holding company that will exist for two to ten years. Average returns have been up to 20% p.a. over the past decade.
Konvi’s main competitors include Rally Road (USA), Masterworks (USA), Yieldstreet (USA), Otis (USA) and Timeless Investments (Germany).
The Masterworks platform makes it possible for anyone to invest in blue-chip art, with works by artists like Banksy. From 1995 to 2020, contemporary art prices outpaced S&P 500 returns by 174%, and it is part of an estimated $1.7 trillion asset class that is expected to grow 58% in just 5 years, according to Deloitte.
US equity crowdfunding platform StartEngine is currently offering equity in fine wine from Bordeaux, France. According to Wine Guardian, wine is a stable investment that has earned investors a solid 13.6% annualised return over the past 15 years.
Investing in luxury item assets is often beyond the control and protection of financial investment authorities. As well as poor decisions made on receiving poor advice, there is also the prospect of deliberate, fraudulent scams.
As an example, rare whisky has recently been the top performing UK luxury investment. According to The Wealth Report 2020, rare whisky was the best performing collectable of the decade, experiencing a meteoric rise in value of 586% up to 2019; faster than any other collectable luxury asset, such as watches, art or classic cars.
Whisky is not under the remit of the Financial Conduct Authority (FCA), which would only get involved if the investment was structured under a collective investment scheme.
HM Revenue and Customs is responsible for excise duty for whisky casks, approving persons to hold excise casks without payment of excise duty, while the whisky matures in a secure and approved excise warehouse. They would only get involved with a potentially fraudulent firm if it didn’t pay the correct tax.
Misleading investor advice through paid-for communications is under the authority of the Advertising Standards Authority (ASA).
Yet high returns attract undesirable actors, out to part the unwary from their wealth. And in unregulated markets, with plenty of grey areas, it can be easier to achieve. – With alcohol there is no spot-price like with commodities such as gold to provide a common yardstick. – Even if their was, the main problem with buying into whisky as an investment is that you don’t always know exactly what you’re getting. – Identifying fakes, if it indeed exists at all, can be difficult, time-consuming and expensive. It could even involve lab-tests such as carbon dating. Given time, NFT technology could make it quicker and cheaper for all stakeholders – investors, brand owners and enforcement bodies – to identify counterfeit products and distinguish fakes from the genuine article.
In the meantime, good advice for potential investors is they should fully research any firm they are looking to engage in an investment with. Look at the age of the company, the duration it has been trading whisky casks for, and whether there’s a valid Alcohol Wholesaler Registration Scheme and WOWGR licence (under The Warehousekeepers and Owners of Warehoused Goods Regulations 1999).
I am an independent crowdfunding advisor, providing strategic overviews of how to plan and structure a successful crowdfunding campaign, without links to any particular platforms. If you think that could be useful to you, please get in touch.
Since January 2022 I have written numerous articles for what is going to be a new equity crowdfunding platform in the UK, called CrowdInvest. Its unique market position is that it will offer UK investors opportunities to buy shares in tech startups that operate primarily in India, which is the world’s third largest startup ecosystem. With a population approaching 1.4 billion, startups in India can seriously scaleup without the added complexities of developing or servicing a market in other countries.
CrowdInvest is a group entity of Red Ribbon Asset Management Plc, an Indo-British investment company established in the UK in 2007. Crowd Investments Limited is an Appointed Representative of Prospect Capital Ltd, authorised by the Financial Conduct Authority in the UK, and investor benefits will be available under the HMRC’s EIS and SEIS schemes.
I recently interviewed CrowdInvest’s co-founder Nakul Garg, an alumni of the London School of Economics. With his permission, here is that interview that was originally published at his LinkedIn account.
Let’s begin with something that many people ask. The Financial Conduct Authority approves CrowdInvest. Particularly for anyone new to equity crowdfunding, does this mean their money is safe?
Money is safe, and we will comply with all FCA requirements and vet the startups we will host to ensure they offer viable investment opportunities. We also ensure that lead investors back the deals and that the risks borne by retail investors are shared with them. However, the failure rate of startups anywhere is notoriously high, and the success of any individual startup cannot be guaranteed. Capital invested in private companies will always incur a level of risk.
UK investors who buy shares through equity crowdfunding enjoy valuable tax advantages when they invest in privately-owned UK companies registered under the HMRC’s EIS and SEIS requirements. Why will they choose to invest in Indian startups?
This is something we seriously thought about. Our solution is that we will require Indian startups to open a branch office to scale their operations in the UK. Doing so will make them eligible for the HMRC’s EIS and SEIS tax benefits. Also, we will onboard UK startups who are already eligible for EIS and SEIS tax benefits and wish to scale up operations in the Indian market.
So the CrowdInvest platform will also host non-Indian startups?
In the first phase, we will focus on startups located anywhere in the world who operate in or want to scale up in the Indian market. They will principally, though not exclusively, be Indian startups. In a second phase, we will onboard investment opportunities from African and south east Asian markets and open up opportunities for investors from other parts of the world. We will truly be a cross-border platform.
Does CrowdInvest have to be approved and regulated by any Indian authorities as well?
No, when we start trading, we won’t cater to Indian investors, so we are not required to be regulated by the Indian regulatory bodies. All our financial promotions will focus on UK investors, so we need to comply with only UK laws and regulations.
What investment options will CrowdInvest provide?
In the first phase, our focus will be on equity crowdfunding and convertible loans. We will start offering other alternative financial instruments as we grow our market penetration.
How will CrowdInvest win the trust of investors?
We will make sure only vetted startups are onboarded on the platform. The vetting process will include rounds of preliminary checks and due diligence to ensure they have the required certificates, licences, intellectual property, and everything else in place per UK standards.
Other crowdfunding platforms have webinars for startup founders to pitch to potential investors and for investors to ask questions. Will you be doing the same?
Yes, we will, through panel talks, speed date sessions, virtual round tables and YouTube. CrowdInvest will also provide newsletter inclusions and social media promotions.
With the market value corrections that have taken place this year in the startup space, it has been reported that Indian startups have shed over 11,000 employees, and several are now operating at valuations lower than their IPO. Is there any feeling you may have maybe missed the peak market?
In India,Inc42collects data and reports on the startup scene. They said a little while ago that 57 VC funds launched in 2022, 37 focus on early-stage funding. Seed stage funding in India in the first half of 2022 has been four times higher than in 2021. So whilst a market value reset has certainly taken place, many investors had already turned their attention to the higher ROI generally available from backing startups earlier in their lifecycle. This is where CrowdInvest will operate. So No, we haven’t missed out on anything.
That’s very positive to hear. We’re nearing the end of the interview. Can I ask you what is your own background in crowdfunding and what drew you to it?
I started in the crowdfunding industry three years ago and have since carved out a niche for myself in cross-border investments and fundraising in the Indian startup ecosystem.
I graduated with a Masters from the London School of Economics and gained more than eight years of experience in entrepreneurship and risk consulting, with an extensive background in business development and crowdfunding. My expertise lies in developing and maintaining strong client relationships.
I am also a recognised early-stage entrepreneur, endorsed by the LSE Entrepreneurship arm (LSE Generate) and incubated at IIM (Indian Institute of Management) Udaipur Incubation Centre. Additionally, I have worked with PricewaterhouseCoopers in Consulting and served US-based startups with their financials while working at a PCAOB registered firm (the Public Company Accounting Oversight Board).
That’s very impressive and well-rounded. A final question, if I may. Do you already have some longer-term aims for CrowdInvest?
We will certainly democratise platform ownership by running our own equity crowdfunding. Our vision is to become a crowd-owned alternative investment platform operating across international borders.
Thank you, Nakul. I wish you success. Thank you, Clive.
This year I have been writing articles for an Anglo-Indian asset management company. They have been planning an equity crowdfunding platform that will enable tech startups in India to offer equity to UK investors. The latest news is they have received approval to go ahead from The Financial Conduct Authority and the platform, CrowdInvest, will launch on 1st September 2022. Anyone can register to be kept informed of news and progress at https://www.crowdinvest.com/.
Even not so long ago there were still articles appearing that tried to put crowdfunding and VC funding in opposite corners, posititoning them as rivals for the favours of startup founders who were seeking investment. The truth is that while there some limited of overlap, they represent different types of investors who have some different motivations and expectations. Here is a reduced version of the article I wrote on this topic.
EquityCrowdfunding withVC Support
Going to VC investors or using equity crowdfunding is often portrayed as a binary choice. In reality the two are not completely interchangeable. This article looks at similarities and differences, and some examples where they have been used together.
Both forms of funding buy equity in a business for it to develop and grow. The businesses do not have to repay the money, it’s not a loan, though the business owners do reduce their level of ownership. Dividends aren’t required because investors expect to see profit reinvested.
Businesses do not have to be making a profit, or to have even started trading. VC fund managers and equity crowdfunding investors gauge future potential. Business sector knowledge and investment experience help develop analytical skills to identify the ones most likely to succeed.
In both cases the investments are relatively illiquid. Money can be tied in for several years, difficult to get back early, and of course a business may fail with all investments lost.
Investors want to know the Exit Strategy.
VC funds and equity crowdfunding platforms represent different types of investor. Those investing through VCs generally invest much higher sums and tend to be High Net Worth Individuals, or represent family funds or institutional investors. It is Strictly Business. VCs usually invest between £2m and £50m. Whereas crowdfunding’s non-professional “retail investors” use personal money, can sometimes back a business from as little as £10, and perhaps invest in businesses they simply want to give a chance rather than expect a healthy ROI.
VC funds therefore prefer close integration with businesses they back. This can involve a seat on the board, setting KPIs, releasing funds in tranches when certain milestones are achieved, making introductions, and advising the directors. They may also pressure businesses to agree deals or sell out at a time that suits the VC fund more than it does the company founders. A business with hundreds or thousands of crowdfunding shareholders is unlikely to experience such co-ordinated pressure on its decision-making.
Equity crowdfunding allows private companies to raise sums that are far below a level that would interest a typical VC fund manager. Yet at the same time they’re higher than could be expected from bootstrapping or contributions from friends and family.
Used in conjunction
Two trends have emerged.
1. Before VCs become involved, the earliest startup investors have often already enjoyed the biggest ROI. Some individual VC investors want to feed nearer the top of the food chain. The response has been to launch Micro VC funds that focus on early stage startups.
2. Equity crowdfunding has established itself as a viable source of business fundraising and investment opportunities. Demand to be hosted on a crowdfunding platform allows them to be selective about the startups they accept. They receive payment only after successful projects, so they often give preference to candidates that already have high levels of guaranteed support.
These factors converge when VC funds become cornerstone backers of a business that uses equity crowdfunding. VC backing can encourage more retail investors to get involved, believing that the VC’s due diligence checks must have found no cause for concern.
The Seedrs platform has a substantial network of long-standing relationships with top institutional and angel investors looking to invest in high-growth, high-potential businesses, and arranges meetings to help startup founders secure vital cornerstone founding.
Using both VC funding and equity crowdfunding is particularly good for a business that wants to recruit loyal customers. This applies to fmcg grocery brands as much as fintech startups. Committed customers can become investors, and investors can become valuable customers in a virtuous circle.
Examples of VCs supporting equity crowdfunding
Wealth management startup Moneybox raised £35m institutional cash in April 2022, led by Fidelity Ventures. Moneybox wanted some of its account holders to share in their future success alongside the institutional investors. 14,704 people became shareholders through investing £6.25m in May 2022 via equity crowdfunding.
Insurtech startup Cuvva sells short-term cover to drivers who don’t own a car but are able to borrow one. Its equity crowdfunding target was £2.5 million. By June 20, with two days left to run, they had achieved £3.26m from 2,835 investors. Three VC funds (LocalGlobe, RTP Global and Breega) invested £1.5m, 60% of the declared target.
Online art marketplace Artfinder raised £443,000 from 590 investors through a Crowdcube campaign in May/June 2022. This included further backing from VC firm Wellington Partners which brought its total investment to £5 million.
Honestly Tasty makes a plant-based alternative to cheese. Their June 2022 equity crowdfunding had a £450,000 target, and Vegan investment fund Veg Capital contributed almost £250,000 – 55% of it. By June 20, over 350 backers had pledged more than another £425,000 with 16 days remaining.
Please get in touch if you are considering using any form of crowdfunding yourself. I have studied it for eight years and I will be able to advise you on how to improve your chances of success.
In January 2022 I started writing content for CrowdInvest. It is a new equity crowdfunding platform, and part of Red Ribbon Asset Management Plc. The platform will enable Indian startups to trade shares in the UK to raise investment funding. India now has the world’s third largest startup ecosystem, though equity crowdfunding as we know it in the UK does not happen in India. This article is about how local campaigners and activists can structure a variety of community projects as a not-for-profit company and issue shares in them through a crowdfunding project.
Crowdfunding is an extremely versatile way of raising money. It can raise donations towards personal aims or charitable and worthy causes, act as a sales channel for new products, and private companies can trade equity. A further use of crowdfunding is to generate funds that are used for a community benefit. Since 2012, community share issues have raised over £155m from more than 100,000 people to support 440+ enterprises.
Why not just pass the hat round and collect donations in a regular way? This article will explain the added benefits delivered by community shares offered through a crowdfunding project, who is eligible to run them, and provide some examples.
What are community shares?
A community project can set itself up as a legal entity and offer equity for money invested in it. The investors seldom take part with an expectation of financial reward, they usually do it to support initiatives that will benefit their local community.
Each investor is allocated one share, regardless of different amounts they may have invested. Also, the shares cannot be bought or sold in a secondary market. These measures protect the integrity of a project from majority control being bought by a third party who could be hostile to its aims. Shares can only be sold back to the issuer, if there are funds available to buy them.
There is little expectation of an eventual return on investment in the standard sense of a company acquisition or an IPO, and dividends are not paid though there could be interest payments at a pre-fixed rate. Like any commercial venture, there is the risk of a project failing and capital could be lost.
It may not always be necessary to use crowdfunding and community shares. A group of community activists may be able to afford the cost of their project without publicising their venture to a wider audience. However, there are several other benefits from using crowdfunding.
Crowdfunding community shares is a low cost way of transferring equity, without needing solicitors and lawyers. The crowdfunding platforms can ensure any relevant financial and legal rules and regulations are followed, they handle the transactions, and issue shares when the fundraising is completed. For this they may charge a fee, which includes handling transactions, of up to around 8% of the amount raised. It varies, and project leaders should check with the platforms they are thinking of using.
Research has shown that investors in community shares put in eight times more than they would have given as a straight donation. That’s a measure of how much it means to people to be formally involved with a local project and have a say in it.
A crowdfunding project can gain media exposure and bring a project/society’s aims to a wider number and range of stakeholders.
Investors can inject more than money. They can also bring added skills and knowledge they are willing to offer to the project.
Once a community project is incorporated as a society eligible to issue community shares, it may also be able to register with HMRC under its EIS or SEIS schemes. Investors who pay UK income tax would then be able to reclaim from 30% to 50% of the money they put in.
Crowdfunding platforms may also be able to offer match funding donated by a third party.
What’s needed for crowdfunding to succeed?
There are basic requirements that include providing a business plan for potential investors to study, and an offer document.
Beyond these essentials, there are three more generally accepted key requirements:
1. A community project/society has to have a crowd of supporters who can be inspired to make an investment.
2. The project should provide a tangible long-term benefit, rather than be a way to shore up running costs or cash flow problems associated with some existing infrastructure, for example.
3. The project/society leaders have to be happy to share ownership with a wider community. Investors who have voting rights will also expect their views to be heard.
Community share projects can often be in out-of-the-way places where trading levels are insufficient to meet turnover or profit targets. This can cover a community buying its local pub when the brewery-owner would otherwise close it down, or taking ownership of a village shop and post office. Shareholders then have a vested financial interest in supporting the community assets.
Preserving a local bookshop in the face of growing online shopping was another example. The project leader said afterwards: “We raised the money we needed quicker and we raised more through community shares than we would’ve done via a loan. It’s great having all these members having a stake. They will be customers as well as members.”
On a far larger scale, the town of Dingwall in Ross-shire, Scotland, had a proud tradition of malt whisky production dating back to 1690. Ninety years after the town’s last whisky distillery closed, a new one opened as the world’s first community owned distillation plant after a £2.5 million community shares fundraise in 2018. Over 2,400 investors from 30 countries bought shares in what became the UK’s largest community share crowdfunding campaign. The distillery created local job opportunities, with business and personal incomes feeding in to the local economy.
In this example, issuing community shares supported sustainability in the built environment. Carl Elefante, former president of the American Institute of Architects, said: “The greenest building is the one that already exists.” When the NHS decided to close the Southwold and District Hospital in Suffolk it was going to be demolished and replaced by luxury homes. A group of local people partnered with a housing association to buy the former community hospital and recycle it. Their community share offer raised almost £400,000 towards redeveloping and repurposing the former hospital as a community hub with a library and co-working space, plus nine affordable flats and houses.
LATCH (Leeds Action To Change Homes) is a community benefit society in the Chapeltown area of Leeds. For over 30 years it has been transforming derelict buildings into new homes for people who need them, helping them get their lives back on track while at the same time providing training and employment opportunities. In August 2021 they raised over £550,000 to refurbish vacant properties as eight new homes.
These few examples demonstrate how community share crowdfunding can empower local communities to take control of their environment and resist corporate decision-making that is not always in their best interest.
The world’s population is expected to have grow by over 2.3 billion people from 2009 to 2050. To feed the world population by then, food production will have to increase by around 70% from the 2005/07 levels (source: The World Bank). Meeting this world demand for food is going to need innovation in agriculture: selecting what to grow, how to grow it, learning how yields per acre of land can be raised, and reducing food waste significantly. Innovations and breakthroughs do not have a past history for banks, other traditional lenders or investors to weigh up the potential risks and returns. Crowdfunding for agriculture, agritech and new foodstuffs will help develop the innovation needed to feed over 9 billion people by 2050.
It’s more than just the number of people
Annual economic growth forecasts for developing countries are around 2.9%, which will reduce economic poverty substantially. Rising income levels usually drive an increased demand for meat, eggs and dairy. This in turn boosts pressure to grow more corn and soybeans to feed more cattle, pigs and chickens. If too many farmers follow this trend it would still mean shortages of subsistence crops for the poorest people.
Other complications include:
an increasing level of foodstuff used for biomass fuels
methane produced by livestock is a significant contributor to greenhouse gasses
extreme weather conditions associated with climate change will ruin crops more often
On the plus side:
hydroponic farming enables more efficient use of resources
robotics coupled with better data collection will allow greater use of artificial intelligence
better crop selection, reduced infestations and better-timed harvesting will improve arable efficiency and yield levels
There are different types of crowdfunding, all based on the broad principle of getting a little bit of support from a crowd of people, rather than try to get all the money from a single source.
Donations crowdfunding is what it says; people donate and expect nothing tangible in return. The satisfaction of having helped a cause or an idea they empathise with is enough.
Reward crowdfunding was originally a way to incentivise donors with a perk – some form of a related benefit: perhaps a product sample; a t-shirt as a thank you; or a mention on a website page. This developed in to commercial reward-based crowdfunding, whereby crowdfunding platforms can be used as virtual sales channels: a “donation” is “rewarded” with a specified product item that can be made on demand. The sums involved can range from very modest projects to some generating over £1m of orders.
It is common for startup creators of an innovative product to use reward-based crowdfunding to check marketplace traction. On achieving good results they move on to equity crowdfunding to set up a solid business. A great example is The Cheeky Panda, which has disrupted the paper tissue market with a plant-based alternative. It began in 2016 with a reward-based crowdfunding project that aimed to generate £10,000 of orders for tissues made from sustainable bamboo, which has three crops a year. After just five years’ trading and four rounds of equity crowdfunding, plus VC and institutional investment, the business is currently valued at £80m. Its founders are reportedly planning an IPO in 2022 at a flotation value of £300m.
The UK remains a global leader in equity crowdfunding – which is the raising of investment funds through trading shares in a business via a crowdfunding platform. By comparison, U.S. equity crowdfunding remains complicated by a two-tier system of accredited and non-accredited investors; limits on how much businesses are allowed to raise and individuals can invest; and strict (expensive) legal verification of documents. After a brief trial period in China it does not exist at all. It is banned by the financial authorities in India who claim the majority of people need to be protected from both scammers and from inherent financial investment risks they do not understand.
In peer-to-peer lending, crowds of retail investors make money available to P2P loan companies, for whoch they receive a higher fixed rate return than the retail investment levels generally available to individuals. With fixed repayment dates, it is a more liquid form of investment than taking equity in startup businesses. P2P lenders make the funds available to vetted borrowers. Without having to pay middlemen, shareholders, or finance a legacy infrastructure of bank branches, it means the borrowers can pay lower interest rates. Approval and access to the money is also much faster.
Folk2Folk is a UK P2P lender specifically for the crowdfunding for agriculture / farming sector.
Crowdfunding new foodstuffs
Seaweed is being hailed as a “superfood.” It is increasingly used as a basis for snack products, and for meat-free mince used in sausages and burgers. It can also be used in fabric to make clothing, in cosmetics, and feeding seaweed to cattle can reduce their methane output by up to 80%. While it is growing, on undersea ropes, it is more effective at removing CO2 from the environment than forests on the land.
Seaweed farming is in its infancy in the UK. Traditional lenders and investors lack a database of past performance against which they can assess the risks and potential returns. The modest sums often sought for early stage developments are not large enough to interest VCs.
Yorkshire-based Seagrown reached its reward crowdfunding target of £25,000 in August 2021, which will allow it to seed an extra four kilometres of rope. The seeded ropes will be suspended just offshore in the North Sea in October, and Seagrown expect to harvest their crop in summer 2022. The perks for the biggest backers include a boat trip out to the rope lines. This will give Seagrown’s founders a unique opportunity to spend time with them and find out how much they may be prepared to invest if they decide to go ahead with equity crowdfunding. Crowdfunding is good marketing and network building, it can open doors.
In 2019, the US plant-based food company AKUA launched the world’s first kelp burger made from sustainable seaweed. In 2018 they had used reward-based crowdfunding to generate $80,000 of orders for a packaged kelp jerky product via Kickstarter and Indiegogo. Then from early November 2020 to late April 2021, they raised $1,070,000 (the maximum permitted at the time) via the US equity crowdfunding platform Republic. This reinforces that progression from reward to equity crowdfunding is now quite a standard path. AKUA’s success, and that of all similar businesses, creates a growing market for seaweed farmers.
An example of crowdfunding for agriculture related to clothing is a young UK entrepreneur, Adam Costello. He grew up near the Anglesey coast. Time spent clearing plastic waste from the sea and the beaches led to a business plan to make clothing using seaweed fibre, and decorate it with messages about ocean sustainability. He offered the clothing to early backers through Kickstarter. His gross order value was modest, just over £14,000, though it was enough to start his Inland Sea business. This shows how crowdfunding provides an individual with a way to follow their passion and start making a difference, as well as an income.
Crowdfunding hydroponic farming
Also known as vertical farming, crops are grown indoors, in stacked layers, in nutrient-rich water instead of soil. Hydroponic farmers manage and maintain optimal nutrient levels in the liquid solution. It means food can be grown anywhere there is a supply of fresh water and energy for lighting – no soil required! Food can even be grown underground or in surplus office blocks, nearer to population centres in hyper-local supply chains. This reduces the food miles required to put it on to consumers’ plates. It uses far less water per volume of food produced, and no pesticides, making it more sustainable and climate-friendly.
A World Wildlife Fund 2020 report estimates indoor farming will have an annual growth rate of over 24% between 2018 and 2024, hitting $3 billion in revenues worldwide in 2024.
At a startup level, Harvest Londonraised over £400,000 in 2019 to grow food to order in the heart of London for restaurants. They are still trading, desite the hospitality shutdown during the Covid pandemic.
Also in London, UK, Square Mile Farms raised over £500,000 through equity crowdfunding in June 2020. They install vertical farms in workplaces, to engage employees in their maintenance and help businesses create a culture of healthy, low-impact living. Early customers included the major property owners and developers Grosvenor Estates and British Land, plus Vodafone. The property owners became active partners through providing access to their commercial tenants.
More recently, another specialty B2B operator, Local Indoor Farming (LIF) in The Netherlands, raised €108,000 in July 2021 through a crowdfunding campaign on the CrowdAboutNow platform. LIF will now manufacture and provide herb towers to hotels and the catering industry so they can grow their own fresh ingredients in a totally controllable manner in limited space.
On a much larger scale, Aerofarms is a US agritech business that began in New Jersey in 2004 and today it has indoor vertical farms across the country. In 2010 it raised an undisclosed amount through equity crowdfunding. They use any available buildings that are large enough, including former factories and nightclubs, even a paintball venue. In 2019 Aerofarms invested $42m in a 150,000 square feet purpose-built facility in Virginia. A recent investor in 2020 was the Abu Dhabi Investment Office (ADIO) that wants to grow food in its desert. In 2021 Aerofarms completed an IPO. They are listed on the NASDAQ exchange and currently valued at $1.2 billion. They claim they grow 400 times more food per unit of land than conventional farming can achieve.
Crowdfunding for agriculture technology – agritech
Drone Ag provides farmers with drones they can fly using software loaded to their mobile phone. Without having to be there, they can spray crops, check that crops are growing well, spot infestations, and create images far clearer and more detailed than using satellite-generated ones. This enables better control of pests and soil nutrition, reduces costs and chemical use, and ultimately increases yields and profit. The two business founding brothers were farmers themselves, and through absolutely understanding the challenges that exist today they have created technology that will handle the future. They raised almost £300,000 in 2019 in exchange for approximately 16.6% equity, and then a further £300,000 in 2020 for 10.7% equity.
In the last 12 months, UK-based Small Robot Company has transitioned from prototypes to a commercial service. It uses an autonomous robot and AI software to create a weed map for customers. Fungicides and biopesticides can then be applied with precision to reduce the amounts wasted in places where they are not needed. In August 2021 Small Robot Company raised £4m through equity crowdfunding to manufacture a fleet of robots for its commercial weed mapping service. Two other devices under trial include the world’s first 5G-ready agri-robot for arable farms, and SlugBot is the world’s first robotic monitoring and bio-molluscicide treatment system for slugs.
Crover is a new business in Scotland. Its crowdfunding for agriculture technology was to develop a robot that burrows down in to cereal crops stored in silos or while it’s in transit at sea. The robot checks non-visible conditions inside the crops: humidity, temperature, presence of any pests, and so on. In August 2021 it raised £337,000 through equity crowdfunding. Crover’s next steps include pilot tests in the UK and Italy as part of the agROBOfood Innovation Experiments throughout March 2022.
Crowdfunding for agriculture will accelerate the innovation in new foodstuffs and agritech required to feed over 9 billion people by 2050.
I originally wrote this article for Crowdsourcing Week as part of its Content Marketing programme.
It’s said by many people – not just me – that as well as raising money, effective crowdfunding is great marketing. It gets you written about and maybe interviewed. It gets you noticed by would-be suppliers, collaborators, distributors, influencers, affiliates and stockists, as well as backers. I made one of own investments after being impressed when I saw, by total accident, a startup CEO interviewed on television about her crowdfunding project.
Crowdfunding is one of twenty categories in the third annual round of the international BOLD Awards. Their aim is to recognise and shine a spotlight on crowd-related breakthroughs and innovative people, businesses and projects that are leading the way and setting an example in digital industries. Other categories include AI, Robotics, AR/VR, Crypto, Fintech, Cybersecurity, Agritech, Sustainability…….. here’s the full twenty categories.
Here’s how it works. Entries are submitted online, naturally, and can be viewed by potential voters and continually updated by the entrants. There will be a public round of voting early in 2022, which is an opportunity for entrants to mobilize their communities and “get the vote out.” An international panel of judges will then take a look at the entries, and winners in each category will be decided through a blend of public votes and judges’ appraisals.
Winners will be able to collect their awards at a prestigious black-tie gala dinner on March 25th, hosted by Europe’s largest accelerator hub, H-FARM, on their campus just outside Venice. It will be a unique event, with unrepeatable opportunities to network and connect with leading edge innovators and disruptors among the other winners, the judges, and invited VIPs. Given thatcrowdfunding is great marketing, here will be your chance to make an impression in person.
Plenty of candidates would be able to enter under several categories. As an example, the Small Robot Company, with its agritech robots controlled by AI and working to improve sustainability, has recently concluded a round of equity crowdfunding in the UK.
Previous nominees in the Crowdfunding category include Startup Italia and Borrow A Boat from the UK.
Entries are open, with the price held at €77 until September 15. If you have worked hard and enjoyed crowdfunding success, get some recognition at the BOLD Awards gala dinner award ceremony in Venice in March 2022. Register to enter now, and maybe I’ll see you next March in Venice.
Crowdfunding is firmly established as a means for individuals and privately owned businesses to generate funds, and in some case it can literally make dreams come true. Crowdfunding is a very flexible and adaptable method of fundraising which this selection of activity I spotted in July 2021 demonstrates.
I have looked at how some of the GB competitors at the Olympic Games used crowdfunding to help them get to Tokyo; how it has been used by two startup brands in the plant-based food sector; and by a trio of gin makers.
Sports fundingthrough donations crowdfunding
Many of us are enthralled by top level sporting contests, and certainly the pinnacle in many sports is to take part in the Olympic Games. However, while commentators encourage feelings of national pride at GB success, funding varies hugely across sports; while some receive millions of pounds, others only receive thousands to get them through the Olympic cycle. Also, several sports had their level of funding cut in the run up to the games in Tokyo, and many members of the GB team turned to crowdfunding to try and fill some of the gap and let them keep training as much as possible to compete at the highest level.
One such competitor was BMX rider Beth Shriever. Supposedly based on the likelihood of winning medals, funding for male riders stayed in place but female riders were left to their own devices. This meant Beth Shriever relied on crowdfunding donations made through the GoFundMe platform and a part time teaching assistant job to maintain her place in the team. Simply being in Tokyo was a major achievement, which the former junior world champion from Leytonstone topped by winning a gold medal.
Members of the GB Rugby Sevens squad found themselves in a similar position. After the home nation rugby football unions of England, Wales and Scotland cut their funding, a combined crowdfunding project was launched for both the men’s and women’s squad members on the Pledge Sports platform. Both the men’s and women’s teams reached semi-finals, and lost a playoff match to miss out on a bronze medal. Who knows how much their on-pitch performance might have been improved without money worries in the build-up not just to the Olympics but also other competitions they played in to keep fit and sharp?
Their reward-based crowdfunding remains open for a few days for anyone to still show some appreciation of their efforts. Rewards are still available and include coaching sessions, signed playing shirts and joining players for a day’s golf. Crowdfunding is flexible and adaptable, though in this case could probabaly have been helped by more support on social media by the players.
Equity crowdfunding to help us eat less meat
There is a growing trend to eat meat less often. Cattle farming is increasingly regarded as an inefficient use of resources, forests are cut down to create grazing land, and cows give off high levels of methane that contribute to the climate crisis.
Meatless Farm creates vegan, plant-based meat alternatives in a product range of mince, burgers and sausages. It was founded in 2016 by Danish entrepreneur Morten Toft Bech. As of October 2020, Meatless Farm employs 100 people in Leeds, Amsterdam, New York, and Singapore. Their products have a much lower environmental impact and are stocked in many branches of the leading UK supermarkets, and are available in 20 overseas markets. They can also be ordered frozen for direct delivery to consumers, and consumed in Leon Restaurants, Pret a Manger and Itsu outlets.
Meatless Farm’s current round of crowdfunding on Crowdcube closes on August 19. Against an initial target of £2 million they have raised over £3.4m from over 4,200 backers. The money is being raised as Convertible Loans. This means a share price has not yet been established. It will be set as part of the next corporate funding round, anticipated later this year, and will be based on the company valuation at that time. When it is set, the value of each backer’s loan will be converted to equity at a discounted rate of 15%, plus 5% per annum interest. This round is not eligible for investor benefits under EIS (Enterprise Investment Scheme), though does demonstrate how flexible and adaptable crowdfunding can be if you haven’t even got a company valuation.
Institutional backers dating back from before the crowdfunding include Bridford Investment Group, Channel 4 Ventures, Stray Dog Capital, and Beyond Impact. Having worked in Media Advertising and Corporate Barter Trading, the Channel 4 backing is of particular interest to me. The tv station effectively traded over £1m of advertising airtime for equity in the business. Advertising will initially run regionally across Channel 4’s main channel and on its streaming service All 4, targeting a core 16-34 year old audience. Channel 4 is in the process of moving its head office to Leeds, where Meatless Farm is based.
The Crowdcube round forms part of a total of £18,000,000 of convertible loan notes. The company raised £5,870,000 from existing investors in May 2021 and allowed for up to £5,000,000 from Crowdcube investors. Discussions are underway with addititonal institutional investors for a further investment of £7,130,000 through the convertible loan notes, though to date no agreements have been signed and no funds have been committed. Meatless Farm has the discretion to increase the total amount of convertible loan notes from £18,000,000 to £24,000,000.
Another business in the meat-free food sector that recently used crowdfunding wasReady Burger. They are a fast food restaurant chain serving vegan, plant-based, non-meat products. To date they have a solitary branch in London’s Crouch End, and yet by June 23 raised almost £2 million from over 800 investors for 22.47% equity. A second site on Finchley Road will open in September 2021, and more locations are in the pipeline.
Max Miller, co-founder and CEO, was well aware of the valuable benefits of crowdfunding beyond simply raising money. “It was important to us as we wanted to create a community of people who would support the brand and hopefully become loyal customers, eat at Ready Burger restaurants and recommend us and our mission to their friends,” he said in an interview with Catering Today.
Investors had been lined up through effective pre-selling and the first £1.5m came flying in within hours of the crowdfunding starting.
When crowdfunding is just the tonic that gin needs
I was contacted recently by the founders of a premium gin brand who wanted to explore opportunities and benefits that crowdfunding provides. I was able to find several examples of other gin makers using either reward-based or equity crowdfunding. Though one that particularly stood out is a reminder that one of the earliest forms of crowdfunding is the simple raffle.
I am a shareholder myself in a gin maker through equity crowdfunding: the East London Liquor Company has a distillery and its head office in London’s Mile End. They have just completed a second round of fundraising through Crowdcube, raising over £900,000 for 3.35% of equity from 757 backers. They already had a company valuation of £26 million.
Looking at the other end of the scale for gin startups, I found that in May 2020 five women raised £22,000 through reward-based donations crowdfunding to start the Isle of Cumbrae Distillers in Scotland. Being of a self-described “mature age,” and with no commercial spirits industry experience, it’s highly unlikely they would have met the terms required for a business loan or startup grant. Their crowdfunding project not only raised the seed cash they needed but also helped them form a group of loyal supporters who have become regular customers. One backer even offered to buy them the distilling equipment they needed to get started! They hope they will be an inspiration to other women to go in to business.
However, one fundraising effort that particularly stood out is a reminder that one of the earliest forms of crowdfunding is the humble raffle.
Bronagh Conlon became the launch director of Listoke Distillery in Ireland in 2016. She bought out the original business founders late in 2020, a process that involved valuing the company at €1.7 million. There has been considerable interest in her gin, and other spiritis, from China and Russia and Bronagh decided it was time to upscale the business. To raise an investment budget she decided to sell raffle tickets through the UK-based online service Raffall. com, for £20 (€23.30) each. The draw was made on July 9, and the first prize was a 5% shareholding in the business, potentially worth €85,000. Second and third prizes were €10,000 and €5,000, plus cases of gin.
The potential gross income from selling all 50,000 tickets was €1,165,000. At the time I bought my raffle ticket they had sold almost two-thirds of them. Even if there had been no further ticket sales, that level of sales would have generated around €777,000, of which €15,000 went in prize money and there was a 10% commission fee to Raffall.com. Allowing for other costs to promote the raffle, plus legal and other professional fees, they would have been left with at least €600,000 to invest in the business – and all for just 5% equity! This really does show how crowdfunding is flexible and adaptable.
Are you considering your own crowdfunding project, whether on an equity basis or using a reward-based model to lauch a new product? I am an independent crowdfunding advisor with no allegiances to any particular platforms. I can provide you with an object view of your plan, help improve it, and perhaps operate as a Campaign Manager to co-ordinate its execution. Crowdfunding is flexible and adaptable. Are your plans maximising its opportunities and benefits? Email me at [email protected]
Enterprise Nation members – or any startup or small business owner – hardly need to be reminded that starting a business is risky. One of the benefits of equity crowdfunding is it’s a risk that many small investors are prepared to share and contribute towards, and sometimes for other reasons than seeking a financial return on their investment. I have experience of hundreds of pitches from startup founders who wanted backers to either order their new product or buy a stake in their business. It gives me valuable insight to share with anyone who wants to explore using crowdfunding, and this guide to equity crowdfunding for startup entrepreneurs answers several common questions.
Benefits of equity crowdfunding for entrepreneurs
Startup businesses are turning more and more to a range of alternative finance options for early stage investment. Equity crowdfunding platforms are website marketplaces that bring together businesses that want investors, and people looking to invest modest amounts in ways that provide better returns than the negligible high street interest rates. As well as raising money there are several other benefits for entrepreneurs.
It can be good marketing, it gets a business noticed.
Successful backing provides “proof of concept,” helping a business to then get further investment from other sources.
Feedback from “going public” with ideas and aims helps to refine plans and targets.
It’s a virtuous circle in which customers can become investors and investors can become customers – sometimes very valuable ones.
It encourages investors to become brand advocates, climbing “the loyalty ladder” to give the businesses positive word-of-mouth support
It is a public event, establishing a confirmed value that early stage investors clearly agree with.
Investors may choose to back a business where they identify more with its social, ecological or environmental aims than its financial prospects: for many such people the prime reward is the buzz of helping an enterprise they admire to get off the ground.
One of the benefits of equity crowdfunding equity is that it is not a loan, the money is not repayable. Though there is a degree of responsibility to shareholders, and legal obligations.
Why don’t more new businesses use equity crowdfunding?
Crowdfunding isn’t easy. When you look at crowdfunding projects hosted on the various platforms they are like icebergs, which show 10% above the waterline. Below the water is a massive amount of unseen work. I have identified seven key elements of crowdfunding projects, and they all have to be executed well to have a real chance of success. Here are three fundamental ones:
Build a crowd of potential backers, which may have to start months before a crowdfunding project actually goes live on a crowdfunding platform. This requires marketing that includes any amount of activities, techniques, social media and other communication channels.
At least 30% of the financial target should appear in a project within the very first few days of going public, and it requires personal pre-selling by the project leader. It could be an angel investor or a VC. Money arriving quickly creates momentum, and gives confidence to potential backers who may otherwise sit on the fence. Platforms are unlikely to let a crowdfunding project go to a public phase if it has not achieved this level of pre-backing at a private pre-selling stage.
It vital to communicate a clear vision of what the money will be used for, how it will advance the company’s development, how that progress will be measured, and any intentions to run subsequent rounds of fundraising.
There is also a quality bar set by crowdfunding platforms. They only earn from successful projects, so they don’t want to waste time on weak ones. A business owner might get knocked back several times to improve any part of their project.
The time these matters can take means that turning to crowdfunding only as a last resort, perhaps after exhausting every other option, can make it impossible. Think months ahead so you do not have to rush and take shortcuts, because a business that fails to reach its financial target will receive nothing.
How long does equity crowdfunding take?
After preparation to complete the seven key elements to a good standard, the equity crowdfunding platforms generally agree on around allowing three months, starting with a “Hidden phase” as shown in this chart created by the Nordic platform Invesdor. The “Public phase” usually runs for four to six weeks. It’s hard for fundraisers to maintain the required intensity level for longer.
What do investors look for?
Think of crowds of investors as hunting in packs to uncover signs of weakness that will cause them to make their investments elsewhere. Any number of potential backers can ask detailed questions through the crowdfunding platform. One of their benefits of equity crowdfunding is that the answers will be made visible for all potential backers to see and maybe comment on further. Questions will include items such as these:
what the money raised is going to be spent on and how far it will advance the business’s development
evidence of a true market opportunity
financial statements and projections
timetabled KPIs to monitor progress
intellectual property, or some other hard-to-copy factor of exclusivity
existing or potential competitors
the management team’s abilities and experience
strengths and weaknesses of supply and distribution chains
the impact of any known forthcoming legislation
current and future customer interest/sales prospects
eventual exit strategy
All the information – not just most of it – has to be prepared in advance and made ready for swift replies. Larger investors may request personal calls or meetings – project leaders have to make sure their schedule allows time for this. Questions can come in at any time of any day. It’s full-on 24/7, don’t go on holiday!
Potential investors also look for very advantageous tax benefits offered by HMRC. UK income tax payers who invest in businesses registered under EIS (Enterprise Investment Scheme) and SEIS (Seed Enterprise Investment Schemes) are able to claim a refund of up to 50% of their initial investment through tax relief. If a business later fails, investors can claim a further refund. When a business succeeds, investors can shelter returns from Capital Gains Tax. There are also very early stage SEIS benefits for company directors. They really are worth checking out. Further information is readily available from a number of equity crowdfunding platforms including Seedrs, Crowdcube and Crowd For Angels.
How much does equity crowdfunding cost?
In the Preparation and Hidden phases of equity crowdfunding (see earlier image), there are costs for preparing documents, maybe intellectual property fees, a video and image library, and a budget needed for crowd-building and marketing activity in the build up to and then during the public crowdfunding.
If a startup business considers offering its suppliers payment with equity, they need to keep in mind that shares acquired this way are void of EIS and SEIS tax benefits, so will be of less value.
On completion, crowdfunding platforms all charge commission on successful projects, plus sometimes a completion fee, and there will be transaction fees for handling the investors’ payments. Build these costs in to the fundraising target. Allow for 10% of the total raised to begin with, and check with each platform how much you can bring this down by, and what else they can provide.
How much to ask investors for
Do not expect or attempt to raise all the money you need to fully grow the business in one round of funding. Plan it in stages. As a business grows it commands a higher company valuation, meaning startups are able to raise money in subsequent rounds based on higher share prices.
Road builder MacRebur recently ran its third round of equity crowdfunding. In Round 1 its share price was £7. In Round 2 it was £17 and this time each share was valued at £21, marking the company’s growth.
The Cheeky Panda, a brand of bamboo-based tissues I talked about in the reward-based crowdfunding article, valued shares in its first round of equity crowdfunding at £4.26. It offered 10% of the business for £50,000 in 2017, and when they hit target it represented a public statement that “the market” believed the business was worth £500,000. Then they raised further investments from an angel investor, and institutional backers came in later on. In their second round of equity crowdfunding each share was £18.25, and it was £36 in round three in 2020. Their fourth round in June 2021 saw its shares priced at £50. This is likely to be the final round of equity crowdfunding before an IPO when they have grown revenue to over £50m a year, which could be in 2022 or ’23.
What support does a crowdfunding advisor provide?
An experienced crowdfunding advisor knows the standards required by the crowdfunding platforms, and can save a business owner time and money by avoiding a series of knockbacks to improve a project. They can also negotiate with the platforms to gain added marketing support and other “extras.”
When a crowdfunding project team looks for professional support, there are many marketing, PR and video production companies that have added ‘’crowdfunding’ to their list of capabilities and services. My own experience of some of them has shown patchy competence, with little unerstanding of how to unlocjk the benefits of equity crowdfunding. Do the ones you might choose really understand the dynamics and nuances of crowdfunding projects? A specialist crowdfunding advisor will be able to tell, and can also fulfil a Campaign Coordinator role to steer the entire process.
A crowdfunding project has a start date, an end date, and takes a lot of work. If the financial target is not achieved it’s all for nothing. Though success can make dreams come true and transform lives forever. Follow me on Twitter for frequent examples of crowdfunding projects, and please get in touch when you want to discuss your own crowdfunding project.
In five years as a strategic crowdfunding adviser, I have seen and heard hundreds of pitches from start-ups that wanted backers to either order their new product or take a stake in their business. It’s given me valuable insights to share with anyone considering using equity or reward based crowdfunding for business purposes.This is an article first published by Enterprise Nation in their ‘Learn Something’ series: https://www.enterprisenation.com/learn-something/how-to-use-crowdfunding/
The simplest form of crowdfunding asks us to make online donations through platforms such as GoFundMe or JustGiving to a worthy cause, or to someone who needs help to get through a personal difficulty. Despite the number of small businesses pleading for help recently to tackle Covid-related problems, this form of crowdfunding is not particularly viable for a start-up business.
In this article I focus on reward-based crowdfunding. Among many other benefits, reward-based crowdfunding can provide proof of concept and generate pre-paid orders for goods that may not yet even exist. A follow-up article will cover equity crowdfunding, in which private companies raise funding through offering investors an opportunity to become part-owners in the business.
This is the sort of crowdfunding that runs on Kickstarter and Indiegogo (US platforms that operate internationally), and the UK’s Crowdfunder platform, for example. Kickstarter alone has hosted over half a million projects. Just 38% of them were successful, raising over $5.1bn. Over half (54%) of the successful projects raised between $1,000 and $10,000. The overall average amount raised is $2,580.
It may not sound enough to launch a business, and although results can’t be taken for granted, a professional approach can significantly outperform these average figures. It’s not luck that divides the winners from the losers, it is hard work and careful planning. For anyone prepared to do that, it can be truly life changing.
De-risking the first production run
Project owners create content that compellingly displays and explains the benefits of their new product(s). This information is hosted on reward-based crowdfunding platforms, which also process pre-payment from people who place orders for the item(s). They understand they are not ordering something from Amazon or eBay that will be delivered quickly.
Under a commonly used ‘all-or-nothing’ model, the value of pre-orders needs to reach a minimum financial target, by a set date, before there is an obligation to deliver anything. Given the costs of an initial production run and the volume of goods that would be produced, project owners can set a price per unit and calculate a breakeven point.
If the target is reached, the crowdfunding platform advances the pre-payments and production goes ahead. If the target is not reached the money is returned, and the project owner can return to the drawing board. This real-life research programme saves anyone from being left with production cost debts and a stock of unwanted items.
Projects sometimes fail to hit their target because the marketing effort was inadequate. Perhaps the project owner just didn’t tell a big enough crowd of the right sort of people. The marketing has to be as professional as financial plans and projections.
In a scenario where finished products do already exist, it is also possible to use rewards-based crowdfunding without setting a minimum target. This is the ‘keep-it-all’ model, and all orders must be shipped, regardless of the total number. This model applies to most of the projects on the Indiegogo platform, and that is the major difference between Kickstarter and Indiegogo.
Added benefits beyond raising money
Crowdfunding can test demand and build a customer pipeline
I met a textile designer/market stallholder at Greenwich Market who makes and sells her own clothing range. Niki Pearson was crowdfunding to raise the money to buy fabrics and anything else needed for her next collection of hand-illustrated, ethically made scarves and accessories.
The rewards for people who backed her project were priority delivery and product discounts. The crowdfunding was both covering some production costs and lining up some confirmed orders.
If Niki hadn’t gained enough support, she would have been able to create some different designs and try again.
Even international corporations use reward-based crowdfunding. Coca-Cola used it to distribute a limited amount of mineral water from Switzerland direct to consumers. This meant it had buyers’ contact details and could ask them for product feedback. It used crowdfunding as a product research exercise.
Crowdfunding to verify ‘proof of concept’
Have you seen a recent TV commercial for People’s Energy? It is a relatively new renewable energy supplier, with a stated aim to return 75% of profits to its customers. This could disrupt the energy supply market, though a business model like this hasn’t been attempted before. Who would invest long-term in a business dedicated to giving away 75% of its profits?
In 2017, People’s Energy raised almost £500,000 through a reward-based crowdfunding project. Over 2,000 backers donated the money to help the business meet early set-up costs. It was repaid in 2018, and those early supporters will enjoy discounted energy bills for as long as they remain a customer.
The crowdfunding success provided ’social evidence’ that People’s Energy was based on credible principles, and helped to impress institutional investors. The number of customers before the TV advertising campaign had grown to over 40,000.
Reward-based crowdfunding can generate impact investment
In a recent UK project on Kickstarter, with a £13,000 minimum target, a surfer/marine activist/clothing entrepreneur was offering t-shirts made with seaweed fibre to both highlight his original clothing range and to promote action against ocean pollution. It taught me that an acre of underwater seaweed can absorb 20 times more CO2 than an acre of forest. Good crowdfunding is good marketing.
Crowdfunding to validate a product innovation
In 2016, a reward-based crowdfunding project on Crowdfunder tested demand for toilet tissue made from bamboo rather than paper. Bamboo grows very fast, with three crops a year. Massive volumes in China are simply left to rot, making it a very sustainable product. It is also naturally stronger, softer and more hygienic than paper tissue.
After exceeding an initial target of £10,000 of orders, and based on positive user feedback, the founders of this startup had the confidence to order more supplies and it quickly became a top seller on Amazon.
The Cheeky Panda’s products are now available in major supermarkets; it has beaten global, market-leading brands to win international awards; and in June 2020 it broke its £10m monthly sales barrier. The Cheeky Panda has also run three rounds of equity crowdfunding, which is the topic of my next article.
My role as a strategic crowdfunding advisor
If you’ve been using the hyperlinks in the article you’ll have seen what a number of crowdfunding projects looked like online. Many crowdfunding users fail to realise they are seeing just the tip of an iceberg, and that so much preparation work is invisible below the water line.
I had the privilege of putting questions to a number of international experts in an event organised by Crowdsourcing Week about what goes in to a successful equity crowdfounding round. This article sums up their key insights. If you want to discuss any plans of your own, I’m an independent crowdfunding advisor, which means I have no ties to any particular crowdfunding platform beyond my own personal investments. Send an email to [email protected]
Raising capital through equity crowdfunding
Andrew Zhang of Republic, a U.S. equity crowdfunding platform, ran through the essential structure of a money-for-equity campaign.
They have certainly hosted enough projects to have built up a wealth of insight and experience. Republic has enabled over 150 companies to raise a total of $45 million. Last year the average raise was $500,000. Most of the investors were non-accredited, and the raises were capped at a top limit of $1,070,000 by SEC regulations.
Successful equity crowdfunding can run alongside other funding mechanisms that between them can bring in a maximum of $5m.
There is a strict vetting process to ensure that only the best opportunities are put to Republic’s database of investors: under 1% of all applicants end up launching a campaign.
However, keeping to the theme that equity crowdfunding has democratized the process of funding a startup business, 40% of project leaders have been women, and 20% have been Black or Latinx.
Funding generally comes from four sources: friends and family; people who know the business – customers, suppliers, other stakeholders; Republic’s network of investors; new supporters brought in by marketing activities.
The usual timeline is for a three to four month campaign from going live online to issuing shares to new shareholders. Though prior to this there are issues including arriving at a company valuation, preparing marketing materials, and pre-selling to reach c. 30% of the financial target. Pre-selling ensures the public stage of a successful equity crowdfunding campaign starts with a bang and not a whimper, and gives it dynamic momentum that attracts investors looking for a home for their money.
Key lessons include the realization that at whatever stage of a company’s growth, in addition to raising money, successful crowdfunding involves, builds and strengthens communities. In an increasingly competitive environment this requires expert communication skills.
To be a successful equity crowdfunding project it should be clear what it is asking for; what the organisation raising the money hopes to achieve; and who will benefit. Any funder can go on to become a customer, an advocate, or a supplier. So keep communicating after the crowdfunding closes, share news about your progress through achieving milestones or report on KPIs.
As well as improved professionalisation of all aspects of the process, regulations are adapting to crowdfunding being a global practice. Funds need to flow freely to encourage cross-border financing, though authorities have to be aware of laundering. European harmonisation through the ECN will ease cross-border payments from outside the EU – which of course from 1 January 2021 includes the UK.
Retail investor access to VC deals
Equity crowdfunding is often described as having democratised access to investment funds for startup owners who do not mix in the same circles as high net worth individuals and VC managers. In the same way, equity crowdfunding has opened up opportunities for retail investors to invest in private companies, sometimes alongside institutional backers.
Jonathan Medved is CEO of Israel-based OurCrowd. As the country’s biggest VC investor, he said their links with crowdfunding are becoming more stretched and tenuous than before, though they still allow individuals to piggy-back on their VC investments. For a management fee and a 20% carry-over on profits, retail investors can enjoy the same pre-IPO terms as a VC. Half of OurCrowd’s investment deals are in Israeli businesses.
OurCrowd’s prospects are looking good. Their investor network includes 50,000 U.S. accredited investors. Jonathan is delighted the U.S. SEC (Securities Exchange Commission) is relaxing its stringent rules on who is allowed to invest, and how much they can invest, through crowdfunding projects. Professional qualifications can now replace former demarcations based on income or savings definitions. And smaller businesses will be able to raise more than the previous cap of $1,070,000.
Also, a recent normalisation of political and trade relationships between Israel and the United Arab Emirates has the potential to unleash a torrent of investment capital, perhaps as much as half a billion USD in the first 12 months.
Crowdfunding for Policy Makers
Author and management consultant Tim Wright, of TwinTangibles, closed the event with a session based on insights gained from co-authoring a recently published book “CROWDASSET, Crowdfunding for Policy Makers.” The book looked at crowdfunding from a variety of perspectives, given that policy makers can represent the interests of diverse stakeholders.
His visual device representing the core benefits of a crowdfunding campaign relates to core policy maker interests. In gaining a better understanding of what is of key concern to policy makers, crowdfunding project leaders can better ensure their campaign is fit to succeed.
Naturally, the key element of the whole exercise is that businesses want to grow. For that they need Finance, which in equity crowdfunding is achieved by selling part-ownership of the company. This aspect is overseen by financial regulators and authorities that ensure compliance with financial regulations. National tax regimes differ on how they treat the funding received, cross-border investing is scrutinised for possible money laundering, and the U.S. has an added complication of different rules that apply to accredited and non-accredited investors.
Some countries still bar equity crowdfunding in the interests of protecting unsophisticated investors from possible financial harm, including India.
Crowdfunding also provides Insight to company founders through receiving feedback from people on the nature and structure of the business, validation of the value put on the business, and feedback on the proposed products or services to be delivered. Business trading standards authorities, as an example, would be keen to know that any products offered by firms using crowdfunding meet statutory minimum requirements.
Good Communication is vital for successful equity crowdfunding. This covers the marketing activities, raising awareness and stimulating sales. Most countries have extensive regulations on what can and can’t be said about crowdfunding opportunities, which can differ from one to another. So a crowdfunding campaign can’t always be picked up from one country and then run again in another.
Networks relates to a business’s customers, suppliers, supporters (who may not always be customers), and social media followers. Trading and Advertising authorities would once again be involved here.
And finally, there are also the vested interests of the crowdfunding platforms themselves, who are often members of their own professional trade representation and lobbying group. Such groups include the UK Crowdfunding Association, European Crowdfunding Network, National Crowdfunding & Fintech Association (NCFA) in Canada, and Bundesverband Crowdfunding eV in Germany.
The breadth of interests and responsibilities of related policy makers is thus extremely wide.
Don’t forget, if you want to disucss your own thoughts or plans for an equity crowdfunding project feel free to email me in confidence, I’m an independent crowdfunding advisor: [email protected]