Not so long ago it was still quite common to come across articles that tried to pitch VC investors and equity crowdfunding supporters and platforms against each other, as if every startup business entrepreneur faced a binary choice of which investment route to pursue. There are growing signs that the complementry rather than competitive nature of these sources of startup and scaleup business funding are beginning to be appreciated.
Many startup founders seek investment budgets that are beyond the resources of friends and family backers, yet are too small for VCs to normally bother getting out of bed for. And if a business is in its earliest days without a trading history or future sales orders, there’s precious little hope of securing a business loan, whether from a traditional source like a bank or from a peer-to-peer lender such as Funding Circle. So there is a true gap in the business investment market that equity crowdfunding occupies, at the same time as providing better returns for small-scale investors than they can get from high street deposit accounts or investment schemes.
It remains fair to say that equity crowdfunding is not yet a fully developed entity due to the small number of exits that have allowed investors to reap their rewards: the UK Crowdfunding Association’s website has just one solitary case study (though there have been more). Other business finance commentators harp on about the startups that still fail, sometimes within months of raising seven-figure sums through crowdfunding, as if crowdfunding ought to provide some mystical defence shield against business failure.
Despite these shortcomings, the rude health of hundreds, even thousands of startups around the world that have traded equity for an investment from a crowd of backers supports enough confidence for the practice to continue to grow and spread.
It has now reached a point where venture capital firms are not only taking notice but some also want to be involved. In the UK, for example, the startup support division – called G – of the global accountancy firm Grant Thornton works with the equity crowdfunding platform Crowdcube.
It is a symbiotic relationship: Crowdcube can offer its clients a longer business development path than just realising their earliest investment rounds, and Grant Thornton gains an entry point to build relationships with promising entrepreneurs before they are big enough to usually be worth their attention. G also offers to make introductions to some of its network of investors who have indicated they are open to the idea of making early seed-stage investments. Here is an example of this co-operation in practice.
Gunna is a range of uniquely-flavoured, craft-made soft drinks which aims to disrupt the established carbonated drinks marketplace in a similar way that craft beer has. It retails at a competitive price for a product made with better quality ingredients, and contains less than 5% sugar to be part of a healthy lifestyle. In 2018 it was available in over 3,500 UK stores, sales were up 300% on the previous year, and their highly experienced founders wanted to raise funds to accelerate the growth rate.
Initial discussions with Grant Thronton indicated that £500,000 would be appropriate to build distribution through recruiting additional sales people and investing in trade marketing. Although this amount is below Grant Thornton’s minimum threshold, their growth finance team remained involved to get Gunna investment-ready to run equity crowdfunding via Crowdcube to raise the money.
Support from some cornerstone investors who wanted to get involved at the ground level, introduced by Grant Thronton, strongly reassured a crowd of smaller retail investors. The equity crowdfunding project generated £819,150 from a total of 245 backers. As Gunna grows it’s likely there will be a need for further, larger rounds of investment which will meet Grant Thornton’s VC-backing criteria. Gunna’s hoped-for exit strategy is acquisition by an international drinks company.
A less formalised example is that of a business founded in 2013 that recycles surplus fruit and vegetables to make traditional recipe relishes and chutneys, Rubies in the Rubble. They were able to gain investment backing from Mustard Seed, a VC fund that takes a principal investor role in world-class early-stage businesses that generate compelling financial and societal returns. However, beyond accepting £160,000 from Mustard Seed, the founder of Rubies in the Rubble, Jenny Costa, used it as cornerstone funding to launch an equity crowdfunding project on the Seedrs platform.
A rule of thumb has evolved based on empirical evidence that successful crowfunding projects ought to start with very early pledges of at least 30% of their financial target. This is achieved through personal pre-selling by the project leader and their team to guarantee – as far as possible – that their project starts with a bang and not a whimper. This creates momentum as it gives vital confidence to what are usually smaller retail investors who require some reassuring encouragement to take the plunge.
Rubies in the Rubble set a target raise of £300,000, in which Mustard Seed’s investment easily covered the 30% requirement. At the time of writing (in May 2019) the project on Seedrs has easily surpassed the initial target and is currently overfunding at £465,000. The funds are to support the launch later in the year of a mainstream ketchup product and a vegan plant-based mayonnaise. The business aim is to capture 3% of the UK ketchup and mayo market by 2023, whilst continuing the fight against food wastage. A trade sale is the most likely exit strategy.
Please get in touch for further insights and support on how you could use crowdfunding to raise money to startup or scaleup your business, plus reap the benefit of numerous other advantages. I’m an independent crowdfunding advsisor, not tied to any particular platforms: [email protected]