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.
Equity Crowdfunding with VC 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.