18th June 2018
The roots of equity crowdfunding date back to 2011, during the height of the financial crisis. It was initially used as a mechanism for early-stage businesses to access equity finance and was a necessity at the time due to high-street banks’ reluctance to lend to small businesses.
In its short lifespan, it has already become the most popular source of equity finance in the UK. The most active equity investors were Seedrs (144 deals) and Crowdcube (133 deals) in 2017. Additionally, the total amount invested in equity crowdfunding platforms in the UK was £300m in 2017, according to a Beauhurst report.
This makes the funding type the second largest source of equity finance after private equity and VCs.
In simple terms equity crowdfunding is a way for individuals to invest in early-stage businesses via an online platform. They receive shares in return for their investments into businesses.
Crowdfunding platforms advertise equity crowdfunding opportunities, which showcase campaign pages that typically consist of an investor video, financials and a summarised business plan.
One of the reasons it has become so popular is linked to the generous SEIS and EIS tax relief schemes, which most campaigns on equity crowdfunding platforms qualify for (read more about the schemes here).
It is becoming increasingly common for institutional investors to allow the crowd to invest alongside them. A notable example of this is Monzo Bank, which kept back a £1 million allocation of their million Series A round to Crowdcube investors. The round was predominantly made up by Passion Capital, who invested £5 million.
Under current EU legislation, the maximum amount which can be raised through equity crowdfunding is €5 million (about £4.4 million).
Each has their own individual characteristics including the way they structure deals and the fees they charge. If you are considering raising money through equity crowdfunding you should talk to a minimum of at least two different platforms.
This will allow you to potentially negotiate lower fees, as well as understanding what level of support (ie. PR activity, SEIS or EIS registration) that can be provided.
One of the main things you will need to consider is whether you want to use a platform which allows crowdfunding investors to hold shares directly or through a nominee structure. Both structures have pros and cons so this is a decision which should be given some thought.
It’s often said that equity crowdfunding is about more than the money. It can be a great way to generate a PR buzz, create brand advocates and ultimately generate more sales.
It is for this reason that consumer businesses typically fare well on platforms, due to them being concepts which are easy to understand for everyday investors. It’s an effective way to galvanise an existing customer base and create a long-term bond between them and your company.
This investor base can effectively be tapped into by communicating the investment opportunity to followers through social media channels and email communication.
A number of our clients have successfully raised funds on equity crowdfunding platforms, including Tribe (a high growth sports nutrition company), who raised £1.7 million on Crowdcube last year (read our case study).
Deloitte Propel can support you in getting investor ready, whether an institutional or alternative funding raise. We offer a wide range of services for businesses, including coaching and advice to businesses seeking funding. Contact us to discuss how we can help you.