Equity crowdfunding myths
Working in such a nascent and ever-evolving industry I get asked a lot of the same questions every day and so I thought I would write down some answers here in an effort to help more people understand how crowdfunding works in practice. More importantly the aim is to try and debunk some of the misconceptions surrounding the industry.
All thoughts are my own.
1. Putting my pitch together is most of the work
Going through due-diligence, putting together your pitch and making sure it is FCA compliant, creating a video and the lot, can easily take 3–4 weeks and can entail a significant amount of work if you want to do things right. However, thinking that the hardest is over once this is completed is a fallacy. It’s when your pitch goes live that the real work starts. Actively marketing your pitch, creating meaningful updates, organising events and generally shameless self-promotion — all necessary to ensure success. Especially if you take into account that most investors have day jobs, you are likely to be working evenings and possibly even weekends during the campaign period. This is why effective planning is more than important when thinking about running a crowdfunding campaign.
You will most likely fall in one of the two categories:
You have a community
Great! You most likely already have a ‘crowd’ of investors to go out to. Before you decide if crowdfunding is a good fit for your business, why not send your customers an email and see if there would be appetite to make such a campaign work. Something along the lines of… “If we were to start a crowdfunding campaign to raise funds for X growth plans, would you possibly and after having read all the documentation be interested in investing? And if yes, what investment range would you be investing at?” I can assure you that you will be surprised by the responses and this might give you a good steer on whether or not crowdfunding is a viable option.
You don’t have a community
Not to worry! You will however need to rely on your extended network, on angel investment, and/or even institutional funding to kick-start the campaign. Without having investment lined up from day one or a clear indication whether those funds might come from it will be a much harder ride.
Usually having a mix of pre-secured funding, a community that you can go out to and being an active ‘marketer’ throughout a campaign will all be essential in order to effectively capture the ‘larger’ crowd’s interest. The clear message here is that you must make sure to have enough time to both run a campaign & your business — this is the single most important factor in a campaign’s success and why businesses fail on the platform.
2. Having 30% of my target pre-committed and I will fund
Contrary to some arbitrary statistics that have been flying around recently there is truly no golden rule in terms ideal % pre-committed prior to going live. In my relatively short tenure at Crowdcube I have seen businesses come to the platform with nothing secured and fund within a week and I have seen businesses come to us with a little more than 50% pre-secured and fail. Ultimately, anticipating the crowd’s reaction to your pitch is an exercise in predicting the future and no matter what anyone says I can’t see this being mastered anytime soon. The way to mitigate failure is to make sure you have a clear indication where as much of the initial target can come from and hope to use and leverage this to benefit from substantial ‘crowd investment’.
3. I can get a higher valuation than with Angel Syndicates, Venture Capital or Private Equity
Although it is true that we’ve generally seen higher valuations with crowdfunding since its inception in 2011, valuation is always a hot topic on the forums and the crowd has become increasingly savvy at asking for fairer valuations. Additionally, the co-investment model has become mainstream and more than ever the crowd will look to have your investment validated by more seasoned investors. Start-up valuation, the ‘artistic science’, will always be an item up for contention, but having a robust justification & rationale is just as important for the crowd as with other investment routes.
Go out with too high a valuation and you risk setting yourself up for failure. Although this can always be rectified during your campaign, it is usually more advisable to go out with the right valuation from the start to avoid putting off any potential investors. Lowering your valuation mid-point also can look a little desperate, and we all know how much perceptions matter in the investment game.
4. Managing so many people on my cap table is going to be a nightmare
This is quite simply untrue. I challenge you to find any entrepreneur that has major issues because of having many investors rather than a select ‘larger’ few. When we talk with our #fundedclub entrepreneurs, the reality is most investors are relatively passive with regards to day-to-day operations of the business and it is unlikely that they will be calling you on a Monday morning to see how ‘things are doing’.
I’m your typical ten-pound investor. I have an interest in venture capital, but neither have the expertise nor the capital to become a substantial investor. I invest in businesses that resonate with me, with problems that I identify with and in teams I believe in. Ultimately I’m hoping that one of these businesses will exit and cover some of my other investments, but more importantly give me the bragging rights for when I argue about the future of the world over a beer at the pub. It’s a vehicle that enables me to put my money where my mouth is — so to speak. I have no interest in attending your next board meeting or challenging your sales projections for the next quarter. I want you to get on with your business and increase my shareholder value — not waste valuable time.
And in all respects these investors should be considered as more of an asset than anything else. Their combined knowledge, expertise and network are at your disposal in times of need and their purchasing power when you need to bolster your sales. They will be looking to support you where they can and be useful for when you fundraise again in the future so it’s important to keep them updated — quarterly at a minimum.
For those scared about not being able to raise PE, VC or other institutional funding thereafter or the difficulty in exiting need not worry. Both have been done and the model is now proven — Ecar club exited to Europcar earlier this year and the likes of DN Capital, Episode 1, Passion Capital, Index Ventures, Octopus Ventures and Crystal Capital have all invested either prior, during or after a Crowdcube raise. Crowdcube itself has received funding DFJ Esprit, Balderton Capital and Numis — we also all have over 900 people on our cap table. If a VC wants to invest in you, trust me, they will find a way (no matter how many shareholders you have).
So why do I really need a crowdfunding platform?
- Speed: fundraising is a lengthy process. Some entrepreneurs I speak to talk about spending as long as 9 months in conversations with investors before closing off a round. As soon as you launch a crowdfunding campaign, the timer is on — investors you’ve been speaking to need to decide within the 30-day period. With the right momentum & sense of urgency created by a campaign, entrepreneurs can leverage their position to close off investment as well become very quickly oversubscribed — the power is no longer solely in investors’ hands.
- Multiplier effect: Having managed to secure some investment but needing some more? Crowdfunding can be a great way to leverage off the pre-secured investment and if pitched just right you may end up overfunding over 300% of your initial target (just look at Sugru, JustPark and Emoov). With an extended runway you can now spend more time concentrating on the business rather than having to fundraise again in 6 months.
- Terms: everyone investing in the round is on the same terms (although our direct investment model with A/B share split alleviates the administrative burden with only A share holders having pre-emption & voting rights — more info on our legal process here) — no special shareholders’ agreements with ridiculous demands. It’s the take it or leave it approach.
- Customer engagement & brand advocacy: Having a hoard of supporters, ambassadors and advocates who have a vested interest in your start-up can be incredibly valuable. Forbes estimates average post-campaign sales to see an increase of over 340% for equity crowdfunded businesses. Their statistics are perhaps a little out-dated now, but there’s no denying the effect that a campaign can have in terms of brand awareness.
Ultimately, there will always be pros and cons for every method of fundraising but as Doug from Adzuna puts it: “all of the hard work of crowdfunding is also building your brand — where the work with lawyers and pitching to partners in board rooms to do a VC round may be less so.” If you want to fundraise while promoting your brand, while building a group of ambassadors and are up for a challenge then crowdfunding is for you. I’m yet to raise equity investment for a start-up but I know that the day I do, I’m definitely crowdfunding it.