The peer to peer lending market was worth £2.2 billion in 2016 (according to research from Nesta and Cambridge University in partnership with KPMG). In 2015, NESTA recorded deal values across UK equity crowdfunding platforms as £332 million (it was £84 million in 2014) and 15.6% of all seed and venture capital investing in the UK came from equity crowdfunding.
The UK industry is highly competitive with numerous players and it’s regulated by the FCA, as are all equities. While £1K is the averageinvestment amount, £22million is the largest investment that has been raised so far via equity crowdfunding.As a benchmark, fees are around 5 to 7.5% of a successful raise, but members warn to look out for other payment processing fees.
Equity crowdfunding platforms vary, with different fee models and structures for raising capital. They tend to offer a combination of the following:
- Lead investor:a Venture Capital (VC) or lead investor for each funding round
- Expert panel:offer analysis and guidance tobothinvestors and investees
- Tailored crowds:fewer investors but higher investment amounts
- Scale: largercrowds, but lower minimum investment levels
- Business set valuation:the investee defines or sets the valuation
- Crowd set valuation:the valuation isbased on crowd interest and investment
- Equity stake:the platform takes an equity stake and arrangement fee for hosting a pitch
- Direct ownership:shareholders hold / administer their own shares so talk directly to investees
- Nominee ownership:the platform holds / administers shares and can advocate for shareholders
Members also observe that some platforms have begun to take a cut of investor profits.
Crowdfunding has boomed because of how easy it is to investand list for investment. Those seeking investment gain profile from a highly marketed platform and confidence from a range of advocates in the founder and their business. For those looking to invest, all of the research and due diligence is done upfront so people can either opt in or out.The downside is that around 30-40% of companies do not reach their target and that failure is just as public.
Advice from members who have sought investment through crowdfundingis to participate as an investor first to understand the process from both sides. Look for the most active platform for the best chance of generating interest as this will boost confidence and further interest. They also advise creating your own PR and marketing collateral for your company,product or concept to use this as part of your application as this will help to instill confidence. As with any form of investment, you need to be able to answer any question about why you need it and how you will deploy it so do your homework on the financials as people will ask probing questions.
It’s common for companies to come back for extra rounds of funding via the crowd. Some platforms offer full pre-emption rights to investors for follow-on rounds. For multiple rounds, the main platforms are generally good at making their "drag and tag" quite clear and not giving investors nasty surprises.
It’s advisable not to give away too much equity early on if you will be seeking further funding down the line. If it lookslike you’re going to raise more than the amount you are seekingyou can stopand you’re not obliged to accept furtherfunding. However, members say that it’s always worth getting more than you need to give you more runway initially so you can focus on growth rather than cashflow. Also, investors like to see momentumand once it’s stopped it’smuch harder to get it back. Once you have secured your optimal investment, send out a weekly or monthly update on the company to all of your investors to keep lines of communication openand maintain confidence.
While valuations are essentially led by the founder, some platforms have an inhouse investment teamwho will mediate valuationsand others can choose not to list you if they feel it’s too over-valued. Platform’s usually let the market decide if valuations are fair,but everything should be supported by evidence.
Crowdfunding is subject to the same regulation that other investment opportunities are, and there are numerousof rules and regulations toprotect investors. All statements must be fair, clear,and not misleading. Risks must be sign-posted; and investors should know what they are getting into. Promoting an inducement to invest is deemed as a Financial Promotion, which the FCA states only authorized financial services can make. Alternatively, authorized businesses can make promotions on behalf of the business. Most good platforms will give you guidance on what you can and can’t say.
To protect investors, platforms have a quiz for people to demonstrate their understanding of the risks. In the US, the onus is on the platform to protect investors from bad investments. Seedrs has a nominee structure, where it holds and manages the shares of start-ups on behalf of the underlying investors after an investment is completed.
The industry average is 65% and the success rate after the initial 20% rate is typically very good. All platforms have their own algorithms for spotting what is successful, and pushing it further. Comparing different platforms, only threeprojects have been unsuccessful raising funds on Syndicate Room, although Crowd Cube list more than Syndicate Room so naturally have a lower success rate. Seedrs is currently the most active equity crowdfunding platform in terms of deals and investment. Kickstarter claim to be able to predict what will be successful within 2 hours of posting from the website information they track their side.
Top five platforms highlighted by members
CrowdCube is regulated by the Financial Conduct Authority(FCA). It takes5% of the total funds raised plus other fees (legal, payment processing), accepts20% of all applicants,and5% of people get full funding. Anything over £200K is usually a blended round(ie HNW, angel, family,etc).
Seedrsis regulated by the FCA and can raise alongside angels, VCs and other institutional investors. It is the most active crowdfunding platform by amount invested into campaigns and number of campaigns funded, according to Beauhurst, with £40m+ invested into campaigns in Q3 2017 and 68% of campaigns reach their target. Seedrs takes up to 6% of the total funds raised plus other fees (ie payment processing). Its nominee structure means businesses just have one legal shareholder for consents (Seedrs) and potentially thousands of beneficial shareholders.
Funding Circle offers peer to peer debtthrough a simple 10 step process (you can go through the whole process and pull out before agreeing to anything if you wish). There is a 3-year fixed period paybackand the average investment is around £400 per investor. Members advise asking for a personal guarantee (to Funding Circle, not the individual investors). Investors get the interest rate that they bid at, but you pay an average of this to Funding Circle and they pay out to the investors. It has a secondary market where investors resell the debt to others.
SyndicateRoom is an online equity investment platformregulated by the FCA that offers investment in both private and public market opportunitiesto sophisticated investorsor high-net-worth individuals. It has raised £111m+ for over 100 companies since September 2013. There is a minimum investment of £1,000, it offers the same share classand same price per share as the lead investors, EIS and SEIS tax benefits, and no fees to the investor.There is a £1,600 setup fee, payable before the listing goes live on the platform, and on successful closure it charges a commission of 4% and a 1% annual fee for ongoing services.
KickStarter has an audience of 600,000 users. Unlike Indiegogo, where you have to reach 80% of the funds to go ahead (but they charge a higher percentage), you must reach 100% of your target to progress on Kickstarter. Unlike CrowdCube, you can’t meet someone face-to-face to discuss the investment and transactions are done through Amazon. Members advise building a community online before undertaking this as it is a PR play.