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Funding From The Crowd

Crowdfunding platforms have grabbed a lot of attention of late. This phenomenon first started in the US and then went to Europe and recently we see it in India. Many entrepreneurs now have access to capital from these platforms quite similar to the funding that they generally get from Angel investors or from other VCs.

Investors can now start investing sums from as little as £10! As one of the new investors on these crowdfunding platforms like Seedrs, CrowdcubeFunding Circle and many more, I started to get a feeling that this is indeed a great opportunity for individuals to become part of a great idea and a great team which is highly motivated and has  resolved to do something different, something big. You might see that a team wants to build a product that resonates with you, something that you also wanted to do but never started.

If you have ever watched UK’s famous BBC series Dragons Den then you must have aspired to sit along with other Dragons and watch entrepreneurs making a pitch in front of you, to impress you and get funding. How does it work? Entrepreneurs pitch their idea in the form of a 3-5 minute video, they talk about the founding team and their shareholding, their commitment after investment, the market they are targeting, monetization strategy, current valuation, equity that they are willing to share in exchange of funds that they want to raise. For those investors who want to know more, they provide Q&A section where you can ask questions publicly and privately. Individual investors can decide how much money they want to put in and the crowdfunding platform takes care of the rest, especially any formalities or compliances/ documentation requirements. Investors make money if that company is either acquired or goes public.

In the beginning to become part of such platforms one had to be a HNI (High Net worth Individual) but now it’s open to all. All you have to do is answer a set of questions that highlights the risks associated with early stage investments and then you are good to go.

Such campaigns run from 30-60 days and most platforms expect campaigns to be fully funded, otherwise the money will be returned back to the investors. This is also regulated in UK and there are tax benefits for investing in early stage start-ups. Platforms make money by charging a fixed commission of 5-7% of the money raised by the entrepreneurs and they may also charge some commission from investors when they make money or in case of exiting the investment.

Interestingly Seedrs themselves have raised money two times on their platform, in the first round they raised £2,583,420 in exchange for 33.3% equity, valuing company at £5,174,171 and in second round they raised £2,500,008 in exchange for 8.33%, valuing company at £27,499,992.

There are many such success stories and we have a recent case where Brewdog raised £5m on crowdfunding platforms breaking all the past records!

Some experts argue that the current crowdfunding process is not fair for the crowd as many platforms themselves act as nominees, which means that the crowd does not have much say or many rights. Experts also say that the information available is not enough and investors do not properly scrutinise numbers before putting in their money as they are not professional investors. However, the fact is that this kind of investment which was only available to few selected individuals or some institutions in the past, is now available to almost everybody who is willing to take a punt.

What might happen in 2016?

I have no doubt that this trend will continue and many more such platforms will become available and more and more entrepreneurs will prefer to raise money from crowdfunding platforms.

One thing that really stands out is that there are no negotiations happening between the crowd and the entrepreneurs. Even if I am just putting in £200, and you have many such small investors, the overall amount raised is still quite large. From half a million to £5m, that is a lot of money. I believe as these platforms mature and individual investors start realizing that it is very high risk game, they will start questioning more and will want to negotiate even if the amount invested is small. Hopefully soon, these platforms will provide a way for the crowd to negotiate with entrepreneurs, and get a better deal and proper valuation of the company. I hope to see all this happening in 2016.

20 Comments

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  1. Crowd funding is emerging fastly and it has its own benefits . With the small amount of investment you can be a part of a large future venture . It gives chance to middle class to invest in and for startups to gear up for things without dealing with angel VCs contract and equity .

  2. Interesting …crowd funding in terms of starting new ventures is a great new idea that is trending these days. It really helps remove the boundaries that surround an entrepreneur. Today’s world has made things much easier for a budding businessman!

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    Hello! This is kind of off topic but I need some guidance from an established blog. Is it very hard to set up your own blog? I’m not very techincal but I can figure things out pretty quick. I’m thinking about creating my own but I’m not sure where to start. Do you have any tips or suggestions? Thank you

  4. For the young budding entrepreneurs it acts as a a blessing in disguise and in my opinion this platform gives both sides a promising platform. As being an investor if I invests in a startup in that early stage then it’ll going to benefit me in return as I am at advantage of getting bigger equity than at normal funding rounds. Also for the new Entrepreneurs who are with a great idea and are in process of building their prototype, crowdfunding fetches attention and money for their other process to move progressively ahead.

  5. Crowdfunding is a new way of promoting entrepreneurship. Well, it may be famous in developed countries but it needs to be implemented in countries where less angel investors are there. Take an example of India where entrepreneurs have a lot of potential and great ideas but they fail to get momentutous funding. Therefore, crowd funding will be very helpful to gather money for such entrepreneurs. But, at the same time it has some issues also like there will be amateur investors also who will participate in crowd funding and can lose their money.

  6. Apart from the above mentioned prospects do you think there are certain risks in crowdfunding? If so, are those limited to the fundraiser or will have an effect on the consumers/crowd(investor) too?

    • I think risks are on both sides, from crowd point of view – they can only have limited information about the company as there share is very limited and also type of shares given may not give them full rights as share holder (like voting rights). From fundraiser side, though they are getting money but they are not getting all connections and help that otherwise come when they get funding from VCs

  7. Wow thanks for such an interesting article and sharing valuable information on crowd funding trends.
    But practically should we expect to see such trend in India soon?

  8. The concept of crowd funding has gained unprecedented momentum in the recent past and is expected to upscale higher levels in the near future. Credit must also be given to the innovative start ups flocking up ,indirectly providing the common people,an opportunity to earn without much effort and also get associated with a enterprise which perhaps turns out to be in great demand in the future.The flexibility in the amount to be invested is a great move as this will lead to a greater participation in crowd funding.However,as correctly pointed out,there is still scope for improvement,when it comes to monetary inputs made by the crowdfunders and the associated negotiations.

    • While communicating to these startups before investing, I also realized that they just do not need money, many of them are looking for skills n time or even alpha/beta testing!

  9. it is motivating to know that the reach of earning funds for budding startups is growing enormously. Although crowd- funding in India from what I perceive is not developed as compared to other regions you mentioned or are not so encouraged as they should be.
    top 5 platforms that I searched about are Ketto, BITGIVING, MILAP, FUNDDREAMSINDIA and WISHBERRY.
    so I hope that I could provide Tarun with some examples and the writer can add them.
    also some other new sites that I found about includes ShoutStart, ZingoHub, Pik a venture and others.
    there are platforms that are rising in number still I believe that considering the mindset and entrepreneurship culture in India people are hesitant to grab this opportunity. Hopefully the ideas and notions will change and people will realize its benefit. Surely the market can be and will be successful in coming years.

    • I think main issue in India as of now is around regulation, like in UK for sure it is regulated and government also provides tax rebate which means for every £100 funding you may get tax relief of £40 (assuming you are in 40% tax bracket).
      Indian government must do same to encourage and government can then use funds for big ticket investments like infrastructure , healthcare. Same should be done for P2P lending!

  10. It was a great article for an overview on crowd funding platforms. Crowdfunding platforms are truly the future of startup funding. Although there are some problems like unfair negotiation, transparency etc as have been raised by you, but these problems will surely be resolved as the idea of crowdfunding moves from its initial to an advanced stage.

    • Thanks, There are still regulatory constraints for people to invest in different countries, startups like globevestor are trying to address that so that people can invest from one country to another!

  11. A good insight into different project/company funding approach.It is almost like a bidding platform and it has some aspects of ponzi schemes.These aspect needs to be managed.The Risk associated with funding needs to be reduced and more transparency needs to be added.

    • Yes I agree, more transparency needs to be added, also crowd investors needs to be more aware of risk associated with this. Eventually this will become bidding platform, I recently came across a pitch which started with small percentage of equity but then went up after not getting full funding, again this was entrepreneur’s driven not crowd driven.

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