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, Crowdcube, Funding 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.