June 10, 2016
Up until recently, venture capitalists or angels seemed like the chosen ones. They had the privilege to gain from the upside of their investments in new companies. Commoners didn’t have the ability to invest and buy shares in early-stage companies. If you had $5000, no startup wanted that money—that is until equity crowdfunding came into picture. So what happens when instead of one VC, a large number of people back your startup with money? Do you lose credibility because you went with an alternative channel? Will no VC will touch you later? Let’s debunk such myths.
VC funding has long been the traditional norm for companies looking for funding. But a new and radical model has been disrupting the investment raising process and looks to revolutionize the way we think about funding as a whole—equity crowdfunding. A lot of people who are doing economically well (such as VPs and presidents at large companies) are already investing via equity crowdfunding sites.
Equity crowdfunding is the process where people invest in an early-stage unlisted company in exchange for shares in that company. A shareholder has partial ownership of a company and is entitled to a share of the profit should the company do well. But if the company fails, investors can lose some, or all, of their investment. You can think of it as stock market for private companies.
According to SeedInvest—an investing equity crowdfunding platform—the global equity crowdfunding market has grown from $400 million in 2013, to $1.1 billion in 2014, to $2.6 billion in 2015 (approx.). Equity crowdfunding—and crowdfunding in general—has seen tremendous growth for the last couple of years. In the past four years, more than 2,000 companies have raised about $175 million with zero cases of fraud in the UK alone.
Let’s take a look at some examples of successful equity crowdfunding:
Tandem is the UK’s next-generation digital bank that helps customers live a better life with their money. The company raised over £2.34 million in equity crowdfunding with Tandem surpassing its original goal of £1 million in just 20 minutes! Over 1,500 people have backed the company during its campaign on Seedrs.
Led by Peter Herbert, CEO, Steve Hulme, Gavin Smyth, Chief Risk Officer, Ruth Handcock, Chief Customer Officer, James Greenwood, CTO, and James Devlin (Investor Relations), Tandem aims to offer a full range of banking products, including current accounts, loans, savings and credit cards, all within a mobile app that will allow customers to see financial information, and deliver smart notifications and guidance.
The company, which already obtained the banking licence by the Bank of England and FCA, currently employs 90 people. Tandem has already raised £22 million from Omidyar Network, Route66, eVentures, and other high net worth individuals, which valued it at £65m.
Satago is an all-in-one cash-flow finance solution for SMEs. The company recently announced that it had secured £4.6 million in funding from ESF Capital, an institutional marketplace lending accelerator. The newly-signed financing arrangement comprises an initial £3 million credit line from ESF and an equity investment of £1.6 million, with further potential for additional equity and debt funding. The deal signals the launch of Satago’s unique financing solution, which marries dynamic single invoice financing with a free, online, universally-accessible credit control platform for SMEs. Satago invoice finance had previously been in a pilot phase since January 2016.
Satago is also a real crowdfunding success story, having initially raised equity (the first company to do so) via Seedrs, the crowd-equity funding platform.
"Satago was one of the first businesses to raise funds on Seedrs, shortly after we launched in 2012, said Seedrs CEO and Co-Founder Jeff Lynn. "We’re thrilled to see their ongoing success. The £4.6 million institutional investment they have just raised is wonderful validation for a great company, and shareholders who invested in Satago a few years ago on Seedrs are enjoying a huge increase in share value as a consequence.
Zenos Cars was established in 2012 to design and produce high-performance, lightweight and accessible sports cars that deliver maximum driving thrills. Since launching an equity crowdfunding campaign earlier this month, Zenos has attracted a broad range of investors. Zenos chose Seedrs, the UK’s No.1 equity crowdfunding platform for its planned £750,000 funding round, in order to accelerate development of its next models. The funding will enable the home grown sports car company to introduce next-generation products that build on the strengths of its first production models and appeal to an even wider customer demographic.
Zenos is fast on the road to becoming a UK success story. Production began in January 2015 and the factory is already running at full current capacity to meet demand, which has exceeded the company’s ambitious forecasts.
The model of equity crowdfunding seems to have taken root in crowdfunding. Crowdfunding is a way for businesses or other organizations to raise money in the form of either donations or product sales to multiple individuals, e.g., Kickstarter. This new form of capital formation emerged in the wake of the 2008 financial crisis. Technologists are thinking of taking it to the next level. Combining blockchain technology and equity crowdfunding, decentralized exchanges are being used to create digital stock offerings. Equity crowdfunding itself is an emerging market with several early leaders like Seedrs and Crowdcube. The appeal of digital-based equity crowdfunding is that it is easier to create an aftermarket once a sale takes place as well as marketing the offering around the globe. Among firms to watch are Swarm, which uses the Counterparty protocol as its underlying blockchain technology, as well as Ethereum, which is trying to make everything that can be made digital.
The flip side: Even though things seem great for equity crowdfunding, there is a pickle with the democratization of a professional service like investments. The desire to provide more opportunities for the financial well-being of the general population often does not correspond with the ability of the population to make safe and educated choices. Granted an opportunity to invest, many people may be doing it for the first time and have little to no understanding of the risks involved, not speaking of the ability to adequately assess the company and its potential.
Given that investments aren’t particularly the most liquid type of personal funds, granting everyone an opportunity to allocate funds in any venture creates a risk for an inexperienced investor to find himself in a rut in the long-run. With the expectation to receive returns almost right away, the whole class of inexperienced investors may experience stress over possibly lost funds and the inability to liquidate them if they change their minds.