A practical guide to equity crowdfunding

Crowd­fund­ing plat­forms, such as Indiegogo and Kick­starter, have been pro­vid­ing alter­na­tive finance options since the mid-2000s. These rewards-based pro­grammes paved the way for increas­ing­ly pop­u­lar equi­ty crowd­fun­ders such as Crowd­cube, Syn­di­cate­Room and See­drs, com­pa­nies that aim to help entre­pre­neurs bypass the bar­ri­ers of tra­di­tion­al fund­ing. 

Crowd­cube co-founder Luke Lang says their ini­tial goal was essen­tial­ly to “democ­ra­tise invest­ment”, adding that “before Crowd­cube, if you want­ed to invest in a start­up or ear­ly-stage busi­ness, you basi­cal­ly had to be a wealthy, white, mid­dle-aged man”.

There are many lim­i­ta­tions to debt financ­ing and ven­ture cap­i­tal­ist fundrais­ing, includ­ing the risks of over-lever­ag­ing and dimin­ished con­trol over busi­ness deci­sions. Per­haps the most alarm­ing red flag is the wide­spread dis­crim­i­na­tion would-be entre­pre­neurs of cer­tain demo­graph­ics encounter going down these routes. 

Accord­ing to RateMyInvestor’s 2017 Diver­si­ty in Ven­ture Cap­i­tal report, in the Unit­ed States only 9.2 per cent of start­up founders were female and 75 per cent of ven­ture-backed founders were white. Sim­i­lar­ly, a 2019 report by Extend Ven­tures found just 0.24 per cent of UK ven­ture cap­i­tal­ist invest­ment went to Black-found­ed busi­ness­es which, as Lang says, is rep­re­sen­ta­tive of the bias­es held by the peo­ple call­ing the shots at most invest­ment bro­ker­age firms.

Ser­i­al entre­pre­neur and co-founder of SoHo Token Labs Elis­sa Shevin­sky says the issue is com­pound­ed. “Many investors make deci­sions based on pat­tern recog­ni­tion, when nowa­days there are more and more exam­ples sug­gest­ing suc­cess­ful star­tups are led by founders who don’t fit the tra­di­tion­al mould,” she points out. 

Equi­ty crowd­fund­ing plat­forms allow for any­one, regard­less of their wealth or exist­ing port­fo­lio, to invest in busi­ness­es, open­ing doors to investors who have more flu­id ideas of what con­sti­tutes a depend­able founder.

Ini­tial­ly, coro­n­avirus dealt a blow to invest­ment activ­i­ty, but Lang claims four out of five of Crowdcube’s largest cam­paigns have occurred since the pan­dem­ic. See­drs chief invest­ment offi­cer Kirsty Grant says they’ve had “a very busy year, despite the dis­rup­tion” and Syn­di­cate­Room co-founder Tom Brit­ton has noticed that while val­u­a­tion growth for ear­li­er-stage com­pa­nies has expe­ri­enced a “cool­ing-off” peri­od, busi­ness­es in lat­er-stage rounds of fundrais­ing “seemed to soar even high­er”.

That being said, there are still fac­tors putting entre­pre­neurs off this style of invest­ment. Aditya Baner­jee, glob­al man­ag­ing direc­tor at emerg­ing ecom­merce com­pa­ny Clus­ter­Hall, says he might be dis­cour­aged from equi­ty crowd­fund­ing. “There are many stake­hold­ers; it can be chaot­ic and might dis­rupt progress,” he says. If that isn’t a con­cern for your busi­ness and you’re inspired by the suc­cess sto­ries of Mon­zo, Rev­o­lut, What3words and the hun­dreds of oth­er enter­pris­es that used this method to their advan­tage, here’s how to make it work for you.

Choose the right platform

The first thing to do once you’ve decid­ed to raise cap­i­tal this way is to choose the facil­i­ta­tor that’s best suit­ed to your prod­uct and busi­ness plan. They may appear to be sim­i­lar, but each plat­form has unique fea­tures that could ele­vate or hin­der your cam­paign. For exam­ple, as the first plat­form of its kind, Crowd­cube has a larg­er pre-exist­ing investor base than some­where like Syn­di­cate­Room, which is younger but offers a hybrid ser­vice of angel invest­ment and equi­ty crowd­fund­ing more attrac­tive to cer­tain entre­pre­neurs. See­drs, on the oth­er hand, pride them­selves on the sup­port they pro­vide to port­fo­lio busi­ness­es through their easy-to-use mar­ket­ing and pub­lic rela­tions toolk­its.  

Be prepared and manage your expectations

“Rais­ing cap­i­tal is com­pet­i­tive and those who have spent more time research­ing the mar­ket, iter­at­ing their busi­ness plan and real­ly fig­ur­ing out why their busi­ness deserves to get cap­i­tal will get cap­i­tal” says Brit­ton. A Uni­ver­si­ty of Bath study into suc­cess­ful crowd­fund­ing con­clud­ed the best way to opti­mise this kind of fundrais­ing is to keep fund­ing goals as low as pos­si­ble. Cam­paigns that hadn’t raised a size­able per­cent­age of their goal after ten days of being live were deemed as unat­trac­tive to poten­tial investors, accord­ing to the study. Per­cent­age of funds raised is more impor­tant than the actu­al amount because most plat­forms present this data graph­i­cal­ly.

Stay transparent and responsive

For Brit­ton, the best online cam­paigns are run by founders who are polite, hon­est and quick to respond to ques­tions posed by poten­tial investors. “If I’m going to invest in some­one, I want to know how they respond to both chal­lenges that are fair and chal­lenges that may not be rel­e­vant. You’ll get cus­tomers in both veins; how you treat them will deter­mine how suc­cess­ful you are,” he says. Brit­ton also doesn’t rec­om­mend bluff­ing or cocky cam­paign­ing, claim­ing one of his biggest red flags is hear­ing a founder say they are the only ones who do “xyz”. “It shows a naivety of the mar­ket. In the off chance you were, in fact, the only com­pa­ny to do ‘xyz’ exact­ly as you do, there are many, many, that do it sim­i­lar­ly or who offer a sub­sti­tute good. This, along with a com­par­i­son table that shows your prod­uct as hav­ing ‘every­thing’ and your com­peti­tors as only hav­ing some, just sends sig­nals you are not aware of the whole mar­ket,” he says.

Network and promote smart

The Uni­ver­si­ty of Bath study also found cam­paigns per­formed best when pre­sen­ta­tion videos were of qual­i­ty pro­duc­tion, short and focused on the fun­da­men­tals, such as prod­uct descrip­tion, devel­op­ment time­lines and fund allo­ca­tion. The over­all pur­pose of these videos is to grab atten­tion, con­vey cred­i­bil­i­ty and cre­ate prod­uct demand. Grant believes founders who do well are dynam­ic sto­ry­tellers and expert net­work­ers. “The abil­i­ty to com­mu­ni­cate your busi­ness and the prob­lem your busi­ness is solv­ing is a fun­da­men­tal of any fund­ing source, along­side com­mu­ni­ty-build­ing. Plat­forms like See­drs bring a large net­work of investors, but the first investors in most cam­paigns will come from the business’s own audi­ence, whether that be cus­tomers, users, fol­low­ers or per­son­al net­works. They pro­vide the ini­tial val­i­da­tion for a fund­ing round, which will then make it attrac­tive to new investors,” she says, sur­mis­ing that “crowd­fund­ing is not for every­one, par­tic­u­lar­ly those who are too scared to tell the world about their busi­ness and shout about their fundrais­er”.