Equity crowdfunding, invented a decade ago, is more popular than ever with entrepreneurs and investors – professional and amateur alike.
By the end of last year, entrepreneurs had raised more than £1.4 billion for more than 1,700 businesses on Crowdcube and Seedrs, two of the most popular equity crowdfunding platforms.
But as a successful founder and entrepreneur, what do you need to know about this important branch of Fintech?
How it works
Equity crowdfunding leverages the power of our social networks to address the difficulties entrepreneurs and founders face in raising early-stage finance. Entrepreneurs pitch online to raise equity funds in return for shares in their company. If the target amount is reached, cash is exchanged for shares; otherwise, all bets are off.
It works a bit like an online version of Dragon’s Den, except that entrepreneurs pitch their ideas on an equity crowdfunding platform to a huge virtual network of potential investors. Equity crowdfunding is often attractive to investors because they can put small amounts into a variety of businesses, with potentially high returns. It’s also appealing to entrepreneurs and founders because they have control over what they sell, how much and at what price.
The investors it attracts
Equity crowdfunding has a diverse group of investors. Many are experienced venture capitalists, angel investors and entrepreneurs in the same sector as you.
Others are interested in a particular firm or product, while some are looking at the impact of an investment on a neighbourhood or the environment. Another set are simply looking to grow their savings at a time when interest rates are rock bottom. So the environmentally conscious can invest in promising new ideas for carbon capture, while enthusiasts can invest in their favourite micro-brewery.
The typical pitch receives the bulk of its funds from a few large investors, but also from many people who just like the product or want to support a company that is local to them or employs people they know.
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Don’t forget that the social network aspect of equity crowdfunding could be an important source of new ideas and feedback that could help your business for years to come. use the shareholding register, and the wider pitch process, as a foundation for a loyal and wise client base.
There’s no immediate impact on your cash flow
When a founder or entrepreneur raises funds through equity crowdfunding, the funds they raise create a liability in the form of equity, rather than debt. The business owner is exchanging a share of their future profits for capital right away. This means that, unlike if you had raised money from a bank or via online peer-to-peer lending, there is no immediate impact on your cash flow because interest is not paid on debt.
This gives you an extra advantage – raising capital in this way doesn’t expose you to the threat of bankruptcy if you’re not able to meet your debt obligations.
Of course, the new equity holders will have rights to the agreed share of your future profits, once you begin to earn them.
It’s not a time-consuming process
Entrepreneurs and founders know all too well that the process to raise funds can be a long and torturous one.
Equity crowdfunding platforms have well-established processes. Entrepreneurs and founders must capture the imagination of the ‘crowd’ on their chosen platform. Success is far from guaranteed, but there are numerous examples of what works and what doesn’t.
At a most basic level, entrepreneurs must provide business plans and information about their team and products for all potential investors to see and take part in online conversations about their business. The video from the entrepreneur explaining the business model and why she or he is the right person to implement it is often key.
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The process, as far as entrepreneurs and founders are concerned, is tried-and-tested and not too time-consuming.
Be aware of how much information you’ll need to make public
Despite the many advantages of equity crowdfunding for entrepreneurs and founders, it’s not an ideal way of raising funds for all new businesses.
If yours is a firm which relies heavily on a unique technology or business model, you’ll need to post quite a lot of detailed information about this on the platform. You may prefer a less information intensive and open-source way of raising funds.
Professor Saul Estrin
Saul Estrin is an Emeritus Professor of Managerial Economics and Strategy and the founding Head of the Department of Management. He was formerly Adecco Professor of Business and Society at London Business School where he was the Director of the CIS Middle Europe Centre and Research Director of the Centre for New and Emerging Markets. At LSE he is affiliated with the Centre for Economic Performance and was the Research Director of the Entrepreneurship Institute.