Analysis by a new equity crowd-funding platform – a site where investors can put money in companies in return for shares of equity – has theorised that the UK market could provide a pool of as much as £31.4 billion ($52.9 billion) for new business.
The new crowd-funding site, Volpit, arrived at its figure through a survey of 1,000 employed UK adults. It found that 39% were interested in investing a minimum of £500 ($841.50) and 29% were interested in investing over £1,500 ($2,524), which they were now able to do due to new regulations issued by the UK’s Financial Conduct Authority (FCA) at the start of April.
88% of people were still unaware of the change in regulation at the time of the survey, but Volpit calculated that if all employed UK adults would be similarly interested when informed, together they could produce the £34.1B ($52.9B) pool.
As summarised in part one’s look at the investor side of equity-crowd funding, that figure may represent a theoretic ceiling almost certainly unobtainable in reality. Nonetheless, equity crowd-funding remains an increasingly important source of finance and advice that could disrupt the way seed funding and initial start-up investment is currently sourced.
The FCA calculates that equity crowd-funding alone raised £28 million ($47 million) last year in the UK – a 600% increase on 2012.
Luke Lang, co-found of equity crowd-funding platform, Crowdcube says his site has seen a similar pick-up in growth. He estimates that this year has seen £7 million ($11.8 million) invested in 33 start-ups. This compares to Crowdcube raising around £12 million ($20.2 million) for 54 businesses last year and just over £23 million ($38.7 million) for 117 businesses since its launch in 2011.
Meanwhile Seedrs – another equity crowd-funding site that operates a model where funds invested are pooled together before being given to a new business, with Seedrs then subsequently acting as a sole intermediary between the investors and businesses – estimates that it has fully funded 81 businesses with £8 million of investments from the crowd and has another nine that have gained full funding commitments but are still going through due diligence checks before receiving the funds.
This growth shows how crowd-funding has move from a financing option of last-resort for entrepreneurs to a primary method for generating investor interest. Equity crowd-funding in particular has seen phenomenal growth, considering it is new even compared to other forms of crowd-funding such as donation based models like Kickstarter or peer-to-peer lending models such as Banktothefuture (which also runs equity crowd-funding services).
There was initially scepticism about the idea – certainly from existing corporate finance funds and angel networks,” says Land. “Over the last three years we’ve started to prove people wrong. Starting out and creating a new product, particularly one that disrupts the current market – can take some time to get traction.”
As equity crowd-funding grows in acceptance, it could become a fully established model of financing, helping to address the problem of businesses being overly reliant on banks and grants and disrupting tradition methods of raising finance – particularly many current seed finance models, he adds.
It will replace most forms of current offline initial entrepreneurial financing, agrees Jeff Lynn, co-founder and chief executive officer of Seedrs. “It’s a tool to make financing for SMEs and entrepreneurs simpler and more democratic,” he says. “It will make doing an angel deal the way we’re doing it today look quaint and antiquated.”
However, many secondary methods of financing for start-ups – such as venture capital and institutional finance funds – will remain. They will start to work with crowd-funding platforms to provide continual financial support to vibrant businesses as they grow. “They bring a lot to the table. Partvof our platform is to make sure it all works together,” he adds. “The good firms will thrive but they bad ones that base success solely on being the only ones with both the information and the money will cease to exist.”
But some might argue that finance is only one of the benefits angel investors bring to new start-ups and working online would eliminate that personal interaction that is essential for advice and mentoring.
The crowd-funding sites would argue the opposite. Investors must provide a significant amount of information in order to certify and be registered as either as a high net-worth individual, an experienced investor, an investor receiving qualified advice or the FCA’s newly created consumer class of crowd-investor. This means that sites such as Volpit can match an entrepreneur with investors that have the skills, networking contacts and experience to help a new business succeed, says Justin Nothling, Volpit co-founder.
“Part of the idea is to be a match-maker,” he adds. “We want active investors, not just ‘sit back’ people.”
Online crowd-funding also opens up mentoring and the sharing of advice to a wider range of investors who may want to be more active but do not have the time to do it justice, says Lynn.
“In any given round you have a number of people who want to get very involved but don’t have time the time to sit on a board or mentor due to other commitments. But what they can do, is every now and then jump in and offer some advice or a contact,” he explains.
And there is a track-record to show that a business can secure funding and continue to grow with investor help and advice.
One in three businesses on Crowdcube hit funding targets, says Lang. Already 15 have come back to get secondary rounds of funding, with some others going to alterative secondary funding sources such as established contacts, venture capital and other business angels, he adds.
Meanwhile Seedrs has seen nine businesses come back for a second-round of funding on the site, with one of those, Veeqo, returning for a third. Others, such as Future Labs, creators of PlayCaptcha, have also secured funding from other sources. The single investor stake-holder model used by Seedrs could prove to be important as start-ups look for further investors elsewhere.
“We’ve talked to venture-capitalists who have said they’d be put off by having to deal with multiple stake-holders. By Seedrs acting as a go-between, this problem is eliminated,” says Lynn. “It’s a normal way to let all these different people invest but only have one legal share-holder and is not actually all that novel of a structure that can be seen in angel investing networks as well as VC.”
As equity crowd-funding continues to expand, these online platforms will become increasingly global. Already Seedrs is available to entrepreneurs throughout Europe – although currently transactions are only in Pounds Sterling. Euro transactions should be up and running in about a month to six weeks, according to Lynn.
Others will likely follow suit – helping to create a global network of investment for entrepreneurs everywhere.
This article formed part two of a two part look at equity crowd-funding. Click here to read Part One, which discusses the investor side of equity crowd-funding.
