It is important to note that not every business will need to raise finance, as this will depend upon the business, as well as the growth plans of the founders. Having decided that the business does indeed need to raise external funds, the next part of the question is instantly “How much do I need to raise, and how much of my business do I need to sell to achieve this?”
The topic of valuing a business is worthy of a separate article, as there are many different ways to value a business, but the most commonly and widely used cannot really be applied to startups and early stage business as they rely on previous trading figures and do not take into account rapid growth. Valuing a company at this stage then is more of an art than a science, but a balanced scorecard valuation is often a good place to start, along with looking at valuations based on forecast financials.
The traditional first steps for a company raising finance is of course to approach ‘friends, family, and fools’ that know the founders as individuals. As such they invest with their heart as much as with their head, and the decision is much more a personal one than purely a business one. But this initial fundraising is almost a form of bootstrapping, as often it is done in an informal way and typically only raises smaller amounts.
True external fundraising would normally be obtained through one of three distinct channels: The first is high net worth individuals/ angels / angel networks; the second is crowdfunding; the third is venture capital. This article will focus on all aspects of crowdfunding and how to ensure that should this be the chosen route to raise funding, then it is carried out in the best way to maximise the chances of a successful campaign.
There are many crowdfunding platforms to choose from but the first major one in the UK, and still the largest, is Crowdcube. The other major UK provider is Seedrs, and they have historically led the way in innovations such as nominee shareholding, a secondary market for shareholders, and other such benefits. These two platforms have announced that they are to merge, but this will be a slow process and they are still expected to operate independently throughout 2021. Many of the smaller platforms have a very specific focus on industry, sector, or ESG approach for example, and may be more appropriate for more niche companies, although the pool of investors is much smaller.
It is worth noting that there are also a few platforms, such as Kickstarter, that are specifically aimed at funding ideas, prototypes of products, social campaigns and the like, and these tend to be much smaller campaigns. Also, these raises are effectively advance payments and do not require the fundraising company to part with any equity.
Lastly, there are sites that focus on crowdfunding debt rather than equity, the original and still the largest of which is Funding Circle. However, these typically require the borrowing company to have been trading for some time and are, therefore, not accessible to early stage businesses.
Most equity crowdfunding platforms operate on broadly the same parameters, albeit there are variations in some of the detail. For the purposes of this article, we will focus on the large providers as that is where the majority of funds are raised. On these platforms, campaigns can be anything from about £100,000 to £5m+, but are more typically between £150,000 and £2m.
Crowdfunding is best for companies with products or services that are aimed at consumers, that is B2C businesses rather than B2B ones. This is not a strict rule, but certainly the business and what it produces must be relatively easy to understand by many people without needing specific technical knowledge. But, as ever, it is important to tell the right story in the right way in order to generate interest and understanding and, thereby, a desire to invest.
It is true to say that valuations for businesses on crowdfunding platforms would often be higher than if raising finance from a VC or even an Angel but it is crucial that founders do not over value the business, as this reduces the chance of a successful raise. In addition, should the business then require further funding in the future it is very important that the valuation is seen to have risen and that can be difficult if the initial valuation was too high.
The biggest mistake that many founders make when considering raising finance from any source is leaving it too late. As a guideline, it is sensible to expect a timeline of six months from start until obtaining finance from whatever source, although this can of course be shorter.
Crowdfunding campaigns, like so many other things in business, require much planning and effort prior to launching the campaign. Indeed, this is so crucial that there is often a direct correlation between the amount of planning and the chances of success, thus proving the old adage of ‘failing to plan is planning to fail’. For at least six months – and preferably longer – before the campaign it is important to start to maximise the database of customers and other contacts, so that these can be contacted in the pre-launch campaign and asked to pre-register if they have a potential interest in investing.
Crowdfunding platforms will typically expect a business to be able to demonstrate that they have a soft commitment for approximately 60% of the target raise before they will be taken onto the platform. The first step is ‘private live’ where those that have pre-registered an interest are able to invest first via a link (and possibly able to take advantage of any SEIS entitlement if it is available) before the campaign is then moved to ‘public live’ and can be seen on the general platform and invested in by the general public.
It is important that the campaign gets off to a good start and maintains momentum as many potential investors, no matter how interested, often do not actually invest until they see many others doing so. In addition, the platforms have funds that automatically invest when certain percentages or other conditions have been met. These additional funds boost the campaign further and encourage yet more investment.
Statistically, some 80% of funds that go public live are successful and typically go on to overfund and raise an average of 140% of the target amount although this can be stopped at any time. The success rate reflects the fact that the platforms reject many applicants and for those that they do accept they ensure that they do not go public until fully ready.
Fees are typically around 6% of monies raised but are only payable on a successful raise. It is important to underline that unless the full targeted amount is raised then no monies are handed over and are indeed returned to the potential investors. The fees cover all aspects of the legal procedures before, during, and after the raise, as well as issuing share certificates, any EIS certificates and all other such documentation.
Each investor becomes a potential buyer of your product or service as well as an ambassador for the company, and each existing customer or contact is a potential investor, so crowdfunding can be a very powerful marketing and brand building exercise.
Seedrs has just announced that on Christmas Day 2020 it passed the £1bn invested on its platform since launch, and in 2020 more money was raised for more companies, from more investors, than in 2019. Interestingly, the Covid-19 pandemic and lockdown seems to have made very little difference to crowdfunding, with the same levels of retail investment going across the platforms as previously. There are a slightly reduced number of companies raising however, but for those companies still in a position to do so this can only increase the chances of success.
Clearly the best chance of a successful raise is to ensure that the business is fully prepared and that the founders, directors, or someone that is closely involved in the fundraising has a full understanding of the processes, algorithms and all other aspects of crowdfunding.
Ø Especially good for B2C companies that are easily understood by retail investors
Ø Provides large marketing exposure as well as fundraising
Ø Typical fundraises of between £150kto £2m, but between £100k to £5m+ possible
Ø Higher business valuations than with a VC but take care not to over value
Ø Allow six months but can be quicker, although initial preparation should be longer if possible
Ø Largely unaffected by Covid-19 for many businesses
Ø Retail investors still hungry to invest in the right businesses
Ø The most successful campaigns fully understand all aspects of a crowdfunding raise
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in British English