Equity crowdfunding, a relatively new funding model in the ever-changing alternative finance sector, has been used by early-stage and growing companies to reach new frontiers of growth in recent years.
In our latest blog, we spotlight the recent popularity of this form of funding and consider how it has become an alternative to the more traditional avenues of funding for early-stage and growing businesses.
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Equity crowdfunding: A new wave of fundraising
Equity crowdfunding is generally used to describe an individual or company raising capital from a larger pool of small investors rather than a smaller pool of larger investors (private equity, venture capital and high net worth individuals). Like any form of equity funding, with this source of finance, shareholders will usually only receive a return if the company launches an initial public offering (IPO) or if the company exits and sells to a private investor.
Historically, there have been limited financing options available to entrepreneurs; bank loans and financial assistance from family and friends have long been the convention.
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More recently, the prevalence of crowdfunding platforms, such as Crowdcube, Seedrs and SyndicateRoom, have supplemented traditional types of financing and, driven by the advent of new technology, enabled founders to reach a wider pool of investors.
Essentially, crowdfunding has flipped the traditional investing model; no longer are a few wealthy investors needed to launch a project. Instead, a larger number of smaller investors can now invest small amounts each to deliver the required funding.
What kind of businesses pursue equity crowdfunding?
Equity crowdfunding is generally pursued by early-stage and growing businesses across various sectors, including biotechnology, technology, software, health diagnostics, and AI spaces.
Crowdfunding applies to a wide range of funding requirements, from tens of thousands to several million pounds depending on the company’s type, stage, and sector looking to raise funds.
Whilst there are many successful smaller rounds completed every year, recent high-profile examples of crowdfunding include:
- Challenger bank Monzo’s record-breaking £20m crowdfunding round in 2018,
- Smartphone-based digital wealth manager Moneybox’s £7m raise in July 2020
- Scottish brewer and operator Brewdog’s £15m crowdfunding round.
In short, the rapidly expanding alternative form of financing has democratised the world of investing and has brought entrepreneurs much more intimately in contact with shareholders with a range of investing experiences.
Risks associated with equity crowdfunding
Despite the perceived benefits of equity crowdfunding, and as with any form of investment, this relatively new method of fundraising carries risks:
- Crowdfunding platforms provide startups with access to funding but not much else.
- With a larger number of smaller shareholders investing, there is a larger shareholder base to manage (although some platforms invest through a single fund to manage this).
- Meanwhile, other investment options come with supervision, rigorous financial reporting standards and support from experienced investors. For example, venture capital funds provide smart money and often contacts, specialist skills, and technical expertise and are prescriptive in their reporting demands. Future investors may be attracted by the processes, systems and controls implemented by the investor and existing investors who are prepared to continue to invest in future rounds.
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- The costs associated with marketing materials to support an equity crowdfunding round are often quite high. Moreover, these costs can rise as the duration of the equity crowdfunding round may stretch from weeks into many months. During that time, a founder will spend a significant amount of time delivering the funding round, which could distract them from driving revenue-generating activities.
- Finally, as with other investment forms, wrapping the opportunity in the government’s Seed Enterprise Investment Scheme (SEIS) and the Enterprise Incentive Scheme (EIS) can only go so far. Investors must still believe they will profit from an exit or IPO.
However, as with any form of investment, one round of equity crowdfunding may be insufficient. As a result, businesses may need to engage in repeat rounds to fund new product introductions, internal expansion or research and development activities to meet shareholder expectations.
Related article | Make your business more attractive to potential investors with EIS
What are the alternatives?
- Angel investment – Investment from business angels can be encouraged through the SEIS or EIS schemes. More information about the tax incentive, including how to become SEIS/EIS eligible, can be found elsewhere on our blog by clicking here.
- Small business loans, such as government-backed loans and regional funding initiatives.
- Small business grant
- Venture capital funding
- Private equity funding (generally, this type of funding is appropriate for larger businesses).
How can we help?
At Isosceles, our specialist team of accounting and finance professionals can support entrepreneurial businesses throughout the fundraising process.
Our team of experts conduct due diligence and the necessary preparatory work to support fundraising rounds, engage with potential investors, and provide rigorous accounting and financial analysis to meet the prescriptive reporting requirements of investors.
Our experience working with many investor-backed early-stage businesses, including 14 Tech Track 100 companies, allows us to add significant value to the fundraising process from the get-go.
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