When The Crowd and The Venture Capitalist Collide
The sceptics said equity crowdfunding would be a short-term event, a gap filler until the finance industry bounced back after the recession. Yet we have seen big name backers enter the arena* and now this alternative finance solution is firmly entrenched in the equity funding landscape.
Institutional investors are not only funding the platforms but they are increasingly investing in businesses raising funds on the platforms.
Noteable examples of companies getting institutional capital alongside the crowd:
Justpark - £3.7 million in 2014 with the crowd investing alongside Index and BMW i Ventures.
Rockabox round was led by Notion Capital.
Emoov, the online estate agents, raising money alongside Episode 1 Ventures.
Venture capital (VC) is no longer seen as an 'either/or' option for businesses raising capital, we are frequently seeing fundraises that combine investments from VC’s, angels and the crowd.
Platforms have been quick to capitalise on this popular model and platforms such as SyndicateRoom, Seedrs or the Los Angeles-basedCrowdfunder bring angel investment, venture capital and crowdfunds together in one deal. They bring a credible lead (or featured) investor to start the campaign and then the crowd is invited to co-invest. SyndicateRoom claims to have pioneered this investor-led model in crowdfunding.
VCs once sceptical about equity crowdfunding are now recognising that there are advantages to this type of fundraising and are embracing the concept. VCs and institutional investors that have publicly invested in Seedrs campaigns include Passion Capital, Faber Ventures, Playfair Capital, 500 Startups, Seedcamp, Wayra, BBC Worldwide Labs and Unilever.
Catherine Clifford, writing for Entrepreneur said: “Crowdfunding and venture capital have, historically, existed on opposite corners of the start-up finance playing field. But these opposites are increasingly acknowledging the benefits of each other’s business models, and are even starting to realise they might be better off working together, taking the best that each of them have to offer and creating a new fundraising reality.”
According to venture capital database CB Insights, nearly 10 percent of all U.S. crowdfunded projects that pass the $100,000 mark land some level of formal venture capital funding after the campaign ends. The report says more than $300 million in venture capital had been committed to companies as of mid-2014.
Crowds bring more than just the money.
Not only does a large crowd probably consist of many expert connections, which ordinarily take years of pitching, road shows and presentations to onboard, crowdfunding is also serving as a validation tool to test the concept of a product or service.
The PR and audience reach of a campaign can serve a dual purpose and bring more than just financial connections and partnerships. Shareholders of a business play a key role as ‘ambassadors’ for the business, they spread the word and recommend the brand. Having several hundred brand ambassadors is a valuable asset for any enterprise.
Aligning a fundraise with a product or service launch is a cost-effective way to exploit the associated PR and marketing opportunity and get exposure to a large customer base. Entrepreneurs and backers know that topping up a fundraise with a crowdfunding campaign will give the business more than just financial fuel.
This was the case for blow LTD, London’s leading beauty services on demand provider. It secured a £500,000 investment from Unilever Ventures (Unilever Ventures is the venture capital and private equity arm of Unilever, which invests in companies in the personal care and digital sectors) alongside a crowdfunding campaign on the Seedrs platform.
Blow LTD is a fundraise that is a great example of how businesses can pair direct VC investment with commitments from angels and the crowd, blending institutional fundraising, marketing and advocacy.
Co-Founder of blow LTD, Dharmash Mistry, Venture Capitalist & Entrepreneur, says “Our decision to raise ‘insider’ money and top up with crowdfunding was made partly by weighing up the options. We were looking for an unconventional ‘in between’ round with minimal dilution, whilst we build more proof points before raising more capital to scale at a higher price. So we choose to ‘top up’ crowdfund for marketing - bringing on board 50, 100, 200 or more ‘owners’ will help to accelerate our ‘ambassador’ programme. There was also the benefit of the convenience - a crowdfunding platform provides an efficient way to manage and administer existing investors, new investors and the various elements of shareholder administration.”
Jeff Lynn, Co-Founder and CEO at Seedrs, says “blow LTD’s is a wonderful example of what Seedrs is all about: combining investment from venture capitalists, angels and the crowd to disrupt a larger fragmented market. I am thrilled to see Unilever Ventures joining this round, together with nearly 200 crowd investors - a great base of supporters and advocates going forward.”
For crowd investors, following a credible professional investor is becoming a favoured strategy and it serves the crowd community by increasing investor education enabling investors to build portfolios and learn by example.
When institutional investors bring their expertise and professional scrutiny to a company’s business plan, its performance and its valuation, the crowd benefits. However, institutional investors need to be sympathetic to the crowd and careful not to relegate them with unequal rights and anti-dilution clauses if they want this symbiotic relationship to develop in the long-term.
SyndicateRoom operates with the premise that the crowd should be offered the same investment opportunities as those being invested in by experienced investors and Seedrs says it offers the same voting shares to all investors and uses professional-grade subscription agreements to ensure that investors get the same level of protection as professional investors.
Platforms taking an even-handed approach for all investors will progress this new model of the capital structure and help them to forge the next phase in the fundraising evolution.
* Crowdcube is backed by Balderton, Numis and Draper Esprit. Seedrs is backed by Woodford Investment Management, Augmentum capital and Faber Ventures