Andrew Lockley – Exponential Investor (Great Britain) –
Investors are becoming increasingly familiar with the fact that crowdfunding can enable them to catch billion-dollar “unicorns”, at a very low share price.
It’s a hot topic – and, at our recent Tech Investor’s Symposium, it appears that my talk on crowdfunding created quite an impression. (You can quickly get up to speed – by grabbing the videos, here.) Since then, Nick O’Connor’s been reflecting on the hunger for more information – and he’s decided to bring out a specific crowdfunding product. To help us develop it, we’d like to ask you:
What’s your number one crowdfunding question?
Please do write in to email@example.com.
We’ll attempt to answer your questions, in our forthcoming crowdfunding product.
To whet your appetite, today we’ve got an “insider’s view” on crowdfunding. We’re back talking to James Middleton of Street Stream. His firm is an online courier network – which firms use to give a premium delivery service, but with the flexibility of an outsourced operation. It’s a pretty interesting company – and one we’ve covered before, in Exponential Investor.
But don’t worry – we’re not giving James a second bite at the cherry. He’s not here to big-up his firm; he’s here to spill the beans on the crowdfunding process. Frankly, he’s fairly well placed to do this, as he’s currently raising his second Crowdcube round.
For transparency: Street Stream is a “day job” client of mine – and I’ve a modest position. I’m also commercially involved with a few firms in its broad network of suppliers and clients. Drop me an email, if you need further clarification.
Now, it’s over to James…
AL: For the uninitiated: what is crowdfunding?
JM: Crowdfunding is a modern way for private companies to seek capital from small investors. There are several well-known platforms – like Seedrs and Crowdcube (on which Street Stream is currently raising). These are used for buying actual investments: equity in the company, or sometimes bonds.
By contrast, some crowdfunding isn’t about investment. Kickstarter is used to raise funds from enthusiasts – people who would like to see a product or service happen. There are no shares on offer, but there’s often a reward from the company seeking finance – such as a discount, or early access to the new product.
AL: Why would companies raise investment on crowdfunding sites?
JM: Crowdfunding allows companies to access very small investors who individually might only invest very small amounts, but who collectively may invest a lot. Such investors would not be worth looking for, if you had to find each one individually. Platforms such as a Crowdcube have very large numbers of small (and some larger) investors – and so companies can tap into a “crowd”. It’s also often easier to manage your investor base – as there’s a strict deadline, non-negotiable investment terms, and all the paperwork’s done for you.
AL: How much do people invest?
JM: People can invest as little as £10 – but you also get people investing in the tens of thousands, as well. As an investment sector, Crowdfunding is being taken increasingly seriously. The investors range from the relative amateur who is just dabbling – putting £20 here and there – to more serious investors. The bigger players have often used up their ISA and pension allowances, and they are looking for further diversification, plus opportunities for an attractive return.
AL: What’s in it for investors?
JM: These platforms allow small investors to invest in early-stage companies – something they will not normally get a chance to do. Newer firms are obviously very high risk – but investors could also be very richly rewarded. You never know – you may invest in the next Airbnb, or the next Uber. Indeed, Crowdcube can now claim its first “unicorn” – with BrewDog now valued at over £1 billion.
There are usually great tax advantages, for investors who back early-stage firms. The newest firms are often covered by the Seed Enterprise Investment Scheme (SEIS). This is extremely tax efficient, for a top-rate taxpayer. There is also capital gains tax (CGT) relief, if the investment is held for a minimum of three years.
More established companies are often covered by the Enterprise Investment Scheme (EIS) (a company’s SEIS allowance expires two years after trading starts). This works similarly to SEIS, but the tax relief is lower.
AL: You chose to raise money on Crowdcube, and now you’re doing it again? Why did you choose that, over going to venture capital firms?
JM: Venture capital firms often set stringent conditions on the companies they invest in, which can strangle a new company’s room for manoeuvre.
That is not to say that the investment “crowd” is completely amateur. There are some very serious investors on there. Many know their way round financial accounts, and may also run their own businesses. They are able to weigh up valuations and company prospects – as well as anyone can, with such early-stage companies.
We also felt that our platform would capture the imagination a bit – after all, we are using a “crowd” to offer premium deliveries. Our ethos is therefore not so different to Crowdcube’s.
AL: What was it like using Crowdcube, as a company raising finance?
JM: Street Stream had a really good experience, using Crowdcube in early 2016. Of course, it’s not all plain sailing. There is certainly a bit of work, to get the campaign set up. The due diligence that Crowdcube organises is rigorous – but not painfully so.
The actual campaign is almost fun – investors can ask to see a business plan and financials. There is a detailed Q&A via a forum, and meetings with investors at an investor event. Overall, it is a very democratic process: any potential investor, no matter how small, can ask questions. The questions range from the searching and pretty sophisticated, to some which are a bit out of left field. You have to answer all questions with respect.
Our campaign was so popular that it closed in 11 days. For that reason we have gone back to Crowdcube again. We have another campaign live now and we are hoping to raise more, to take our company to the next level. We’ve got an eye on international expansion now – and I’d love us to be Crowdcube’s second unicorn!
AL: What about the relationship with investors?
JM: Most of the investors are silent, but that does not mean they are uninterested. I get lots of feedback, triggered by the regular trading updates I send out. As a company founder, it is really rewarding to know that there are people out there taking an active interest in the firm you have built.
Some of the investors we have on Street Stream have championed us on social media, and continue to do so. Others have used us as customers. They can make introductions to potential clients as well. All in all, it is a good experience.
AL: Are there any downsides to crowdfunding?
JM: One slight niggle is that you do end up with a lot of small investors – which means a bit of extra paperwork, when it comes to share certificates and SEIS claim forms, etc. However, this is manageable.
One quirk is the role that momentum plays in the campaign. A lot of investors – particularly the smaller ones – are not expert investors. They seek reassurance in the crowd. So if they see a campaign with a lot of momentum, they are more likely to back it. Getting that momentum is crucial. Very often you have to generate some of the initial momentum yourself – by putting your own money in, or that of your immediate personal network. Crowdcube and Seedrs will charge you a percentage of the money raised, even if that is your own money! That seems outrageous at first – but you have to think of it as marketing spend. Furthermore, you demonstrate that you are putting your own money where your mouth is. I have personally backed both of Street Stream’s Crowdcube campaigns.
Do let us know your questions on crowdfunding: firstname.lastname@example.org – and we’ll get them answered, in our forthcoming product.