Equity crowdfunding platform, Crowdcube, allows anyone to invest as little as £10 in businesses in exchange for equity. It is also possible for venture capitalists and other large investors to fund businesses through the platform. In December 2014, Crowdcube was selected by the London Co-Investment Fund as one of six recipients of government funding for co-investment in startups. Along with consortium partner Braveheart Investment Group plc, it was awarded £5m to invest in digital businesses based in London. Although it is headquartered in Exeter, the platform also has an office in London.
The co-founders Darren Westlake and Luke Lang understood the difficulties entrepreneurs faced when trying to raise funding. Lang had experience running his own marketing consultancy and had worked in startups while Westlake founded and exited two VOIP businesses. They set up Crowdcube in 2010 to make it easier for founders to raise finance from their own network of friends, family, customers and supporters. The platform received £3.8m from Balderton Capital in a £5m series B round, and has 125,000 registered users and over 2,000 active users making investments every month.
Since 2011, over 180 businesses have used Crowdcube to raise more than £50m of equity finance. High profile entrepreneurs like chef Hugh Fearnley-Whittingstall, and Sir Stelios Haji-Ionnou of the easyGroup have used the platform. Lang says: “Crowdfunding and Crowdcube have really democratised investment and made it so much more accessible. Anyone can get involved and invest and that’s opened up a bigger flow of capital to the businesses.”
Headline investment criteria
Crowdcube allows all types of businesses, at different stages of growth to launch a pitch on its platform to raise money from the crowd. According to Lang, investors can find a really good mix of businesses from different vertical markets on Crowdcube including tech, food and drink, manufacturing, environmental, and fintech businesses. However he maintains that Crowdcube remains committed to helping early stage companies looking to raise between £50,000 and £150,000. He adds that Crowdcube has funded businesses that were just ideas or business plans.
Before allowing a pitch on to the platform, the Crowdcube team must feel that it is offering something their investors will be attracted to. An open discussion will take place among the team to decide whether a business is eligible.
The entrepreneur has to demonstrate that the business has a clear market opportunity and is making progress with its traction.
According to Lang, the team are also looking for entrepreneurs who have got a “real bit of hustle”, tenacity and who understand how to reach out to and tap into their network and giving people they know the opportunity to invest.
Crowdcube has a team of six business development analysts who talk to the entrepreneurs to understand their business and see if they qualify to be placed in the Crowdcube website. If they do qualify, they’ll be passed on to an investment analysis who will look at the business in much more detail. Only 20% to 30% of businesses that apply will make it on to the platform. The team points those that do not make it in the direction of a different source of funding or tells them what they need to improve before trying again. In the last six months, 38% of the companies that made it on to the platform went on to reach their funding target.
Lang says that the majority of the businesses that have been funded on Crowdcube were tech businesses or had some kind of tech element to them. These companies have a lot of potential to scale, which is what Crowdcube investors are looking for.
Approach to investment
Crowdcube allows companies to raise money with debt through a mini-bond, or equity. The mini-bonds offer investors a fixed rate of interest over a specific time period. The mini-bonds are like IOUs where the investor lends money to the business. These bonds cannot be traded or cashed in early.
The platform’s main offering is to allow investors to get equity in return for the money they put into a company. They can do this individually or get a professional fund manager to create a portfolio for them.
Lang says that with Crowdcube investors get a “real down to earth feel about the business” and understand the entrepreneur, the team, their journey, and the product. He adds “people really feel they’ve got a connection with the business which they wouldn’t get if they were investing in property or stocks and shares.”
Crowdcube doesn’t charge its investors anything. “Our view is, it’s an investor’s money, it’s their risk, it’s their reward. We don’t want to give our investors a reason to say no”.
Shape of investment
The minimum target amount is £10,000 and there is no maximum. Crowdcube advises entrepreneurs to go for between £100,000 and £150,000.
Crowdcube doesn’t charge listing fee, set up fee or membership fee. Lang says: “It’s not in our interest, it’s not in the investors’ interest and it’s certainly not in the interest of the business.”
However Crowdcube does charge a 5% success fee on the total funds processed when a business reaches its funding target.
For entrepreneurs to get their business on the crowdfunding platform they have to provide a business plan, financial forecasts for the next three years, and a video pitch that clearly sets out the investment proposal.
Lang explains that each pitch is approved financial promotion and so must comply with Financial Conduct Authority regulation. This means that every statement that an entrepreneur makes must be factual and it is the job of Crowdcube to verify those facts. Lang says the information must be “fair, clear and not misleading”.
The Crowdcube team also helps the entrepreneur to craft and refine their pitch deck and give them advice on what to include in their video, and to value their business at the right level.
The team will also help them to set the right target for their raise to make sure it is at an achievable level, and discuss their marketing strategy.
The entrepreneurs are expected to keep their investors up to date with their progress by reporting the key milestones along the fundraising.
Reasons not to invest
The Crowdcube team would not allow lifestyle businesses on to the platform. Also if an entrepreneur does not have any real ambition to build and grow a big business that could be sold in the future, they will not make it on to Crowdcube.
If an idea is too complex or the entrepreneur is not able to clearly articulate what the business is, or they have overvalued their business, Crowdcube would not allow it on the platform.
A big mistake that Lang sees entrepreneurs making is writing unclear business plans that do not explain what the business does.
FUNDER CASE STUDY
In June 2014, serial entrepreneur Brett Akker, raised £1.6m for his storage company LOVESPACE, in June 2014. It took 24 hours to reach his initial target of £600,000. In total, he raised £1.6m, 270% above the target, in 12 days. Venture firm DN Capital also invested in the crowdfunding round on the same terms as the rest of the crowd.
“The company was already VC backed by a company called Smedvig Capital. It knew Brett Akker from their previous investment in Streetcar and Crowdcube knows Smedvig Capital very well and they recommended to Brett that crowdfunding would be a good opportunity,” explains Lang.
Lang says that Crowdcube was able to use LOVESPACE’s ‘passionate’ customers in the successful marketing campaign, which resulted in a lot of press coverage and the company being featured in the Daily Mail, Crowdfund Insider, and Inside Self Storage.
“We met one of their investors and she was extolling the virtues of LOVESPACE. She’s a big fan, a big customer and now she’s a shareholder in the business,” says Lang.
Your future investments
In the future Lang sees more London-based tech companies raising money through the platform, as a result of the London Co-Investment Fund. The LCIF stipulates that recipients of the money must be London-based science and technology companies.
Founders will apply to Crowdcube, which will do all the necessary background checks on their business. Once the pitch is ready to go live, Crowdcube’s, fund management partner will choose which companies it feels are appropriate for investment and invest one third of the fundraising target. The remainder will be funded by the crowd on Crowdcube. To be eligible the companies need to be based in London and looking to raise between £250,000 and £1m.
“In the last six months of 2014, 50-55% of the businesses that were funded were tech in some way or had some tech element. I suspect that will probably grow. I firmly believe we’ll have more tech business coming but they will be better tech businesses,” Lang commented.
He also sees a blurring of the lines between investment from friends and family, crowdfunding, angels, and venture capitalists at present and thinks that will continue.
Another trend Lang is seeing is the increasing interest in crowdfunding from VCs, and more businesses that have or are in the process of getting financing from VCs are launching campaigns on the platform.
He has also noticed that larger companies are launching on the platform. “We’re certainly starting to see a trend towards more established companies, and more established serial, proven entrepreneurs using crowdfunding, as well as bigger raises. That’s an interesting development.”
Tech funding challenges
Lang thinks there is a funding gap at the level between £250,000 and £1m. He sees more and more venture capitalists investing at the £1m to £2m plus stages, but this leaves businesses that are raising less than that with few sources of funding to approach. He thinks that crowdfunding is doing a lot to solve this problem.
Lang advises entrepreneurs to always have fundraising at the back of their minds. More specifically he says they should keep a mental note of the people they have encountered along their journey who have shown some interest or excitement about their business.
“You never know. At some point in the future you may need that little black book. Keep them informed of what your business is doing, keep them warm to the company and keep them warm to the idea of investing.”
Other than that, he says that founders should try and grow a great business and demonstrate growth and progress.
*This article was first published on TechCityinsider in February 2015.