With the success of Funding Circle, record breaking months of money raising with Crowdcube and Seedrs and new platforms launching every week, a few questions remain unanswered. Why are most Enterprise Investment Schemes ("EIS") still being promoted with a scruffy PDF and a long trudge through IFA firms, hotel lobbys and coffees shops? Why is it that it appears to be only the more risky startups and not the established profitable businesses, that are looking to expand via crowdfunding? And of course, the question that I am constantly thinking about, should the term crowdfunding be permanently dropped from the business community and replaced by the more appropriate description of what really is happening i.e. crowdinvesting?
An organisation seeking investment in an EIS project or business can now put the information they want to share on a website with video, graphics, documents and relevant financial information. Potential investors or advisors can then examine this information and make an informed decision. This can obviously open up the market extensively. No longer will existing networks and contacts be the only route for entrepreneurs. They can now utilize social media including specialists like Angel List and Venture Giant and identify specialists in their niche sector. They can approach angel networks and only start the inevitable time consuming roadshow when they have some degree of traction.
But the big question remains - what can you share with whom and whose money can you take?
This is the challenge facing entrepreneurs and the crowdfunding community. This is also the basic question the FCA is currently dealing with.
For startups the most obvious route is the Seed Enterprise Investment Scheme ("SEIS"). There are clear rules around their promotion and the specialist who sets up the scheme can advise accordingly (a specialist such as us!). The same can be said for larger raises through EIS schemes and similarly there are rules in place and specialists can advise.
The leading equity crowdfunding sites have limited themselves to the start up sector, targeting High Net Worth ("HNW") and Sophisticated Investors. They are focusing on high volumes of small raises. Allowing investors to spread their risk across a large number of start ups, so the one large success can cover the many failures. They are only open to Sophisticated Investors who it is assumed can pick the winners or High Net Worth individuals who have deep enough pockets to take the hit. In reality, I would argue that these sites are really aimed at recreational investors who want to share a startups journey or predatory investors who invest early with the hope that they will eventually take control.
The interesting space that equity crowdfunding has been slow to capture are more established companies that need to expand quickly in order to take advantage of market opportunities or a technological window. AngelsDen appears to be trying to capture this space. AngelsDen are a traditional angel network with a reported membership of 6,000 members who, it has been suggested, have transacted circa £16m of deals over the past six years. Its clear they appreciate that the expression crowdfunding is a buzz word and in reality they are a dating service for entrepreneurs and investors. AngelsDen charge to list on their crowdfunding site and to pitch at angel events. The fees are set at a level that will not be prohibitive to a typical business that seeks funds to grow, rather than seeking investment in order to survive. This has been criticised, but they are selling a service and we think they do it well.
Taking angel money however can leave a company as vulnerable as taking Venture Capital funds, especially if the investors have predatory ambitions. There are alternative ways of raising capital. For example, what if the business has a wide spread customer and fan base; who want their products or services. The company could approach them. Using a white labeled platform, after taking the correct financial and legal advise to ensure the company meets FCA standards etc., the company could approach them. This could potentially be a much quicker and more effective way to raise funds. Investors will also remain customers and become advocates for what the business does. Of course, for equity investment they will still have to be sophisticated investors,or HNWs in order to comply with FCA requirements.
Partnerships with an IFA may also be an alternative route, so normal investors could be introduced to an IFA who will give them additional advice and then they can invest. Another option if a business wants to capture funds from large numbers of smaller investors is the pledge and reward models. Invest and receive an on-going discount on services or get advance notification of product launches etc.
This is clearly the next step for the sector, so who will be first? We will have to wait and see.
But my final question remains unanswered - why is it called crowdfunding and not crowdinvesting?
I guess the answer can be found in the fact that funding is defined as the supply of money or resources for a particular purpose while investing is to use money with the expectation of achieving a profit or material result by putting it into financial schemes, shares, or property, or by using it to develop a commercial venture.
If the crowdfunding sector is to take the next step into the main stream and attract a wider investor base, this distinction has to be clearly made. Put simply, investors should "fund" for fun and "invest" for returns.